CattleFax described influences in 2015 cattle market crash during NCBA presentationWritten by Saige Albert
San Diego, Calif. – CattleFax looked at a number of factors implicated in the cattle market drop during the fall of 2015 during a presentation at the National Cattlemen’s Beef Association (NCBA) Annual Meeting in San Diego, Calif. at the end of January.
“It has obviously been a pretty volatile last few years,” said Randy Blach, a CattleFax analyst. “If we look over the last few months, we can get a better foundation for what will happen in 2016-17.”
A look back
Blach stated that at the beginning of 2015, markets were making their cycle highs and hitting top levels.
“We started to see the market and anticipate increasing supplies for expansion, which we have seen take place,” he said, noting that producers began to expect a market contraction. “The question was, how fast would the market contract and how fast would we start to see things move lower?”
The resulting market contraction was what Blach described as violent.
“We went from $175 to $120 in a very, very brief period of time,” he said. “We went through the third largest rally in the history of our industry from 2014 to 2015. “We turned around and went through the largest break-evens in history over the last 12 months.”
Blach also noted that, domestic markets and protein supplies created another concern.
“Markets got very violent, and they moved rapidly,” he said.
Shortly after, price became the best news for the beef industry.
“A year ago at this time, we shared that we would see a five to six pound increase in per capita meat consumption per person in the U.S.,” Blach explained. “We thought 330 million more people would have to consume five to six more pounds of meat. That number ended up being nearly 10 pounds.”
The fast-paced, dramatic change resulted in heavy repercussions for the beef industry in the form of a dramatic price drop.
“These things change very quickly,” he said.
Shift of leverage.
Blach also noted that market increases have come from a variety of sources, but recently, market leverage makes a bigger impact.
“In 2013-14, markets went up $28 per hundredweight in one year,” he explained. “Only eight dollars of that came from supply. The balance came from demand growth, with the biggest part of it from leverage.”
A year ago, fundamentals put that impact at $12 of the increase resulting from leverage.
“In the last three or four months, markets have been pricing in a recession,” Blach noted. “That is the leverage shift we have gone through.”
Global economics and global markets also play a huge role in driving markets.
A gap was seen between consumption and supply from July through August, he noted.
“For the year total, we ended up with export tonnage for all meat – that is beef, pork and poultry combined – down by 1.5 billion pounds,” Blach said. “Most of us anticipated that we would export 600 to 700 million pounds more, not be down 1.5 billion pounds.”
The influence of offal and hides in the marketplace also plays a significant role in the export picture.
“When we look at the value of offal and hides, these two items along resulted in an overall loss value of $200 per head from 2014 to where we’ve been in the fall of 2015,” Blach said. “That is because of export markets.”
Each of these factors impacts the marketplace, and Blach emphasized that the change in markets is rapid.
“When we add all of these things up, we ended with the largest net meat supply increase on our domestic market from any year going back to 1950,” Blach commented. “1976 was similar, but this was the biggest year.”
Another issue that plagued the cattle market was how current the market was.
“The currentness index for the last 15 months has been in the red – un-current,” he said. “We are finally seeing it back in the ‘caution’ area, and supply is starting to get cleaned up.”
When the market is not current, Blach noted that leverage shifts away from cattle producers.
“All of these things play a role in the market outlook,” he said.
Look for the CattleFax outlook report in the next week’s Roundup.