February 01, 2023

Commodity Insight: Cattle report bullish for prices

The U.S. Department of Agriculture recently released the December Cattle on Feed report that traders and ranchers anticipated to be bullish.

Though the data was less price-positive than hoped, it did show that for the past three months in a row, lower feedlot placements have set the stage for a much tighter supply of slaughter-ready cattle in the final months of the new year. I was more than pleased with the report as it fit my lean.

Most in the cattle industry are forecasting higher prices in 2023. But an upside spike with cattle prices may come sooner than later if the drought-like weather conditions of the past year are reversed and the weather returns to normal.

If the weather does not return to normal, it may be 2024 before the cattle market turns poker-hot bullish. But the USDA believes fewer cattle numbers will be a market-moving force into 2025.

Keep in mind, however, that markets and prices do not move in a straight line. Markets go up and they go down. They rally and fall.

This new Cattle on Feed report, for instance, painted a bullish picture for prices in the final months of 2023.

But the data in the report was a tad disappointing and over the coming weeks cattle prices may retreat. Any pullback with the cattle futures market should be confined to a $3 to $5 break at the most.

There is, however, a dark cloud over the commodity markets and it involves China. An old saying that came to be about 25 years ago states that “as China goes, so go commodities.”

And here are a few facts about China in today’s marketplace. In 2022, the United States exported the most beef to Japan, followed by South Korea and then China.

In a recent issue of Beef Magazine, it was predicted that China will be the largest buyer of U.S. beef within five years.

Here is the rub with China, keeping in mind markets and prices do not move in a straight line.

From the South China Morning Post: “Since Beijing’s sudden U-turn on ending the zero-COVID policy more than two weeks ago, Chinese officials and state media have struggled to put a positive spin on the decision.”

From Bloomberg: “China estimates COVID surge is infecting 37 million people a day.”

And from Reuters News: “About 248 million people, which is nearly 18% of the population, are likely to have contracted the virus in the first 20 days of December, the report said, citing minutes from an internal meeting of China’s National Health Commission.”

Not only does cattle market and all other commodity markets have to be concerned about the COVID mess unfolding in China, but worries will persist for some time about the Federal Reserve and the other central banks of the world lifting interest rates at the fastest pace in 40 years.

The Fed has already pledged to keep interest rates at lofty levels in 2023 to fight inflation now pegged at 7.1% in hopes to get it back to 2%. Right now, U.S. interest rates are the highest since 2008.

History shows, based on a Bank of America study, that once an industrialized nation experiences inflation rising from 2% to north of 5%, it takes at least 10 years to get it back under 2%.

The Fed has a challenge ahead by any measure. History also shows there will be pain to reduce inflation back under 2%.

Another bump in the road for higher cattle prices in the period ahead was the USDA Pig Crop report released a few days ago.

Most — including yours truly — were expecting a bullish report highlighted by a smaller breeding herd. Instead, the very opposite was seen.

For the first time in two and a half years, the national swine breeding herd experienced a year-over-year increase.

The data showed a rise of 0.5% when most were guessing a decline of 1% with the breeding herd. The difference between expectations and reality is clearly bearish.

But in the same report the data also showed the total U.S. hog herd to be the smallest since 2017.

The Pig Crop report had bullish and bearish data, pleasing some and disappointing others.

Moving forward, I am uncomfortable with the long side of most markets for the first quarter of 2023.

With elevated interest rates on tap for the entire new year and slower economic growth predicted here in the United States and across the globe, it is not the type of environment to spawn bull markets.

And as I mentioned above a wild card for stocks and commodities is the COVID mess unfolding rapidly in China.

I am uncomfortable being a bull until the first quarter of the new year has passed. I am being patient — and you should do the same.