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CME: Volatility in Livestock Trading as Other World Markets Falter

22 January 2016

US - Extreme volatility appears to have become the order of the day in livestock trading as market participants struggle to price risk, write Steve Meyer and Len Steiner.

While market participants have a fairly good handle on beef, pork or chicken supply conditions and outlook, quantifying the impact on demand from another global recession is exceedingly difficult and may prove to be a fool’s errand.

Do we use 1997 (Asian financial crisis) or 2007 as a template? Are global financial institutions in much better shape today or are we about to relearn the lessons of the past? Is this the third leg of the debt supercycle as a Harvard economist recently noted?

Central Banks took some extreme measures in order to fight the last recession and stave off deflation. Those measures may work when modelled on paper but they have not been tested in the real world and we may get to see their unintended consequences.

And what happens with China? The second largest economy in the world has embraced capitalism but not its political institutions.

There is more to the current market than just what are retailers featuring this week or if burger sales are holding up. The purpose of futures is to price risk and that has become an extremely difficult job these days.

USDA normally gives us an update on weekly beef and pork sales on Thursday but the report was delayed by one day due to the MLK holiday so look for those numbers tomorrow.

It is always a good idea to keep an eye on exports given that they make up a significant portion of demand for US meat products. In the current environment, staying attuned with export trends is indispensable.

As we noted earlier in the week, chicken exports remain vulnerable to new outbreaks of bird flu. USDA has worked hard with trading partners to adopt regionalised rules, whereby countries only stop buying from affected areas rather than the entire nation.

This does not mean that countries will agree to adopt these rules. Just as producer groups here fight hard to ban imports whenever there are disease outbreaks in other countries, so do other countries have to contend with their producer groups that want to ban US products.

So far the bird flu in Indiana appears to have been quickly contained but it highlights the risk for the poultry industry going forward.

Between 20 to 25 per cent of the pork produced in the US is exported. Thus small changes in export demand can have significant implications for pork availability in the US.

Last fall there was a lot of speculation about the outlook for US pork exports to China, with both packers and analysts insisting that the big spread between US and China pork prices would translate in a big surge of US shipments there.

China did in fact buy a lot of pork last fall. According to their statistics November imports were up about 86 per cent from a year ago. Unfortunately, they bought much of this pork from the EU.

Imports from Canada more than doubled in November while imports from the US were up about 10 per cent. Which highlights the effect that the strong dollar is having on our ability to stay competitive in global markets.

The latest WASDE report shows US pork exports in 2016 are expected to be up just 3.6 per cent compared to 2015 levels. This means we will ship an additional 180 million pounds of pork (carcass wt basis) at a time that we are expected to produce about 470 million pounds more.

The USDA forecast is certainly conservative but also appropriate given current conditions in global markets.

Based on the weekly export data reported for December we project exports last month were up about 13 per cent from the previous year. For January our projection is for an 8 per cent increase.

The test for the market will come in February and March, however.

Hog slaughter is still expected to be well above 2.2 million head during that time and spring demand still a couple of months away. Keeping exports moving will be a critical factor for US packers and an important price driver.

Daily Livestock Report - Copyright © 2008 CME. All rights reserved.

ThePigSite News Desk

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