Certain success is hard to come by in this operating environment. While August finished on a favorable note, follow-through stumbled prior to Labor Day. Cattle feeders managed to pocket $84-5 during the last week of August - the first $84+ sales since May. That boost came on the heels of a $1-2 jump in the preceding two weeks. As such, fed trade enjoyed three consecutive weeks in positive territory. September, however, opened on a more hesitant note; buyers and sellers largely adopted a wait-and-see mode with Labor Day being around the corner. Sales went mostly untested during the week but possessed a bias to the downside with the northern tier setting the pace – steady-to-$2 softer. Light volume also stems from broader concerns about the direction of the general economy; the coming weeks being important about the overall direction for the remainder of the year (more later).

At this juncture, a longer perspective in terms of year-over-year comparison proves especially useful. Many of the current struggles within the beef complex – especially painful for cattle feeders (and also more on that below) - began in earnest approximately a year ago. Recall that last year fed cattle were trading at $98 while the Choice cutout was hovering around $160 (see graph below). Much of that strength was the direct boost from stimulus checks. However, the party was quickly unwinding; the market found itself at the front-end of an extended reality check over at the CME. The December contract had begun to sell-off in mid-July and receded from $113 to $106 through the end of August. That was only the beginning. Ultimately, the contract slipped all the way back to $84 by the end of the year. Since then, during 2009, the fed steer four-week moving average has bounced between $81 and $87.

That said, those who continue to focus on smaller feedyard inventories have repeatedly found themselves disappointed by the market’s action in recent months. That’s due to several factors. First, the packer has been effective in taking out capacity and subsequently been able to procure supply more judiciously. Second, head count continues to get muted by heavier weights (see carcass weight graph below). Lastly, and most importantly, focus on the supply side is only part of the story - the bigger issue is demand.

Where does that leave us for the coming months of 2009? Primarily, there’s some heavy lifting ahead. The market continues to be burdened by the broader economy. Consumer psychology is tenuous at best. As I explained last month the wholesale market has seemingly established support at $135 for the Choice cutout.

Simultaneously, though, cutout values continue to find resistance in the $140-145 range (see graph below). Range-bound wholesale values will ultimately hamper upside potential for live prices; boxed beef prices need to break out to higher levels to facilitate any major moves in the fed market.

In the end, that’s ultimately a function of consumer behavior and attitudes. Unfortunately, unemployment worries, consumer confidence and higher savings rates will likely cap spending in the months to come. Moreover, those qualms will likely prove to be enduring. Mohamed El-Arian, PIMCO CEO and co-CIO, in a recent CNBC Squawk Box interview (August 14) outlined the current economic scenario like this:

The [stock] market is looking at the economy being on a rocket. This rocket is meant to take the economy to a higher level of growth and employment. The first booster came in the form of enormous monetary and fiscal stimulus. The second booster that we’re going through now is the inventory cycle and that’s going to help the GDP number over the next quarter. But then what? The ‘then what’ needs final demand, needs the consumer, needs spending, needs income. [Employment and retail sales] suggests that is still sluggish. So we’re yet to see a durable and sustainable recovery.

Indeed, the beef complex needs spending, not only domestically but also globally. Resilient recovery is essential to getting beef moving – more volume, higher prices.
In the meantime, beef promotion efforts have never been more important. Beef’s competitors can (and will) use this economic downturn to gain new market share. While somewhat counterintuitive, beef must anchor its demand position while swirling in a recession.

Immediate benefits may be difficult to realize. But investment in maintaining and growing beef demand will reap important benefits going forward. Once recovery begins, such efforts help to ensure that beef spending grows proportionally with the economy.

On a separate note, the financial crisis also plays out in a different manner upon the fed market. The past year has been especially challenging for cattle feeders. Earlier in the year (February) I noted that cattle feeders were being impacted by financing constraints. The discussion included an illustration representing weekly differences between the actual fed market and calculation of market value at which packers generate $145/head gross profit – a rough, industry-wide operating breakeven. Updated, the graph is included below. Data points above the zero-line indicate a fed market that favors cattle feeders; data points below zero favor processors.

Note within the graph several distinct phases of sharp declines. Those periods represent periods in which sellers have otherwise relented and given away large swaths of leverage. That was especially prominent last November; the market receded $6 in just one week. There’ve been other similar, albeit less turbulent, periods along the way including January, late-April / early-May and, most recently, late-July / early-August. As noted in February, making sense of individual decision making is challenging – that’s especially true given the complex and fragmented nature of the feeding sector. However, the trend partially results from the financial crisis.

Lenders are increasingly vigilant about operating capital – especially given the overwhelming losses of late within the feeding sector. Profitability woes continue to dog cattle feeders: pressure to maintain cash flow and/or meet capital requirements have likely forced sales along the way at levels that may have not otherwise occurred.

Nevil Speer, MMP: Lots Of Heavy Lifting Ahead

Nevil Speer, MMP: Lots Of Heavy Lifting Ahead



Source: Nevil C. Speer, PHD, MBA Western Kentucky University