News

Kay’s Cuts: Moving in opposite directions

Jon Condon, 08/10/2015

Editor’s note: Given the rapidly unfolding market events in the US and Australia this past week, it’s worth noting that Steve Kay filed this monthly report with us on Tuesday.

 

steve-kay-1-2A monthly column written exclusively for Beef Central by US Cattle Buyers Weekly publisher, Steve Kay

 

 

 

 

 

 

 

 

 

 

I RECENTLY had the pleasure of dining with Senator Barry O’Sullivan, who, as Beef Central readers know, represents the state of Queensland in the Senate.

The senator, as you also know, has devoted a lot of time to defending family farms and small business across the state.

So I knew he would want to ask me how small producers fare here in the US, during is North American visit.

We had a most stimulating conversation stretching over three hours and I developed an immediate respect for the senator’s passion and sincerity for topics near and dear to him, and for his command of financial and other data pertaining to cattle raising and finishing in Queensland.

He also told me of his belief that collusion between buyers sometimes appears to occur at stockyards.

I have no knowledge of his last point but I suggested that a look back at 25 years of cattle markets in Australia and the US offer up a simple truth – that supply and demand far outweigh any perceived “negative” behavior by cattle buyers or beef processors.

I remember when the grainfed market in the US turned sour for processors in 1989-90 after the industry expanded its processing capacity just when cattle supplies were tightening.

The result was what I called at the time a “competition” premium in the market that added at least $3 per cwt to the live price of cattle each week.

 

Moving in opposite directions

I remember when cattle feeders ignored warning signs about a backlog of cattle developing in early 1993 and how prices fell 14pc from their monthly highs in March to their lows in December.

US cattle feeders are currently reeling from a market collapse that dwarfs that. Weekly cash prices have collapsed since the first week of August, falling 22pc or $33.42 per cwt by last week. They are down nearly 27pc from the same week last year and are at their lowest level since late 2013.

It’s fascinating to see how prices have moved in opposite directions both to the downside and upside in the two countries.

Australian prices last year collapsed as widespread drought forced cattle to market. Around the same time, US cattle prices marched to new record highs in late November, and grainfed prices set a new record of $171.38 per cwt.

The opposite has now occurred. Those prices last week averaged $117.71 per cwt live while Australia’s Eastern Young Cattle Indicator (EYCI) last week closed Thursday’s markets at 594.75c cents per kg cwt.

The EYCI price is a direct consequence of demand exceeding supply, as cattle offerings have tightened significantly post-drought. With the Australian beef herd set to be at a 20-year low, it’s likely that the EYCI will continue to advance. At the same time, a low Australian dollar should allow Australian beef exporters to make money, whether in the US or Japanese markets, over the longer term.

Both the velocity and extent of the US collapse has stunned the industry here.

But the seeds of the collapse were sown nearly a year earlier. Cattle feeders were coming off one of their most profitable periods in some years and had built up a strong equity position.

They used some of this to push feeder cattle prices to record high levels in their desire to fill their pens. Breakevens seemed high but no one was concerned, as cash live cattle prices the last two weeks of November set new all-time records.

At the same time, carcase weights set new all-time highs. Cattle feeders started to feed cattle longer and yet there was also no concern about cattle getting even heavier.

2015 began with live cattle in early January averaging $169.67 per cwt, the fourth highest price ever. This would prove to be the high for the year. But prices fell $10 per cwt by the end of February and cattle faced big losses. They were paying the price for buying such expensive replacements the previous fall and forgetting that the money always runs out before the cattle.

 

Carcase weights relentlessly higher

Losses continued so cattle feeders kept feeding cattle longer and longer to avoid having to replace them, to keep their pens full – because it was economical to do so and to try and reduce the losses with more weight.

A few analysts warned this could create a backlog. But as cash live cattle prices appeared to put in a low the third week of July then rallied the first week of August, most cattle feeders shrugged off the warning and kept holding cattle.

As it turned out, cattle feeders ignored the warning signs at their peril, as they did in 1993.

The longer feeding time only delayed the inevitable. Steers set a new carcase record of 914 pounds (415kg) the first week of September and this had increased to 923 pounds (420kg) two weeks later. Weights don’t normally peak until mid-November so steers could reach 935 pounds (425kg) or more.

These jumbo-sized carcases also carried more back fat than seen in 20 years, so cattle feeders faced heavy discounts for both overweight and over-fat cattle. One can only hope the supply of these cattle will be cleaned-up in October, and that the market starts to rebound.

But the recent collapse is a stark reminder that the first loss is the least loss in cattle feeding.

 

 

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