As we move into the final quarter of 2016 the weakest commodity futures markets of the year so far are those that put a price on meat; cattle (down 24%) and lean hogs (down 16%).
Back in November 2014 we highlighted how cattle prices had doubled since 2009 as high feed prices (partly the result of drought) had incentivised farmers to send their cattle to slaughter.
Related article: How long will cattle price boom continue?
The cattle cycle as its known suggests that inventory and production and by extension prices generally following predictable cycles, typically lasting around 10 to 12 years. All of which suggested that prices were close to a top. As it turned out November 2014 did mark the peak in the market with prices falling by 40% over the next two years.
There was a similar pattern with lean hog futures (which typically follows a much shorter 3 year hog cycle), albeit peaking five months earlier. They have since fallen by over 60%.
A combination of low feed prices (wheat in particular has also fallen sharply in 2016), rising beef production and hogs being sent for slaughter combined with weak export demand from China and Mexico (the devaluation of the peso threatens shipments for 40% of US ham).
Both markets represent just another examples of commodity cycles in action – high prices being the cure for high prices. But now as many other commodities rising sharply since the start of 2016 is it now the turn of the laggards – cattle and hogs – to catch-up?
Unlike most other commodities, cattle and hog futures have a very low correlation with the US dollar so the outlook for interest rates in December count for very little. But that’s not to say that macro factors are not important. Although feed prices (e.g. wheat and corn etc.) are still low, it could be argued that they are unlikely to go much lower. Meanwhile, on the demand side the peso could appreciate if Trump’s election prospects continue to deteriorate, boosting demand from Mexico.
Looking at live cattle futures prices stretching back to the 1980’s and considering the typical length of the cattle cycle, futures prices are probably only partly through their correction. And given the scale of the boom in prices relative to previous ones it may take much longer to work through (a lot like many other commodity markets following the super-cycle).
Price data for lean hogs over the same period suggests that the current price level of around 50 may offer some support. However, given the prospect of continued weakness in cattle markets this is likely to weigh on the potential strength of any rebound in lean hog futures.
Related article: Livestock prices: The top 10 most important drivers