In my opinion, tremendous amounts of information were poured into the markets in a very short period of time this week. Traders and producers alike had to scramble multiple times to keep up with the dramatic policy changes that shifted like the wind the past several days. Futures traders have the luxury of participating or not, while producers are seemingly grasping for every straw to overcome the excess of production capacity to the number of animals available. Futures traders continued to find the cattle market less interesting every day this week with nearly 80K contracts having evaporated. Cattle feeders continue to be the ones viewed as the key link to whatever happens next. With every sector above them having made some form of move to manage their plight, the cattle feeder and feed yards apparently are still on the agenda of an ever-higher price producing profits. Consumers are pulling back, and will do more due to the current administration's stance on tariffs and attempting to live within their means. Grocers and restaurants are pushing the higher box price right to the consumer instead of eating that margin loss themselves. Any further price increase for imported lean trimmings will only go to raise the price further to the consumer as few burger joints, of any size, have the margin to eat a higher beef price. As well, grinding the more expensive grain fed muscle meat into hamburger would be anticipated to impact restaurants greatly. Packers continue to manipulate slaughter pace to elevated box price and back cattle up to gain more. This will most likely not change anytime soon. So, long way around the barn, but it appears that the consumer and several industries that provide beef are taking steps to keep from the ever-increasing beef prices from driving them out of business, into a loss of margin, or worse, crush consumer demand. Not so to the cattle feeder or feed yard. To some extent, there have been a few lower sales printed this week of feeder cattle prices and the index is down slightly week over week. However, the spread between starting feeder and finished fat climbed to over $102.00 this week, suggesting that without a slaughter weight above 1,800#, or cost of gain under $1.00, the losses mount quickly.
Here is what I think needs to take place. One would be for feed yards to cut capacity. I understand the argument of "if the hotel isn't full, you're losing money". I don't think that is the case any longer. With woefully too much production capacity, and zero aspects of expansion, cattle feeders are exposing themselves to risk as never before. As difficult as this is to address, it appears that at the moment, there is no one voluntarily going to quit at the moment. Therefore, some will assume more risk, whether they can manage it or not, or market price action will most likely take enough out that it will finally curtail the production capacity to the animals available. Two, would be for cattle feeders to lower bids. How, I have no idea, but it goes back to the voluntary versus being made to do something. If the cattle feeders don't voluntarily lower bids, then it will truly be a last man standing type of environment. Were feed yards to cut capacity, it would go a long way in backing up feeder cattle.
Tariffs on, tariffs off. It is too dizzying to even try to understand. However, the ramifications are easily seen. The first and foremost is the hate selling of US debt. Bond and note markets have been hit over the head, tied up and thrown into the river. Countries that had been so gracious to buy US debt are cutting their nose off to spite their face. Most of that US debt was accumulated at a significantly higher price and lower yield. Dumping them at a lower price and higher yield, makes the rates very attractive for those who place money on deposit, but has increased the purchase price for everything bought on credit. That is the spite they are attempting to interject. The US dollar gave back all, plus more, of the gains upon Trumps win. Energy markets made four year lows this week, prompting me to recommend topping off farm tanks and booking the remainder of fuel needs for spring planting and summer chores. Corn was higher this week. As a very important commodity, cheap, and in great need, I can see where it has some appeal in ownership. Just about everything increased the costs of producing a pound of beef this week, at a time when it appears the resilience of the consumer is actually starting to show some weakness. We have anticipated it and believed it to have already been showing up in certain sectors of the economy. I expect economic reports to begin reflecting it as well. As difficult of an environment as it is to navigate, these few questions may help you to improve or strengthen your operation. How much risk are you assuming? How much do you wish to assume and how much do you wish someone else to assume? If someone else, what are you willing to pay for that assumption of your risk. Note that all questions are about "you" and what "you" intend on doing to help navigate "your" operation through what appears to be a lengthy time frame of too much production capacity for the number of animals available.
Christopher B. Swift is commodity broker and consultant with Swift Trading Company in Nashville, TN. Mr. Swift authors the daily commentaries "mid day cattle comment" and "Shootin' the Bull" commentary found on his website @ www.shootinthebull.com.
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