Exploring the Traditional Midyear Cattle Market Price Decline

Posted on 03/09/2017 10:23 AM

Live cattle prices set records around $172.00 in November 2014, then set back into early 2015. Last year's spring rally topped out just below $168, with the subsequent seasonal decline carrying prices below $150 by Independence Day. However, instead of undergoing the usual second-half rebound, prices accelerated downward. They dipped all the way to the $116-$117 range in October and again in December before finally turning higher during the holiday season.

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Fed cattle prices posted a seasonal high around $139 in mid-March 2016, with the subsequent decline pulling the monthly average down around $137. Prices dove $8 to the $126 area two weeks ago and continued sliding last week. The real questions facing the cattle and beef industry are how much farther the market may decline during the coming weeks, since seasonal cash losses often last through spring, and how well prices will behave during the second half of the year. The preceding chart puts the current situation in context, illustrating the dramatic price rally of the 2010-2014 period, as well as the huge breakdown suffered from late 2014 into late 2015. The green asterisks are placed around the $113 level, which is where the August, October and December futures were trading early this week.

This pessimism is largely based upon expectations for surging cattle and beef supplies in the wake of the late 2013-early 2014 shift from cattle industry contraction to aggressive expansion. CME traders clearly believe the market will be depressed for the foreseeable future, since 2017 futures are priced significantly below those for 2016. However, readers should recall that the overall U.S. cattle population does not represent the supply of fed cattle; that figure is most closely depicted by the current U.S. feedlot population. The blue and red lines on the first chart represent the percent annual change in the feedlot population and in Nebraska fed steer prices. The first point that stands out is the exaggerated size of the 2015 price drop, as well as the fact that the fed cattle population didn't greatly exceed comparable 2014 totals last year. This suggests that the feedlot population did not cause the market crash.

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The chart above shows feedlot population totals are relatively low. They have clearly fallen substantially from the highs seen in the 2006-08 period and in late 2011. Nor was the percent annual change in the feedlot supply particularly large. Actually, the data need to be parsed even farther in order to get a good handle upon the supply of animals that are immediately available for purchase and slaughter. That is, despite the fact that the feedlot population totals were not very large last year, the supply of heavy, overfed animals available to the market was probably excessive during the second half of 2015.

We think the best indicator of the market-ready supply of fed cattle is steer-dressed weights from the USDA. As one might suspect, cattle weights have been trending higher for years, with seasonal factors, cattle prices and feed costs causing shifts in the short-to-intermediate term. The following chart offers some context on this point, with the annual change in steer carcass sizes reflecting those shifts. Given the long-term increase, it isn't surprising that the annualized changes are usually positive.

Note, however, the tendency for extreme weight readings to coincide with opposing moves in steer prices. That is, when steer weights are surging, cattle prices are usually dropping or stable at best. Conversely rapid declines in steer weights have often occurred at the same time prices are rallying. The shaded areas on the chart represent those periods when weights are moving from extreme highs versus year-ago to extreme lows. This almost surely reflects the market-ready supply of fed cattle and its impact on prices. Depressed and/or rapidly declining weights suggest those supplies are very tight, whereas greatly elevated weights such as those seen through much of 2015 imply excessive supplies and a glutted market.

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This next chart offers a shorter-term view of steer dressed weights, showing they remain quite high by historical standards. For example, the latest reading for the second week of April came in at 878 pounds/head, which set a fresh record for mid-April. On the other hand, this result was just six pounds over the comparable year-ago figure. In contrast, the annual difference reached 32 pounds when carcasses averaged 930 pounds at their all-time high last October.

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As indicated above, the cattle market traditionally performs best when steer dressed weights are running below year-ago levels. That is clearly not the case at this point. However, heavily discounted CME futures are shouting at producers to sell cattle as soon as possible, so they can get the best price available before those drop further. Furthermore, the recent grain and soybean rally is implicitly boosting the cost of feed at some point in the near future. As a result, fed cattle weights will probably drop below year-ago levels by Independence Day.

How will prices perform during the weeks and months ahead? As indicated above, a seasonal price decline from a March-April high to a summer low is quite routine, but the size of that drop can vary rather drastically from year to year. A look at the years since 2000 indicates an average decline of $15.76 from the early-year high to the ultimate low later in the year. If we exclude the massive $51.82 drop suffered last year from the sample, the mean dips to $13.36. Even if we use the complete sample, this suggests the Nebraska market will post a 2016 low around $123.00. The fact that the April 1 Cattle on Feed population was stated just 1% higher than the year-ago total seems rather supportive as well. On the other hand, the recent $8.00 plunge makes the implied summer-fall low look too high.

Parsing the data by steer dressed weight readings may offer more insight. If, as mentioned above, steer carcasses produced during July fall below the comparable year-prior level, that would be only the fourth time since 2000 that they have done so. The seasonal breakdown averaged just $8.97 in the three previous years (2003, 2010, 2013) when steer carcass weights averaged below year-ago levels during July. In addition, cattle prices surged to record highs during the months following. We do NOT expect the cattle market to set any records in the foreseeable future. In fact, we are not at all sure they'll challenge the March high. Still, we strongly suspect prices will hold up much better than is generally anticipated during the second half of 2016 and in early 2017.

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