In my opinion, the cattle markets price action this week will help in deciphering demand. Whether from cattle feeders, feed yards, packers, or consumers, if the price moves lower from here, it will simply be due to a lack of demand from one, or multiple entities. With the border shut, and significant controversy of who knew what and when, supplies are not much of an issue any longer. Barring the border opening, it appears the inventory available outside of vertical integration will have to be fought over with lots more dollar bills. So, if the price goes up, the demand for will be anticipated as good as it has ever been. If it does not go up, then it must mean demand is going down. Most arguments I have heard for paying the inflated price are in expectation of higher fat cattle prices and cheaper cost of gains that will return input costs, or pastures and abundant feedstuffs that may go to waste. What we are on the verge of finding out is whether or not those expectations will be met. For the time being, cattle feeders will be feeding the most expensive inventory in history, note this is not the first time I have stated this, with corn prices moving higher into harvest than lower. Friday's unemployment report did not show the extreme revisions that some had anticipated. However, it did miss the expected number of employed by miles. When the smoke cleared, bonds were up nearly 2 points and equities sold off sharply, just after making an all-time new high in cash and futures. Energy sold off abruptly, as did the US dollar index with the price action of most markets displaying concerns of recession more than inflation. What this leads me to anticipate is lingering stagflation causing a recession. Of the most interest this week was an article from McDonald's CEO describing a two-tier economy. I agree with the analysis presented in this article and believe it worth your time to read. McDonalds has been a key indicator of the health of the economy, similar to Walmart. As the leading fast food restaurant chain, and having sold more hamburgers than can be counted, I pay attention to what they have to say. Recall only a few weeks ago the earnings statement noted the profits came from value deals and not sales of regularly priced menu items.
The price gains of cattle have been inordinately strong the past 60 days with a believed fury of activity produced by all who are in the cattle "selling" business. All of this can be whittled down into a very simple aspect, the number of cattle available to the general public has diminished greatly with a belief that nearly 65% of the cattle on feed are controlled by 3 entities with subcategories of the actual producer. The 3 entities are believed Walmart (22%), Beef Alliance (25%), and the beef/dairy cross (18%). While my numbers may be off a little, I don't think by much as Beef Alliance state's their market share on their website and the percentages from Walmart and the cross are from about 2 years ago. So, the available inventory may actually be less. The shift from feeding heavily in the south to feeding heavily in the north, where there are newer facilities in production and processing, lower cost of gain, and a premium in fats over the south is obvious. All combined it suggests that cattle producers have been fighting tooth and nail for not just limited inventory, but apparently sparsely limited inventory. Hence a reason for what is believed an exceptionally over inflated price. With the supply side unable to change without inventory from Mexico, or even expansion the way heifer slaughter is looking, demand is believed the only aspect for price fluctuation at this time. As unpopular and costly as this may be, I recommend rolling up every lower strike put option and not be hesitant to lay off the risk of newly acquired inventory while basis remains tighter than it could be.
Futures traders began scaling back the basis spreads they were once so willing to narrow. This suggests producers will now assume more of the risk as higher cash prices are paid today with lower prices projected in the future. As well this week, the spread between starting feeder and finished fat is believed to have reversed. This is another factor of demand, due to the expectations of cattle feeders that fat cattle would be more expensive in the future or cost of gains lower. As neither are currently panning out, some of the starch may have been taken out of bidders. Hence, lesser demand. The Mexican black swan, that remains roosted on the barn, continues to be overlooked. If its wings were to start flapping a little, then a combination of loss of demand and more cattle supply made available, has the potential to drop the price at a greater rate of decline. If you thought going up was easy, look at orange juice, lumber, and copper to see what other commodity markets have done in very short periods of time. While I understand there is no fundamental correlation between these markets and cattle, they are all commodity markets and all subject to quick price adjustments upon changes in fundamentals of, whether supply or demand. Bonds were sharply higher upon the release of a grossly missed employment report. The need for lower rates suggests the economy needs stimulating and if in need of stimulation, it must not be very stimulated at the moment. The McDonalds article addresses this distinctly. Energy sold off further when this report was released. The direction of both of these markets is believed the paths of least resistance and reflecting a greater aspect for recession than inflation. However difficult the attempt to manage risk has been, this is no time to forego it. When the decisions are made to buy cattle, it naturally creates another decision as to when to market. If you were one of those lucky winning bids, you are now on the flip side, in search of someone willing to pay even more, in a time frame where only discounts are available in the future.
Christopher B. Swift is commodity broker and consultant with Swift Trading Company in Nashville, TN. Mr. Swift authors the daily commentaries "mid day cattle comment" and "Shootin' the Bull" commentary found on his website @ www.shootinthebull.com.
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