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Outlook: World Awaits Resolution Of Fiscal Cliff

Article-Outlook: World Awaits Resolution Of Fiscal Cliff

Outlook: World Awaits Resolution Of Fiscal Cliff
Given that the current economic environment is replete with lots of noise, chaos and uncertainty, it never hurts to remind ourselves that risk management is essential.     

December is upon us, and all eyes are upon the “fiscal cliff,” so called because on Jan. 1, unless Congress acts, the Bush-era tax cuts will expire and across-the-board federal spending cuts will ensue. It is an issue that currently trumps all the fundamentals and its influence will only escalate as the Jan. 1 deadline approaches. That’s especially true given the back-and-forth political posturing, as the negotiations between the two sides seemingly grow further apart.

At this point, whatever cautious progress has been made, it appears more unlikely that this will get resolved in a seamless, timely manner. So if resolved, it’ll likely only be at the 11th hour with plenty of drama along the way. Regardless of how it plays out, the closer we get, the more uneasy market participants will become.

Therefore, as we creep toward the edge, all sorts of commerce will be influenced by waning confidence and uncertainty. In other words, there’ll be lots of hunkering down, especially by investment funds, because of the pending unknowns. That’s never good for markets.

D.C. Politics: From The Farm Bill, To Fiscal Cliff, To The Estate Tax

Additionally, the more wrangling that occurs, the more public it becomes. And the longer that resolution is delayed, the more likely that actual economic slowdown will become a reality.       

That's because the economy, given its current growth rate, has little room for error as the fiscal cliff (or even the concern of such) looms over consumers. Any absence of agreement ultimately serves as a huge drag on the economy. Clearly, the worry about the potential fallout wouldn’t be as great if there was better growth in the economy – lower unemployment and less debt, which would allow the economy to better absorb erosion in confidence. That, however, is not the case.      

Where does all that leave the beef sector? Let’s first establish that, even if we do go off the fiscal cliff, the world won't come to an end. People still need to eat, and beef will remain the preferred source of protein in the marketplace. But the longer-term implication around beef’s relative competitiveness and consumer purchasing behavior is another matter.  

While consumer confidence is marching higher (Figure 1), we’re still witnessing levels far below those recorded prior to the financial crisis. That’s largely explained by stagnant disposable income growth in recent years. That reality has seemingly spurred permanent adjustments in shopping behavior (see this week’s “Industry At A Glance: Food Shopper Behavior”). Therefore, the fiscal cliff heightens risk for reduced consumer spending and a potential protein shift down to pork and poultry, and away from restaurants to eating at home.   

Moreover, that’s confounded by already-rising food prices. For example, Sysco CEO Bill Delaney commented in the company's most recent earnings call that, “We’re watching [food costs] really close because, obviously, there are other fundamentals out there in terms of the drought that we experienced throughout the summer, and what that may mean second half of the year in terms of both products and livestock and all that type of thing…" In other words, worries about consumer spending couldn't have come at a more difficult time for the food sector.

It’s important to put this into some broader context as we close 2012. To that point, in a recent conference call, there was a question about reluctance among cow-calf producers to rebuild the cowherd. Why not dig in given the prospect for highly favorable calf prices in the coming years? My explanation was primarily a history lesson. Consider that during the past 10 years, the industry has absorbed BSE, ethanol, drought, increasing regulation, financial crisis and maybe now, the fiscal cliff. That succession of events makes producers gun-shy about expansion. 

A Closer Look: Will The Cowherd Expand?

Despite all the worries about consumers, it’s important to also note that beef demand remains resilient. That’s the direct result of the industry’s improvement in responsiveness over time. Better consistency and quality, enhanced precision and increased value-chain communication have dramatically strengthened beef’s competitive position in the market place.

The evidence of that reality has been consumer willingness to purchase beef at ever-higher prices despite the financial crisis. The beef complex is positioned much more favorably than would have been otherwise possible just 20 years ago. But clearly, the industry doesn’t want to test that too far.

The beef industry has done its work during the past several decades. Now, it’s time for politicians to do the same. Maybe by the time you read this, there’ll be some sort of meaningful resolution. We can only hope, but I’m not keeping my fingers crossed. In the meantime, count on some nervous markets and lots of volatility.      

To be sure, neither the market, nor the broader economic (i.e., political) environment, will provide much room for relaxation. Given that the current economic environment is replete with lots of noise, chaos and uncertainty, it never hurts to remind ourselves that risk management is essential. And when it comes to business, remaining objective and staying informed is imperative to facilitating success.

Cattle Price Summary for December

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