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- DTN Headline News
The Market's Fine Print
Monday, September 1, 2014 12:23PM CDT

By John Harrington
DTN Livestock Analyst

Late summer always makes me think of my county fair education, hard-won but invaluable lessons first secured many years ago that have thankfully never faded. In fact, I long felt sorry for city cousins denied the opportunity to run the galvanizing gauntlet of 4-H shows and carnie rides.

Such moral and intellectual superiority might have dangerously mushroomed had it not been for a trunk load of blue and white ribbons that kept my all-too-plain and half-fat steers far from the arena of statewide competition.

Just as well. By the time the tail end of August rolled around, Dad was pretty sick of carrying the feed bill.

Nevertheless, the hometown ring and Midway was good enough to instill three sterling principles of life and marketing that continue to serve me in good stead:

1) Never fall in love with the inventory.

2) The value of the sizzle can significantly exceed the price of the steak (and vice versa).

3) The scarier the roller coaster, the emptier your stomach needs to be upon boarding.

The first time a rookie 4-Her realizes that while he's headed back to school, his production "partner" is headed for the packing plant can be absolutely traumatizing. But if you're lucky and smart, this initial pain slowly matures into successful, real-world marketing skills.

Here's a tip for beginners. In naming your club calf, stay away from schmaltzy monikers like "Black Beauty," "Big Red," or "Fat Curlie." Err more in the direction of "Ground Chuck," "Hamburger Helper," or "Shoulder Clod."

But kids, don't let the grown-ups suggest that you're the only babies in the room. I've seen the tallest of cowboys moan and groan over not receiving enough love from the market. On the other hand, you don't need to look far to find lovesick feedlot managers pursuing replacement cattle with the romance budget of Russian oligarchs.

More on that in a minute.

As far as what the county fair teaches about the relativity of cattle value, I'll never forget one particular 4-H auction when the owner of a local steakhouse locked horns with the bank president, jacking the price of the Grand Champion Steer to over $5 per pound. What had my Dad been complaining about? Making money in the cattle business made shooting monkeys in a barrel look like hard work.

Later that night I told Dad (who was also my banker, feeder, and packer) that since we were related I would only charge him $4.50 per pound for my plain, half-fat steer. The Old Man laughed so long and hard that his nose began to bleed. Upon regaining his composure, he told me that it might bring 40 cents if Omaha firmed a bit on Monday.

The determination of cattle value is never just a simple function of supply and demand. The crazy bidding war noted above had nothing to do with conventional fundamentals and everything to do with context, perception and psychology. The restaurateur and banker got carried away by intangibles that defy measurement and prediction, stuff like prestige, advertising, power, and perhaps even a sprinkle or two of civic mindedness.

Of course, a similar ambiguity often exists within the commercial marketplace. Just think of the incredibly large and frequent week-to-week price swings the fed trade has seen through the first eight months of 2014. Specifically, the weekly average price change through August 22 totaled $2.39 per cwt.

Such a huge "play" in the market is both amazing and humbling. What gives the price whip such a thunderous and persistent snap? Supply and demand realities simply do not vary that much from one week to the next. Rather, this extreme volatility has been driven by indefinite but powerful forces such as perception, psychology, and, if you will, "sizzle."

Lesson No. 3 from the fairgrounds surfaces far from the cattle barn and auction ring where the odor of manure and straw is replaced by the smell of popcorn, cotton candy, and nervous sweat. As a kid, I always had a love/hate thing for the "rides," a combination of excitement and fear that typically paralyzed me until the very last day.

I suppose I became a little more adventurous with each passing year. By the time I had worked up to the "Octopus," the critical rule of fun before food had been impressed upon me many times. Chili dogs and funnel cakes must always wait until after the "Rock-O-Plane."

Anyone who has been involved in livestock markets this year knows what dangerously thrilling rides are all about. Most of the time, producers have never experienced more fun. Month after month of triple-digit profits almost makes them want to buy the Ferris Wheel and roll it home.

And yet I'm afraid that cattle feeders are on the verge of violating my final rule. In fact, many have packed into a rickety roller coaster immediately following a five-course meal and are now barreling into the darkest of tunnels.

Interpretation?

While feedlot breakevens have held in the mid $140s for most of the summer, they are now set to skyrocket over the next several months. Even if the price of corn continues to drop through the first half of harvest, most feeding companies by the end of October will need to sell fats close to $170 just to preserve invested capital.

October live futures closed today at 147.82, roughly $22 below this critical threshold. I may be wearing sunglasses, but that seems like a pretty dark and scary tunnel to me.

Theoretically, a renewed and stronger wave of late-year beef demand could still develop to make for a smooth ride. Barring that, you'll want to have your fair-sick bag at the ready.

For more from John see www.feelofthemarket.com

(CZ)


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