A Few Thoughts by John Nalivka: The cash – futures disconnect and market volatility
May 17, 2018
Years ago I decided to no longer forecast weekly markets. In providing market analysis and advice for companies along the entire supply chain, my focus must center on intermediate to long term fundamentals. These are not necessarily the same as those that impact the short term market and often create significant volatility. Short term market volatility may be become the driver to my thinking and analysis for long term markets. It's similar to managing a stock portfolio by listening to traders on the business news in the morning.
Market volatility is not new. However, it is seems more pervasive and this is true whether discussing the futures market or the stock market. There have always been circumstances in the commodity markets that create volatility including weather, unexpected short term supply issues, trade, changes in regulations, food safety issues, just to name a few. We all know and understand how market fundamentals – supply and demand – can impact and often do impact the cash markets for beef products and cattle. The discussion centers on factors that are relatable. But, as we watch the futures market, there is a growing disconnect. Is short term thinking in that market at odds with the cash fundamentals and is this creating volatility and basis that is increasingly less predictable? I would submit that the answer is yes. Is part of the problem algorithms and program trading?
In analyzing production and marketing decisions, cattlemen face an intermediate to longer term time frame, just I do in providing market analysis and advice to clients. Your decisions require analysis of all facets of your business within that longer time frame. Short term volatility cannot become the driver to sound decision-making. Look away from the futures market for a minute.
Think longer term and ask yourself a few of the same questions I address. What are implications for feeder cattle supplies over the next 4 months as the result of large placements of calves late last year and early this year? Will feedlot placements be sharply reduced over the next 4 months? Will drought curtail herd growth? And, last but not least, are your consumers more satisfied now with the more consistently, higher-quality product being produced and marketed? Sound decisions require insight.