In my opinion, Friday's trading action, upon the President's comments, gave good insight into the division between cattle producers and everyone else. Although a weak start, when the President spoke, they sold off sharply, as did energy and equity prices. Bonds moved higher as well, with all suggesting to anticipate more recessionary factors going forward than inflationary. After the dust settled, cattle feeders and industry participants looked around and said to themselves, "this won't make any more cattle", and began bidding the market higher, and to some extent new contract highs. However, to the rest of the world, it suggests consumers may not be as willing to spend or consume more on beef. While signs and signals are all around that the high price of beef, and questionable economy, is impacting consumer discretionary demand, cattlemen continue to attempt to outbid their competitor to fill pen space. All of the above leads me to believe that more risk is being assumed by the cattle feeder, attempting to fill pen space, at any price, while the beef eating community is seemingly showing great reserve in spending. An answer to a question I have asked often was found this week. To what extent will a cattle feeder go to remain in the cattle feeding business? Whatever it takes. That is what has been on display this week, the cattle feeder doing whatever it takes to bring inventory to their lots, then their competitors. Industry professionals are having to make enormous financial decisions based upon distorted information. Lenders are over a barrel with farmers under water and cattlemen surfing the waves. Both will need more working capital to survive the lower prices of grains, or secure price gains on cattle. Both have been very capital intensive with no signs of letting up. As the US is being circumvented in most every way possible, Friday's comments by the President exaggerated some of the trends already in place. Cattle are the exception and believed only due to the great desire to keep someone else from owning inventory. For everything else, it simply states that the US will have more of its own product for domestic usage. As much as the President may be attempting to achieve great accomplishments, farmers and ranchers will continue to deal with more government interference.
The sharp rally this week was not as interesting to the mass as has been in the past. Very little increase of open interest was seen this week, even with new contract highs and an over $28.00 rally in feeder cattle. Here is where more of the distortion comes into play. While cattle feeders may have various ways to market inventory, on the hoof, rail, formula, or potentially privy to beef sales down the line, but all are pretty much subjected to the same prices of feeder cattle and feed at placement with a little variation. Weight when placed variations are the most common, but when going by somewhat old timey ways of calculating margins, there isn't that much difference when placing. Any difference would be anticipated minimal. Therefore, regardless of how the cattle are marketed, the profit potential is continually squeezed without further advancement of fat cattle prices. This week alone saw cattle feeders pay $9.25 more for a starting steer, via November futures than the April fat cattle contract gained. Were there no advance in cash trade, regardless of how they are marketed, the margins would be squeezed tighter. I can recall a few months ago how dependent cattle feeders are on an ever-increasing price for fat cattle. With packers under extreme duress, and woefully too much processing capacity, they are expected to pull every antic they can to slow the loss of margin. Long way around the barn, but with seemingly a shift having been noticed in consumer demand, and cattle feeders continuing to narrow profit margins by paying higher prices for inventory, leads me to believe that cattle feeders are placing themselves in an untenable position.
Energy made a decisive move to the downside that left few questions unanswered as to the path of least resistance. With no increases of oil production, it leads me to anticipate weakening demand. Diesel fuel is leading the way down now and that does not bode well for the health of manufacturing and distribution. Bonds pushed sharply higher as threats of increased tariffs, and less likely trade deals, will keep more US-made products available to the domestic markets. Bonds moving higher suggests stimulation is needed, and after Friday's price action, it seems as if more agreed. I think this will lead to more government funding of the government, as in, we buy our own debt. The flip side is that regardless of what may or may not happen in the world, the US remains the strongest kid on the block and if things turn south, more countries may want to stand on the side of the US, and fund what sure looks like the gearing up of the war machine. I say that due to the sharp rise in gold. Gold is believed being stored as a tangible asset for which if paper currency were to be devalued further, or any government's failure to pay their debts, gold is a hard asset that can be traded in any currency around the world. President Trump is volatile in his decision-making process. I anticipate this to lead to many more unintended consequences and foil some of the best laid plans.
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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