The Market's Fine Print

For the weather-hardened citizens of Buffalo, N.Y., to complain about snowfall is tantamount to Bedouins fussing over excess sun and sand. To hear them do so a good week before Thanksgiving seems as unlikely as lame-duck legislators bothering with the politically correct.

Yet before I even had a chance to break tank ice this morning, NPR was blaring with grumpy interviews from the snow capital of the Northeast. As much as six feet of snow has been dumped on the Buffalo area, paralyzing much of western New York and spooking tough winter veterans with images of a season-from-hell that arrives early, hits hard, and stays late.

Those of us in livestock country who have been shivering in our boots since the first week of November, while certainly not unsympathetic with our brothers and sisters trapped in this dangerous storm, can be heard mouthing cold bits of comfort like "welcome to my frozen world." I suppose such is the kind of cheerless companionship you might expect among cattle and hog producers caught unawares.

Readers smugly ensconced in the lap of the Sun Belt are no doubt laughing at the suggestion that the sad sacks of the North should be pitied for being bushwhacked by Mother Nature, as if the petrified remains of the party animals of Pompeii deserve special sympathy for answering the last call at the Mount Vesuvius Bar.

That may be a little harsh.

Although any successful stockman worth his salt knows the late-year march through the fourth-quarter chills with every passing step, few see it as cost-effective caution to break out the thermal underwear and bunk scoop immediately after Halloween. To be sure, weather patterns can be as unpredictable as abstract art. But if producers didn't feel generally confident about the turn of the seasons, seed corn would just sit in the bag and lovelorn bulls would never get turned out.

But let's forget about this pointless blame game. No amount of management skill can trump planetary dynamics. A surprise is a surprise is a surprise. Until further notice, market watchers will be wearing parkas and snowshoes, watching production and price possibilities through the lens of an early winter.

If you question how much livestock markets have been caught flatfooted this month, just consider the way livestock spreads at the CME have shifted so dramatically since the end of October. For example, December and February live futures closed on Oct. 31 essentially at par (absolutely no weather premium). Thirteen frigid trading sessions later (i.e., Wednesday), February closed nearly 150 points over spot December. At the same time, the premium status of December lean hogs over February collapsed from 107 points to a mere 12.

This month's definite privileging of February futures in this regard clearly reflected the board's new nervousness about how winter weather could significantly limit commercial meat production going forward. Indeed, the behavior of the Dec-Feb spreads over the next 30 days or so is apt to be the best weather map money can buy.

The specter of a tough winter can cut more ways than a jiu-jitsu knife. On one hand, it can strip tonnage and drive cattle and hog prices sharply higher. On the other hand, if adverse conditions weigh more heavily on meat demand than production, an ugly winter can significantly weigh on prices. Conceivably, extremely cold temperature this week could create ideal conditions for the spreading of PED. It's also possible that the destruction of winter pasture could prematurely force stockers into feedlots, thereby pressuring the feeder cattle trade.

Of course, an early winter does not automatically translate into a long and hard winter. Number crunchers who try to heat the room by burning years and years of temperature data are hard pressed to find any correlation between November readings vis-a-vis the seasonal average and midwinter readings. In other words, abnormally low temps in November can lead to above-normal conditions in January and February as easily as not.

Nevertheless, I've been through enough snowball fights to know that once market expectations and psychology are hit for the first time with an extreme winter blast, it can take longer than you think to shake off the chill.

John Harrington can be reached at feelofthemarket@yahoo.com

Follow John Harrington on Twitter @feelofthemarket

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