click image to zoom 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.