By Elliott Dennis
The cattle markets have been through a wild ride this past week. Both the Tyson packing plant fire and USDA crop report has dominated market activity, commentary, and analysis. The news has caused downward pressure, in some cases limit down, on both fed and feeder cattle prices. This news is important, time sensitive, and will have both short- and long-run implications throughout the beef supply chain. However, even given this news the market’s reaction should be interpreted in the context of the macro economy the cattle market was already operating in.
Trade disruptions and greater uncertainty about economic stability were two ongoing macroeconomic issues spilling over into the cattle markets. First, Chinese trade issues continued to weigh on the agriculture markets. Effects were seen in corn and soybeans spilling over into the cattle markets. The markets avoided a sell off when President Trump delayed tariffs on Beijing till December. Cattle markets saw a response with Chinese purchases towards the end of this past week. In absence of China, several negotiated trade deals have yet to be ratified by Congress. Combined, this has weighed down the domestic market. Second, trade issues caused prices to increase putting a squeeze on manufacturing margins. Faltering Q2 manufacturing and consumer company profits have sent signals of a looming recession. Other market signals tell a similar story. For example, the spread between Treasury yields, commonly used as a measure of economic recession, turned negative this past week –the first time since 2007. With a faltering economy, eyes have now turned to the Federal Reserve to see how they will react either with increased “quantitative easing” or adjusting the interest rates.
So what does knowing about all the instability in the macro economy before the crop report and Tyson fire issues tell us? First, the beef market will need to find additional homes for the beef on the market. More beef on the domestic markets will further depress prices. While beef was doing a decent job at finding internationals home, this trend will need to continue and, in some cases, increase. Second, while domestic demand has been strong there is greater uncertainty whether consumers will continue to have increasing disposable income in the future due to inflation. If inflation spills into the consumer goods market, then this could further depress derived demand prices.
Was the crop acreage report and Tyson fire important news this past week? Yes, it was. However, greater macroeconomic environment and trends will continue to larger players as they directly affect consumer’s disposable income. This has the potential to lower demand which will then be passed down the beef supply chain through downward pressure on fed and feeder cattle prices.