Cattle prices for cash and futures are suffering under the effects of the trade war with China similar other U.S. ag markets. Fortunately, cattle prices are not as depressed as Kansas City wheat that recently fell to a new 14-year low.
But front month cattle futures did close one day this week at a new nine-year low. And, because of such pronounced weakness, several cattle analysts are predicting even lower prices are likely.
No doubt the trade war is weighing on cattle prices, but the most negative near-term problem the market faces is this: There are too many cattle to be marketed between now and January in large part because of the fire in the Tyson plant in Kansas a few weeks ago.
Packers simply cannot slaughter the available supplies due to logistical problems and sagging demand. It truly is a one-two punch in the gut for cattle producers.
I can only recall one other time in history such a scenario unfolded in the U.S. livestock markets, and it involved hogs, not cattle. And the 21st anniversary of that logistical nightmare is close at hand.
In my book, “Haunted By Markets,” in a chapter entitled “Hog Futures: Wildest Market on the Board,” penned in January 1999, I wrote the following: “Consider this: On Oct. 30, 1998, February hog futures traded as high as $43.90. By Dec. 16, however, cash prices had collapsed to a 58-year low and, in the process, February futures plummeted to a low of $26.05. In a month and a half of trading, hog futures fell $17.85, or $238 per contract per day for 20 trading days.”
Based on history, today’s cattle market may be on the cusp of sharply lower prices for the very same reasons hog prices did a historic nosedive in 1998.
The beef packer simply does not have the capacity to slaughter the number of cattle to be marketed in next three to four months amid a slowing demand environment.
But here is the rub, and it comes from “Hog Futures: Wildest Market on the Board:” “Right when the pork complex looked the ugliest, hog prices bottomed and began to rise. From the low set on Dec. 16 to the high set on Jan. 25, February lean hog futures rose a whopping $18.45 cents, or 71% in value.
“But this time, the wild swing in hog prices took place in 26 days of trading. On average, February lean hog futures rose $283 per contract per day during that timeframe.”
Thus, the dramatic decline with hog prices in ‘98 set the stage for an equally dramatic rise once a low was formed. The hog collapse of 1998 was simply a buying opportunity for those willing to be patient.
Of course, they had to have been mentally and financially prepared to take advantage of the historic decline.
Cattle prices will be in a world of hurt for the next three to four months. But once a low is carved out, I fully expect to see cattle prices at the end of the first quarter of 2020 rise to be north of $120 compared to $99 cash prices this week.
Things may get ugly over the near term, but if history repeats itself, as it did with hog futures in 1998, the upside price potential for cattle futures is substantial — once the market bottoms, of course.
Buckle up, tighten that cinch. Pull your hat down tight. The cattle market is going to be a real bucker.