Extreme volatility hurts US beef industry

Price swings in the US beef industry have been extreme over the past 18 months and Rabobank’s global beef quarterly report claimed this volatility has caused grief to cattle producers and feeders.

Changes in the cash market have been up and down in the US. Over the first 22 weeks of the year, reported prices have been higher for 12 weeks, while price fluctuations have been lower for nine weeks.

This uncertainty means cattle producers are never sure of the price they will get for their animals and are therefore unable to adequately plan for the future.

The majority of cattle producers have some form of risk management system in place, but these vary greatly. Some use simple forward contracts while others opt for more complex futures and options contracts. This, according to Rabobank’s report, only “compounds the problem of uncertainty”​.

Alongside volatility in the cash market, the situation has apparently been worsened by unusually strong basis levels – the price difference between cash price and futures price.

Rabobank’s global strategist animal protein Justin Sherrard explained: “In the event a producer has had the opportunity to place a hedge or further position at a price level that offers a positive price for the cattle, a strong basis can be viewed as a bonus. This is because it enables the producer to capture the difference between his cash sales price and the offset to the lower-priced futures position.”​

When future prices are traded below cash prices, cattle feeders are encouraged to market cattle earlier than expected to capitalise on the positive basis price. “The problem with positive basis is that speculators in the market believe the current cash market is overvalued or will be declining,”​ said Sherrard.

These mixed singles make it tricky for cattle feeders to initiate new positions at price level that help the industry make a profit.

“Cattle market volatility can hinder or hurt beef processor and pack procurement, as both buyers and sellers become weary of entering into longer-term supply agreements if the market may move against them,”​ explained Sherrard.

To offset this, Sherrard said long-term contracts could provide the basis for innovation in the beef sector and might improve the industry’s ability to tackle new requirements in a challenging market.