Several months ago a comment from an equity market technician caught my attention. Following his discussion about the current investment environment, the show’s host quipped something to the effect of, “That’s why you’re the expert.” The analyst immediately replied back, “No, the market is the expert, I’m just an observer.” The action of the past month speaks to the principle, for just when you think the market might be out of bullets, it reloads and fires again.
That was the case as March closed business; cash trade reversed from the previous week’s direction and surged $7to close out the month at the unprecedented level of $121-2. And April subsequently opened with positive follow-through; in somewhat haphazard fashion feedyards captured another $1-2 with sales at $123-4 and some trade as high as $125. CME’s deferred live cattle contracts have also ratcheted higher during the past month. For example, the June contract surged from testing $110 in mid-March to almost $121 by April 4 (an ascent nearly equal to $1/cwt per day).
Market prosperity is certainly not a new story. The exceptional strength and persistence surrounding the run, though, continues to be somewhat surprising. Much of the broader coverage relative to the market’s performance seemingly looks to the supply side as explanation. That is, limited availability of cattle has driven buyer competition to fill shackle space. But that focus overlooks the demand side of the price equation – more volume and higher prices.
For example, April’s wholesale beef market opened by underscoring the previous week’s positive action with Choice boxed beef sales crossing $190. Meanwhile, throughput in the first quarter is running nearly 2% ahead of last year’s pace: 2011’s weekly production average stands at 495 million lb versus 2010’s average-to-date of 485 million lb. The market is largely being driven by strong export sales (albeit a portion of that is directly attributable to a weaker dollar – another topic for another day) coupled with resilient domestic demand (more on that later).
All that said, 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.