This is a great time of year—much of that attributable to warming temperatures, sunshine and March Madness. How ‘bout those Villanova Wildcats!? And typically, this is also the time of year when we witness the fed market ticking higher. But March sure didn’t play out that way.
The market fought a tough, uphill battle for most of the month. While cash prices remained steady during the first four weeks of the month, futures prices tugged on the market along the way. But fed trade eventually succumbed to the noise (given various news events) and turned lower at month’s end.
As noted, fed cattle traded mostly steady through much of the month. Cash prices started the month around $126-$127 per cwt and subsequently maintained that range, with some give and take, in the three weeks that followed.
However, the April contract was under pressure through the second half of March; the contract plunged from $124 on March 14 to below $114 to finish out the month. Consequently, the cash market couldn’t hold off the surge and turned decidedly muddy on the final week of the month; fed steer and heifer trade closed the month at $120-$121 (Figure 1).
Not surprisingly, the feeder market followed the fed market and deferred futures lower. The CME Index stood at $160 at the first of the year, but has since slipped $25 and closed out March at $135 (Figure 2).
Clearly, March’s market action doesn’t bode well going into April and May. We’re left with a tug-of-war between the bulls and the bears going into the heart of the spring market. How that plays out will be critical in terms of being able to capture as much of seasonally stronger demand over the course of the next few months.
First, let’s first take a look at the bullish side. The case for breaking out of the late-March funk lies within the strength of the U.S. economy. It’s challenging right now to come up with any signal tied to the U.S. consumer that isn’t favorable.
For example, Consumer Sentiment reached its highest level in March since 2004. Richard Curtin, director of the University of Michigan survey, noted that, “Consumers remain confident in their future job and income prospects. This newfound confidence is anchored more in stability of these economic prospects rather than the size of the expected gains.”
Consumer optimism was underpinned in late March by the labor market. Jobless claims dropped to 215,000, versus analyst expectations of 230,000. That’s the lowest weekly assessment dating all the way back to January 1973.
Jobs equate to income and confidence; that ultimately helps to boost spending. Better consumer attitudes should provide a solid foundation for beef demand in the coming weeks, especially IF we can finally break out of the winter doldrums—there should be some pent-up demand to fire up the grill.
All that said, we need to also look at the bearish side of the equation. Unfortunately, there’s plenty going on there, too. Undoubtedly, the most enduring source of pressure on the market has stemmed from tariff threats and follow-through by the Trump administration. With China announcing an additional tariff on U.S. pork, that’s especially challenging for the pork industry—but could ultimately mean even more protein for the domestic market.
Meanwhile, most recently, NAFTA tough talk will spook the markets. Markets hate uncertainty, and always serve as a source of downward pressure.
The effect of the NAFTA concerns is succinctly explained by Global AgriTrends:
Trade officials reported a desire for a swift completion to the NAFTA agreement. The U.S. granted Canada and Mexico exemptions on the steel/aluminum import duties through April 30th. That becomes the de-facto NAFTA deadline. But fiery Trump rhetoric over the weekend suggests otherwise. The president’s tweet over the weekend stated, “Mexico is doing very little, if not NOTHING, at stopping people from flowing into Mexico through their Southern Border, and then into the U.S. They laugh at our dumb immigration laws. They must stop the big drug and people flows, or I will stop their cash cow, NAFTA. NEED WALL!” This weaponization of NAFTA puts the April 30 deadline at risk.
To that end, as noted last month, “Beef exports to Canada and Mexico, combined, represent approximately 25% of total exports. The value of those NAFTA exports are equivalent to roughly $75 per head.”
Meanwhile, there has also been the continual stream of cattle coming into feedyards, coupled with slower marketings. USDA’s March Cattle on Feed report pegged total inventory at 11.715 million head; 943,000 head bigger than last year’s mark and also the largest March 1 inventory since 2008. That means that feedyards need to work through an additional 943,000 head over the course of the next five to six months versus 2017. That’s a big lift going forward and will work to keep a lid on the respective futures contracts.
Lastly, one interesting phenomenon has occurred during January and February that’s largely gone unnoticed. That is, beef cow slaughter during the first two months totaled 475,000 head—that’s about 54,000 head more versus 2017 or 12.5% more cows compared to last year, and nearly 90,000 cows ahead of 2015 and 2016.
That’s a big jump. Obviously, that could all be tempered in the months to come. But it appears that two factors are in play:
- Drought conditions are forcing producers to bring cows to town, and/or
- Some producers deferred culling in 2017 because of the changes in the tax law
All in all, the column always finishes on a note of risk management. Sometime last fall, I stumbled across several pictures from the game show Jeopardy. Going into Final Jeopardy! the returning champion’s total was only $1,000, while the two challengers had each accumulated $12,300. All three provided the incorrect question; but the two challengers wagered all their money and ended up with $0; the champion wagered $999 and finished with $1 enabling him to play yet another day.
With that in mind, producers are always encouraged to be aggressive about obtaining and analyzing meaningful information. And even at that, it’s impossible to know and/or anticipate everything that can occur. As such, proper risk management and ensuring some sort of buffer against negative events (e.g. providing the wrong answer) still allows you to survive the blow. Stay posted; stay guarded!