Challenging cattle market can spark good marketing plan for producers
I'm having a hard time finding anything that makes me bullish the cattle market in the intermediate to long term.
I know cattle producers don't want to read that right now, but it's my opinion and I am sticking to it. I honestly think the biggest part of the break is behind us (from $115 to $80 is a huge break). But I am of the opinion we should have never spent any time above $105 in the first place.
Cattle breaking to $90 was simply a return to a reasonable value for the moment. And now we are putting cattle prices to a level that is commensurate with the state of our nation's economy. In short, we are still overpriced.
Pull up a chart of the S&P 500 and lay it over a chart of live cattle futures. It is nothing short of shocking how closely the cattle market has tracked the S&P.
For you history buffs, you may be surprised to find out that the stock market has now taken away 50% of its bull move from the Great Depression to the stock market highs set in 2008. Yes, you read that right, the Great Depression.
The stock market is usually a leading indicator of U.S economic activity, and it indicates the U.S. economy has a long way to slide before it shows any signs of an improvement.
It is hard to become bullish about cash cattle prices until I see some signs of life in the U.S. economy.
I know some cattle producers may be pointing to research showing a reduction in numbers of cattle on feed. I know some cattle bulls may be hanging their hat on the idea of a reduction of cattle placements into U.S. feed yards. At the risk of saying something that will, no doubt, draw serious disagreement from many of my fellow cattle traders, in my opinion, there is no such thing as a supply bull market in any commodity.
Sure, you can have short-term supply shocks. But you need the demand side of the market to sustain any healthy long-term move to higher prices.
If the U.S. economy bottoms, then cattle have a chance to bottom. Economists are bad policy-makers and politicians are terrible economists.
You tell me where the low in the U.S. stock market is, then I will be willing to dare the long side of the live cattle market. We aren't there yet. No thanks, I'll stay short.
Some experts would suggest that the U.S. government printing all this money will weaken the dollar, and the weak dollar will increase agricultural exports. However, the Eurocurrency, acting nearly as poorly as the stock market, is a sign the world economy may not support U.S. beef exports. If we are moving into a period of sustained economic downturn, does anyone expect we will be lead off the bottom by Germany and France? Me neither.
For cattle producers, I would follow some pretty simple rules for your marketing plan this summer.
Take advantage of premiums in the deferred months of cattle. As bulls want to build an inventory of long futures positions, they will oftentimes buy the back months to give themselves longer for the trade to work. As the buyers hold up the October and December live cattle contracts, use them as hedging opportunities.