Finally, some reprieve from the fed market’s recent losing streak. June’s first full week of business didn’t really tack on any money but at least trade managed to forego any further losses. Feedyard managers have weathered some tough slugging since the fed market established its seasonal top back in early April. Market action has been nothing but downhill since; in fact, the market has slipped seven out of the past nine weeks.
The picture is pretty grim if one looks only at the market from that short-term perspective. The trend wasn’t unexpected…but that doesn’t lessen the hurt. And the natural inclination, amidst a sharp market decline, is to focus solely on the damage and hunker down for even more.
But it’s important to remember that markets never work in a straight line (that’d be too easy). Moreover, typical market behavior (especially in commodity markets) means the sharper the ascent on the way up, the more violent the correction on the way back down. That reality is underscored by the focus from several months ago. That is, since December, 2009 the market had climbed nearly $45/cwt and during that span of 69 weeks the weekly market trend was nearly two-to-one: 45 “up” weeks versus only 24 “down” weeks.
The market was bound to give some of that back. The Monthly Market Profile noted in April that:
…there’s some caution signs beginning to appear and there needs to be careful respect for potential reversal of momentum. While the cash market was working higher during the first week of April, the futures market began retreating. As such, spring highs have likely been locked in for 2011. Opposing forces primarily include concerns about broader consumer challenges on the domestic front. Those stem from pressures like rising fuel prices or worries about the renewed decline in home values. Consumer anxiety regarding the economy and individual position has improved during the past several years but still weighs fairly heavily on most individuals (see graph below). Perhaps most telling was the fact that University of Michigan’s Consumer Sentiment reversed direction in March. That scenario is not a new story but calls attention to the need for vigilance and risk management going forward.
Accordingly, during the course of the past several months, the market has had nothing but bearish sentiment thrown at it.
Bad weather coupled with weakening economic signals don’t make for positive markets (June’s housing and employment reports underscore the fragile state of the economy). And now the market has to also work eat through some sizeable placements. Meanwhile, outside investors are anticipating the short-term commodity cycle as ending due to the scheduled termination of QE2 – as such, they’ve lost some of their appetite for commodity risk.
That said, the adage of being “…in a dark wood and the way is not straight,” comes to mind in reference to broader economic challenges. There remain numerous challenges throughout the economy and subsequent influence on consumer behavior. We’re in uncharted territory here and finding our way continues to be the theme of the day. Decision-making is all about sorting through mixed signals.
The primary key for the market going into the summer will hinge on cutout values and their ability to remain relatively solid (the chart below details the weekly trend for the Choice wholesale market). June’s recent break below $175 is significant and the market will have to scramble to reestablish some renewed area of support. If that occurs, the beef complex should be able to comfortably work through sizeable fed supplies over the course of the summer.
However, wholesale prices never occur in a vacuum; summer retail features are largely contingent on competing meats and the potential margin mix within the meat case. Softer cutout prices will equate to further downside risk to the fed market and make closeouts especially ugly. What’s more, it’ll make sellers reluctant to deal on a weekly basis and further compound potential for burdensome front-end supplies. As such, the next several months will be significant from a business perspective.
That’s not mention pressure from the cost side. Fed market dynamics, in conjunction with feed cost volatility, make for some enduring challenges in terms of pricing feeder cattle for the fall run. Superior kicks off the summer sales season in earnest in Steamboat Springs in the coming week – the sale being an important test of fall market sentiment.
Finally, turning our attention to the corn market, USDA dramatically adjusted the ‘11/’12 carryover downwards with June’s WASDE report: May’s report projected 930 mil bushels versus June’s report pegging stocks at 695 mil bushels (only 20 mil bu above “pipeline” and representing a stocks/use ratio of 5.2%). Much of that downward adjustment was contingent upon acreage reduction – but doesn’t include acres now out of production due to flooding on the Missouri River. Meanwhile, yield projections remained steady. Moreover, next year’s carryover is predicated on a very slim and questionable ‘10/’11 carry-in estimate.
Challenges within the corn complex are highlighted by the table below. There’s lots of IF’s remaining for the final ‘11/’12 marketing year carryover: IF carry-in is less than 730 mil bu; IF there’s a hot summer with yield less than 158.7 bu/acre; IF planted acres come in less than 90 million (some estimates have the U.S. as low as 87 million); IF a late crop lends itself to harvest delays. All of those spell trouble, not to mention potential deviations from the demand side (e.g. exports) and represent some serious pitfalls ahead. As mentioned last month, 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. Bottom-line: price discovery will be wild ride from here.
Never a dull moment. Stay posted!!!