Our first full week of the year puts the US Dollar Index on our radar as the most speculatively overpopulated market. Our piece for TraderPlanet took a look at this even as the Index itself continues to rally.
The live cattle market was up 28% in 2014 and the Feeder cattle market was up 32% for the year. The cattle markets made all-time highs in 2014 as the U.S. had its smallest slaughter in 20 years. This came as no surprise as we’ve discussed the declining trend in the domestic herd several times. Based on the cheap feed prices, cheap fuel costs and a strong Dollar, this should be another year of declining supply as the U.S. begins to grow its herd to meet the growing foreign demand.
The cattle market has reached new highs repeatedly this month. We’ve known for years that the U.S. cattle herd has been steadily declining. It currently stands around 89 million head, which is the lowest it’s been since 1952. This hasn’t mattered much as the decades long decline in US beef consumption has wilted domestic demand. Furthermore, the impact of modern animal husbandry techniques have significantly increased the final weight of the cattle that hit the
slaughterhouses, thus supplying the market with more total beef on fewer total animals killed. All of this bearish information begs the question, “Why are cattle prices so high and where do we go from here?”
Cattle stocks and beef production in the U.S. have been declining since 2002 and beginning stocks have dropped more than 5% in the last five years. This summer’s drought also led to massive slaughters as farmers couldn’t efficiently feed the animals to hold them back for a later date. The declining cattle stocks across North America will take time to rebuild. Our thoughts have been placed on the buy side of the cattle market as it tightened up and we expected the cattle market to rally sharply in 2012. However, there have been major changes within the global cattle industry that may have signaled an end to our domination of the cattle global cattle market.
It’s no secret that Australia, Brazil and Argentina have been building their cattle business over the last several years. Brazil is second in total production while Argentina and Australia lag behind Chinese and European Union production. Meanwhile, our own production has fallen behind China and places us fourth on the list. The kicker is the new number one on export list – India.
Indian beef production has soared and since very little of it consumed in India, their growth in the export market has been nothing short of astounding. India passed the United States in beef exports in 2011 and will pass Brazil and Argentina this year. India’s 2012 record exports of 2.16 million tons will account for nearly a quarter of global trade. This boom has been fueled by cheaper exports to Asia, the Middle East and North Africa. India’s quickly growing supply has picked up the global supply slack due to the North American drought of 2012. India’s ascension to world leader in cattle exports should cause us to pause for thought.
First of all, every westerner’s image of Indian cows relies on the cows’ place as a religious symbol. Most Indian states have laws against slaughtering cattle. Therefore, the numbers that we’re quoting are only from above the board, licensed processors. The underground meat trade is estimated to have shipped another 1.5 million cattle. This is an additional 4.5% increase on top of their 2012 record exports. If we include these numbers in their processed tonnage, their exports would surpass Brazil’s record production of 2.19 million tons in 2007.
Secondly, the computation of beef production must be taken into account when viewing India’s growth as a major exporter. The trick in the numbers is that water buffalo also count as beef production in all of the World Agriculture Board’s global numbers and India has no laws against the slaughter of water buffalo. Water buffalo production here in the U.S. would be treated the same way. They both fall under the category of, “bovine meat,” and they will combine to make India the top bovine meat exporter in the world in 2013.
Finally, we should all view the interaction between the Indian government, the economy, and the primary beliefs as a negotiation of economic compensation for the sacrifice of personal beliefs. India is a predominantly Hindu country. Hinduism teaches that the cow is a sacred gift that provides man with everything he needs. Milk, butter and other dairy products, of course, but also fertilizer and manure for fires. The cow recycles the earth and leaves it no worse than it found it. These are the principals that are up for sale. The story has been played out over and over in history throughout the world.
Trading the cattle market for the all time highs was the 2012 trade that never happened. Many are still looking for it based on the tight North American cattle supplies. Personally, I think greed will supplant morality and India’s production will provide enough of a cushion to keep prices relatively, in check. I will still look for cattle to trade past the 2012 highs of $137 however; I don’t believe we’ll approach the all time highs of $167 from 2007.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
Hurricane season has brought about some unintended
consequences which are my job to find as a commodity broker. The one least likely to make the news is their effect on hog and
cattle prices. Every time people are forced to flee and cities lose their
power, we see a rally in meat prices. Loss of power creates a temporary demand
shock to the system. Every individual and grocer has to trash every piece of
meat in their home or store.
This didn’t actually hit until the blackout in August of ’03.
I was prepared for the stock market’s initial sell off followed by a huge rebound
based on the public selling the market off on the terrorism fears and buying it
back with a vengeance when it was ruled out. That trade lasted from Sunday
night until Tuesday morning, just as I planned. However, over the next week and
a half, I watched the hog and cattle markets climb and climb. At that time, I
didn’t have the forethought to forecast the demand shock of the replacement
value of all of the perishable goods.
Hurricane Date Change Hogs Change Cattle
Floyd 9/16/99 11% 11%
Blackout 8/14/05 17% 28%
Isabel 9/18/03 19% 9%
Ivan 9/16/04 7.8% 2%
& 8/05 4.5% 9%
Rita 9/24/05 5% 3.5%
This morning’s trade will most likely, send all asset
classes lower. Obviously, this will include the commodity futures markets. Take
advantage of this morning’s weakness to establish long positions in perishable markets
RJO Vantage has a tool called the “Market Book.” The Market Book provides live access to the resting bids and offers in the electronic market. The effectiveness of the Market Book becomes more and more apparent now that 90+ percent of total commodity volume is executed via electronic trading platforms. As a former pit trader in the S&P 500, I find myself used to looking at the depth of the market’s bids and offers to establish any strength or weakness biases the market may have at a given price level. I now use the market book as much as I do the Commitment of Traders Reports. This morning’s action in August live cattle was an excellent example of how the Market Book can increase the effectiveness of one’s trading strategies. Cattle have run up considerably for the month of June without any type of pullback. Over the last week, the market has consolidated just above the 103 level. Knowing that cattle prices tend to peak around Independence day and given the month’s run up, I felt like we could see extended selling on a penetration of the support at 103. I was watching the market as we neared the support this morning looking for the tell tale signs of a stop run to begin the decline. I expected to see standard volume on the available bids….maybe 2-6 contracts on every bid price under the lows, with an occasional 10 lot. Had I seen this, I would have been anxiously looking for a bid to hit to get my contracts sold. However, as the market declined to the support / breakout level, it was greeted with 10 – 85 contracts at each bid. This is an exceptionally large and supportive bid in the cattle market! Therefore, rather than rushing to get my contracts sold, I decided to wait. As I waited, the market climbed and climbed. The point is, had I placed an entry stop at the breakout level, I would have found myself stopped into a short position in a fully supported market. The beauty of the market book is that I was able to get a “read” on the market’s bias and avoid putting my accounts in harms way. If you haven’t spent any time with it, I highly recommend that you do. The market book can be a valuable tool in a trader’s arsenal.Any questions, please call.866-990-0777.Andy.