The Livestock Super-Cycle

by John DePutter, May 2nd, 2014
One goal of the DePutter Market Advisory Service and the Ag-Alert service is to help our clients understand the price and profit cycles of agriculture. It can be valuable to recognize the signs and signals that identify the major highs and lows, because this can help you make business plans that fit the long-term swings in prices and profits.

When the grain and oilseed futures started to take off toward their new, higher trading paradigms in 2006 and 2007, lots of farmers forward contracted crops early. For example, I know of lots of farmers in Ontario who sold large portions of future crops (especially wheat), two or three years ahead, at prices they thought were great. These people didn’t realize that the previous decades of low prices had discouraged production and created a cheap foundation for massive consumption, including a new demand era led by China and the use of grain to make fuel. They didn’t realize non-ag markets were taking off, tipping them off that ag markets could follow. They sold too much too soon and didn’t have much (if any) to sell in the upper stages of the bull market of 2008.

That is the nature of bull markets: there is not a lot of grain to be sold when they are at their highest levels.

Now we are seeing something similar, although with some differences, in livestock. Lots of folks have exited the business. Many did so because of necessity, not choice. They just couldn’t withstand the equity bleed.

Now we are seeing the results of the cutbacks in the cattle business and lack of expansion in hogs. The expensive grain markets of the past several years and relatively less high-priced livestock forced the industry into a state of liquidation that cannot be turned around quickly or easily. So we are seeing a bullish action of historic proportions for livestock, the natural result of the extreme up-cycle seen in grains.

Some will say the latest run higher by hog futures is just because of the PED virus and certainly that is one factor. But my guess is that the market was sitting in a position where it was highly vulnerable to a new development like this and if it wasn’t PEDv driving prices higher it would have been something else at some other time. Point being, poor feeding margins and years of tough financial times were destined to ultimately usher in better feeding margins and better financial times – it was a matter of when and what the triggers might be.

Of course, neither me nor anyone else can be sure of exactly where grain or livestock markets will go from here. Grain markets are hard enough to predict and livestock markets fully as hard if not harder. I do believe however, that the livestock markets are doing what the grain markets did a few years ago, with a delayed reaction: They are rising to a new higher trading realm and they are not in a normal cyclic high – they are into what will turn out to be an extreme cycle, just as the grain markets experienced an extreme cycle.

Bear in mind that notwithstanding the day to day market factors and short-term issues, in the big picture it will eventually be high profitability itself that causes expansion and eventually turns the cycle back down.

Also worth noting, the top of the grain and oilseed markets came with bad weather in certain important production areas of the world and growers who didn’t get good yields and didn’t have much to sell were unable to cash in as much as desired during the topping phase of the bull market. The top of the livestock markets will likewise come when fewer producers are on board, and possibly with trade issues and disease issues that limit the ability of those still in the business to fully capitalize on the best prices. Additionally, some will have pre-priced lots of their production when the best prices are occurring.

Final remarks: Those receiving the DePutter services will be aware that we believe a super-cycle peak is behind us for most of the grain and oilseed markets. We are now starting to monitor the livestock markets for signs that a super-cycle peak might be coming into place. At this time we see some early topping signals, however a full-fledged line-up of bearish signals have not emerged just yet. A recent Ag-Alert newsletter brought subscribers up to date on the list of long-term indicators to watch for.

To see the value that Ag-Alert can add to your marketing and bottom line, subscribe to a free trial of Ag-Alert by visiting the Subscribe/Free Trials page on the DePutter website.