Broader economic and political uncertainties, as highlighted last month, continue to weigh on the markets. After all, consumers – or final demand – represent the core foundation of revenue for any industry. And that uncertainty, especially in this era of investment money flows in and out of commodities, can play havoc on decision making (more later).
That’s precisely where the beef complex finds itself as we encroach the final quarter of the year. The overarching concern, from a spending perspective, rests on the broader economy; fears of recession are seemingly just a bump away. While that may be somewhat overstated, consumer sentiment and ensuing spending patterns makes the foundation around domestic demand somewhat worrisome – or at least at the forefront of risk management strategy.
Per that uncertainty, the market has found itself under some pressure on several fronts in recent weeks. Pre-holiday wholesale action facilitated a short-term run for the Choice cutout with boxed beef sales bumping back up to retest April’s $190 level (see graph below). However, once Labor Day inventories were secured the cutout began to retreat and pushed back on the market. Fed trade ended August on a softer note at $112 (although in the week immediately following feedyards grabbed another $4-5 from the packer).
The key question, amidst economic anxiety, continues to center around longer-term price resistance levels: when and where will consumers begin to really push back? And that question inherently leads to the fed market’s potential trading range in the weeks and months to come.
Meanwhile, there’s also another influence at play in agriculture: the whims of Mother Nature. Sure, weather is always on the watch-list, but it’s now converging in an important way across both the beef and grain complexes.
First, drought has imposed some serious implications for the beef complex over the short-run. That’s immediately evidenced by the dramatic and unanticipated surge in placements during July- 22% ahead of last year and 21% larger than the five-year average. Producers were forced to succumb to lack of moisture and sales were subsequently compulsory. The six-month placement rate now exceeds 11-million head – about 4% ahead of last year’s mark.
As such, the beef complex has effectively advanced the fall run and fed supply in the coming months. The outcome being the fed market needs to build in some premium to the back-end of the board. Such a premium serves to defer sales and smooth out potential supply heading into 2012. That premium also possesses a secondary effect – it discourages fed sales, keeps pens full and diminishes the need to hunt for replacements. As noted in previous months, the feeder market could become very problematic and potentially may force rationalization in the feeding sector (especially in light of higher feed prices – more on that later).
That inherently brings us to the second influence of drought in the beef complex. Producers have not only been forced to market the calf crop earlier than usual, but also found themselves having to dig into the heart of the cowherd. That clearly has long-term ramifications – especially in light of ongoing liquidation trends in recent years. Cow slaughter rate in proportion of total inventory is significant and clearly under the influence of weather. The graph below represents beef cow marketing rates since last October. Producers have dug in deeper this year than ever.
A side-note here just to reveal how tough the drought has been: some of the culling estimates for Texas alone reach as high as 450-to-500,000 cows. Even at the lower end of that estimate that would leave Texas with approximately 4.575 million cows on January 1. At that level, the combined cow population in KY, TN, VA, AL, GA, MS – a land-mass area roughly equal to the state of Texas - would rival the Texas beef cow inventory.
Now we need to turn our attention to the feed side of the business. Several months ago the MMP noted that “lots of IF’s remain for the final ‘11/’12 marketing year carryover…” The futures market has been busy pricing in private estimates regarding yield – estimates that revealed a stressed corn crop. USDA’s September 12 WASDE report confirmed that outlook.
That’s not to mention final acreages estimates which are yet to be finalized. Similar to the theme above, some of that is tired news. What’s important to watch here will be grain stocks reports going forward; they’ll serve as important indicators of potential slowing demand along with whether producers have advanced sales this year given relatively high prices. Nonetheless, going back to comments in the May and June Monthly Market Profile: bottom-line is that, “old-crop versus new-crop, it doesn’t really matter; the corn market will have to work hard to ration supply and begin now working towards the ‘12/’13 prospects.” It’s not too early to begin talking about the battle for acres in 2012.
To close out, I ran across some interesting observations about proper perspective in volatile markets (sourced from Mercenary Trader, Aug 31) – they seem fitting given the noise and turbulence surrounding commodity markets of late. The list is provided as “short-hand rules for dealing with maniacs” - that is, maniac traders who seemingly trade like illogical card players and cause the market to swing unreasonably or irrationally on any given day:
- Stay calm, cool and collected.
- Play fewer hands — pick spots more selectively.
- Be prepared for high volatility.
- Be prepared to hit hard (maximize opportunity).
- Know when to step aside.
Never a dull day – stay posted!