Oil Price & Heavyweight Cattle Could Be Worrisome

Much has been said and written of late about the incredible growth in beef demand and other good news in the marketplace. But there are some bearish signs that deserve watching, and the big one is oil.

Oil prices continued to set new record highs this week, as prices neared $50/barrel. With oil demand soaring in China, it's a legitimate concern that world demand for oil has shifted permanently.

The price of oil has a dramatic effect on the price of all goods and the overall performance of the economy. Record oil prices will have a cooling effect on the global and U.S. economies, but the supply situation could also become precarious. With oil prices already at such levels, any disruption in supply could be disastrous.

It appears prices at the consumer level may have reached levels that are beginning to dampen beef demand. While demand has been a little softer the last 3-4 weeks, we are also in the summer doldrums when demand is traditionally soft.

Of course, there continues to be concern about the prospect of the Canadian border reopening without the U.S. having regained its export trade. Beef imports from Canada for the first five months of 2004 were down by 5.63% compared to a year ago, while beef imports overall were up by 5.23%. The reopening of the Canadian border would result in the resumption of both the feeder cattle and fed cattle trade that has been closed due to BSE since May 2003.

A recent survey conducted in Japan shows that nearly 40% of Japanese consumers claim they don't want to purchase U.S. beef. There is also concern in the U.S. that, not only will the Japan market be slow in reopening, but it will take considerable time to win back the business lost to other beef exporters.

Perhaps the most valid concern expressed by market bears, however, is simply the breakevens that have been purchased to go against the fall. The incentive, of course, will be for feeders to add extra weight to cattle in order to lower their breakevens, and that could hurt us, as well.