In my opinion, just when you thought it couldn't get any stranger, it does. Cattle prices made history in a few sectors again this week with some futures contracts doing the same. Even hog prices weren't going to be left out by weeks end. With the lean hog index having fallen all week, yet futures up sharply. A tremendous amount of basis trading, and formations of, is taking place. Back to cattle. First, there is a fundamental function taking place of too much production and processing capacity for the available inventory. The contraction of production and processing capability is being fought over tooth and nail as just about everyone can see that the rationing of cattle producers, through a higher price, is taking place. The benefit to some is detriment to others. Cattle feeders took it over the head at the end of this week. Not only have input costs been consistently rising, on Friday, everything took another leap. Energy prices soared as did interest rates. Grains even perked up after finding the carry out in corn and beans has been reduced significantly. Throw in the increase price of feeder cattle, and the cost to produce a pound of beef increased again this week.
The resilience of the consumer has been discussed, dragged over the coals, put to bed and now woken back up again for further discussion. Price action of financial markets and energy is believed going to test the resilience of the consumer. Higher interest rates are screaming at the consumer to stop buying things on credit. Higher fuel now will be a direct impact on consumer spending, as well as the higher beef prices. Two devastating disasters on the east coast and west are going to have impacts on the economy, and most likely inflationary as building needs money and of course the Biden administration continues to give money away. As well, the loss of hopefully millions of illegal immigrants, and the lack of infrastructure to support the east and west coasts to bring them up to previous spending ability, is expected to have further impact on the economy.
Risk of loss is high. Not only from the stand point of if the price goes down, but if hedged, the price going up. Losses on hedges can put a heavy strain on working capital and no number of fore warnings of being able to live with the consequences of your actions will suffice the lender. A sound business plan, and not putting someone else's money at extreme risk, is critical due to the significant price expanse and fundamental function of reducing production and processing capacity, or increasing supplies. Neither will be quick and all will be painful to some extent. I believe that if the resilience of the consumer is hampered any at all, it would cause a sharp reaction in the cattle/beef markets. I am finding it very difficult to believe that the consumer is not being impacted by the dramatic rise in interest rates and now commodity inflation. The anticipated bout of inflation is here, begging the question, "does cattle/beef appreciate with the inflation, or hampered by?"
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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