The last couple of weeks have been a wild ride in the cattle market with days of limit up and limit down moves in the futures market. There has been far more downside than upside of late, and uncertainty is the key word. The experts are struggling to explain what all the confounding information means, so it is no surprise that all of us not involved in the day-to-day battle of the markets are left a little confused as well.
The supply side of the equation is not that difficult to decipher. The cattle on feed number is up about 2.7%. That, in and of itself, is not that monumental, but when one considers that placements over the last six months have been down by 3.5%, it does speak to the fact that cattle feeders are responding to economic signals and feeding cattle longer and to heavier weights. Margins, economic signals and available supplies are all telling feeders the same thing and they have responded.
Carcass weights are up roughly 19 pounds compared with a year ago, which is fairly significant when one considers that carcass weights are already matching last November’s highs. Marketings for the year are down 6.6%, so while the heavier carcass weights have added tonnage, production is still down 4.3% on the year.
So the uncertainty comes from the demand side and more specifically from market psychology and macro-economic concerns. I still am bullish on beef demand; not that I think it is improving, but when one looks at what we have weathered, it is nothing short of miraculous.
So, while domestic consumer spending was up slightly in August, without question the world economic outlook appears to be turning from anemic to poor and that’s the source of much of the economic uncertainty we’re feeling today. China announced a 9% drop in manufacturing profits, and our own Federal Reserve has been sending increasingly mixed messages on interest rates. The Fed seems desperate to stop the unprecedented infusion of cash that it has been producing and would love to raise interest rates so it can drop them again if the global economy worsens.
Sadly, years of historically low interest rates and cash creation has had little impact on stimulating the economy. The Federal Reserve has to feel like an army that has shot all its ammunition and has nothing to show for it. Terms like stagflation and comparisons to Japan’s flat-line economy seem far more relevant than they once did.
China has joined America as the engine for growth in the global economy. As a result, we are learning that our future is no longer solely determined by what we do. In the last seven years, we have done the impossible by adding $10 trillion to our national debt. It is ironic that the buzzword in the overall economy is sustainability, when governments around the globe have enacted one unsustainable policy after another.
Geo-politically, things are even more volatile. America’s decision to abdicate its role as the world’s military superpower has resulted not only in increased uncertainty in the Middle East, but has allowed China to move to assert its dominance in the Pacific Rim, and Russia to attempt to reassert its dominance over Eastern Europe and challenge the U.S. in the Middle East. Nobody knows the outcome; we only know that we are in a far more precarious position than we were just a few years ago.
Fasten your seat belt; while the fundamentals in our business aren’t expected to hold many surprises, outside our sphere there is more uncertainty than ever, and we have no choice but to go along for the ride.
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