Commentary: Cattle trade higher as markets recalibrate

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click image to zoom The markets have seemingly experienced a “hard reboot.”   The recent global selloff in equities and commodities indicate market participants are recalibrating.   Markets do NOT respond well to uncertainty.  Neither do they always necessarily function logically – emotion can become part of the process, too.    Fear-contagion and a crisis-of-confidence hit the market hard. 

The rapid, widespread selloff resulted from traders reassessing economic conditions and respective investment strategies going forward.    The outcome being development of a dramatic “risk off” mentality – that’s resulted in a broad flight-to-safety and established a painful washout (with major exceptions being gold and cattle - more on that later).  All of that’s made for some VERY busy, wild trade in recent weeks. 

The overwhelming concern of late surrounds economic and political fragility.   Most notably, concerns about slow growth are increasingly looming over the market(s).  Simultaneously, the market had to battle worries (and frustration) over the United States debt ceiling resolution (not to mention the process) coupled with the chronic malaise about sovereign default in the European Union.  

Meanwhile, consumer confidence, housing and labor (all inexorably intertwined) continue to be stumbling blocks for economic growth going forward.   For example, Consumer Sentiment declined to 63.7 from 71.5 in June and the initial reading for August plunged even further to 54.9 (near the all-time low of 51.7 recorded in May, 1980).   Simultaneously, the NFIB’s Small Business Optimism Index fell in July for the fifth straight month; expectations surrounding growth, or the lack thereof, and the overall business environment have been the major drivers of the pessimism. 

click image to zoom Those types of indicators are converging and weigh heavily on convictions about the future outlook.   And the FOMC August statement affirmed those concerns (while also lengthening hopes about the recovery horizon):  

…economic growth so far this year has been considerably slower than the Committee had expected.  Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.  Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. 

As such, markets found themselves under intense pressure as traders began to price in each and every possible fear.      

            More importantly, it underscores the fact that economic conditions remain relatively tenuous – there remains work ahead.   And markets never find a bottom at a single point; rather, establishing a base becomes a process that requires time.   Looking forward, several head winds appear to be working against domestic beef demand.  Primarily, the outlook for slow growth, continued high unemployment and housing woes will likely serve as an anchor on consumer spending.   That’s especially true in the meat counter as beef prices can potentially invoke some sense of sticker shock.    

            That said, beef producers should be gratified by the market’s resiliency during the course of the current recovery.    As mentioned in the Monthly Market Profile previously, beef prices and cattle markets have largely outdone the broader economy.  As an example, the weekly fed market has consistently advanced faster / further versus the performance of the S&P 500(see graph below) – to the tune of 40% - while also outrunning gains in the broader commodity indexes.    That’s an encouraging sign from a demand perspective, especially in light of current slow-growth indicators across the broader economy.  

That favorable performance is partially attributable to the value of exports.    International trade values through June were updated by USDA on August 11. The aggregate value of international trade represents $2.5 billion for the first half of 2011.   Stated another way, beef and beef-product exports through the first half of the year equate to an additional $220/head to the market; that’s the equivalent of adding $17.50/cwt to the fed market (see graph). 

That also underscores the importance of global monetary policy in the near future.  The potential for shifting exchange rates will need to be monitored very closely in the coming months.   Changes need to remain orderly in order to prevent unraveling of the gains made in recent years.   

Last month’s article was entitled, “A Busy Summer On Tap.”   However, the events of the past several weeks underscore the importance and potential influence of external factors.   Those can be very frustrating but also draw attention to the importance to managing risk very, very carefully!  That’s especially true in these operating environments where all events are connected – markets and institutional money flows are globally inter-connected and reactive.  

  Lastly, at this juncture, some observations about the functionality of the cattle market are essential.  I noted last year at this time the following:  

If ever there was a period in which the market was prone to disintegrating because of inequitable practices 2010 would be it.   The barrage of bad news is never ending; in fact, there’s been increasing chatter in recent weeks about renewed threats of deflation.  

click image to zoom A year later those conditions, especially deflationary pressures, have renewed themselves in almost perfect order.    

But while equity and commodity markets were caught up in a whirlwind of uncertainty the beef complex survived unscathed.   In fact, to the contrary, August live cattle managed a $4 gain during the first two weeks of August.  That boost, coupled with better cutout values in recent days, propped up live trade to finish the second week of August at $116-7 – the highest mark since April.  The point being that recent market and economic events have provided huge opportunity by the packer to disparage cattle value in an attempt to fracture fed trade – IF that opening really existed in the first place…the pragmatic evidence indicates otherwise.  

Meanwhile, S&P’s downgrade possesses some potential impact for the cattle business.  It may conceivably cause higher insurance costs in the country; that outcome will ripple through the bonding industry.   (Not to mention that bonding is increasingly difficult to come by since the financial crisis.)  Put that development on top of the far-reaching and enduring consequences of the Eastern Livestock bankruptcy and there exist some real implications for business continuity or, at the very least, higher transaction costs associated with cattle trade.  Bottom-line:  the beef industry would be far better served to have policy makers and regulatory agencies focus on real problems at hand versus trying to create new commerce rules for problems that don’t exist.  

Lots of other market factors to discuss like weather and grain markets – but I’ll leave that to another month.  Stay posted!!!

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Ken Martin    
Missouri  |  August, 16, 2011 at 07:49 PM

I disagree with Speer's contention that there are no marketing problems in the cattle industry. When you have a high percentage of formula contracts with no established price for those finished cattle except whatever the live cattle market is at the time the cattle are to be slaughtered, you have a problem. Free markets cannot function unless there is a degree of parity among participants, buyer and seller. The consolidation of the packing industry has led to conditions of monopolistic behavior, harming independent cattle producers and consumers. When you have sellers who are discriminated against simply because there are not privy to "sweetheart deals" with packers, you do not have a free market. You have a situation where those with great economic power use it to further increase their power at the expense of those who are weaker. The primary reason for the healthy cattle market are age old supply and demand factors. If the current supply of beef cattle and feeder calves were greater than is presently the case the packing industry would be bringing their formidable power to bear with all the intensity they could muster.

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