Rabobank expectations mixed for US beef

Rabobank expectations mixed for US beef

Analysts say market volatility is a big problem contributing to price problems.


The latest report from Rabobank's advisory group says despite beef's recent price problems, there is hope for an uptick in pricing and product movement.

Rabobank Food & Agribusiness Research and Advisory group keeps a global beef index, which it says ticked up briefly in the first quarter of 2016, before sliding in the face of recent price declines. The economists note softening prices in the US and Canada have opposed strengthening prices in Australia and Brazil.

“Volatility is a key theme across most markets at the moment,” says Angus Gidley-Baird, senior animal protein analyst at Rabobank.

In fact, the group spent quite a bit of effort discussing the problems caused by volatility in the US markets.

The report says, "Extreme market volatility has been equally, if not more problematic, for US cattle producers than net price declines. Cattle producers -- and especially cattle feeders -- indicated that, over the past year to 18 months, the number-one issue nearly always has been market volatility."

Week-to-week price swings in cash markets have been so extreme that it puts a week-to-week uncertainty of $85-100 per head for 1,400-pound finished cattle.

The risk of high volatility has been aggravated by "strong" basis, they say. "The real problem with positive basis is that speculators in the market or natural longs (buyers) believe the current cash market is overvalued or will be declining," they say. "All of these mixed signals make it difficult to impossible for cattle feeders to initiate new positions at a price level that will provide a profit or a reasonable chance of a thin margin."

They also noted that market volatility can hinder or hurt beef processor and packer procurement, since buyers and sellers all become wary of entering into longer-term supply agreements in the fear markets may move against them.

On the other hand, longer-term agreements can help drive innovation in the beef complex, potentially improving product quality and possibly doing a better job meeting emerging-market needs.

Rabobank economists listed four factors driving volatility in the US beef markets.

1. Increasing production cycle: Beef production is increasing, and competitive proteins have already increased, putting a lot of meat and resulting price fluctuations into domestic and export market channels.

2. Heavy carcasses: The problem has decreased in recent weeks, but cattle feeders holding and selling record-heavy carcasses also boosted the beef supply without moving feeder cattle through the system.

3. Poor price discovery: Formula pricing has become the norm in recent years. The problem with this is virtually all the formula agreements use the determined cash price as a base value for the formula. As cattle in the cash market declined in number and quality, the "integrity" of the cash market has eroded.

4. Cash-to-futures price disparity: Fewer cash cattle has naturally equaled fewer cash sales data points. This creates an "inefficient" flow of information between the cash market and the futures market, adding to the price discovery problem.

The Rabobank analysts speculate that, in a more balanced market environment with better information available, cattle feeders would have been able to make better marketing decisions, potentially improving their financial lot somewhat.

Still they suggest a potential improvement in prices before year's end, contrary to many market forecasts and the price structure of the futures markets.

"The combination of escalated marketing, combined with the exceptionally strong basis, has caused second-quarter prices to be a disappointment," they say. "While our Q2 average price forecast of $138 per cwt. looks increasingly unrealistic, we are not ready to alter our Q3 price projection of $120 per cwt., and subsequently we think the deferred live-cattle futures have been undervalued. Our Q4 price estimate is unchanged as well, at $130 per cwt., but could be altered by the continuation of aggressive spring and summer placements."

The economists noted that feeder cattle normally bottom in May and escalate in value through the summer, and they expect the same this year, but also they expect the rate of price recovery to be less than historical averages.

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