Taking It on the Chin: Uncertainty Drops Markets
Jim Robb, Senior Agricultural Economist, Livestock Marketing Information Center, said the cattle markets’ tumble during the black swan COVID-19 hysteria is a demand story and an uncertainty story.
Robb, whose career has spanned decades, said the event most parallel to this one in terms of uncertainty were the attacks on 9/11. At that time, he said the US economy was dabbling with a recession, as opposed to the economy at the onset of this event.
“There’s a lot of uncertainty and markets reflect that,” he said.
Compounding this situation, he said, is high beef production numbers in the U.S., an increase of 6.7 percent. Weights and slaughter numbers are both higher than anticipated as well.
“From an economic standpoint, that would be the front-page news story,” he said. “Why cattle prices are down from a year ago is because beef production’s up. We’ve added this on to that.”
While COVID-19 wreaks havoc on markets, Robb said another wrinkle in market uncertainty is the ongoing oil price war between Russia and Saudi Arabia. Historically, low fuel prices have been a boon for agriculture producers but as America has become an oil and natural gas exporter, that’s no longer the case.
The assessment of LMIC economists is the chance of recession between now and the next quarter has increased to 75 percent. Even with these factors, he said, we’re heading into a potential recession or economic slowdown with low unemployment and the U.S. economy doing well.
According to Robb, futures on fed cattle are anticipating a recession in the U.S., with futures on the June contract falling in a few weeks from $119 to .98.
“Futures prices fall until somebody is willing to catch them,” he said. “When you’re in an uncertain environment, there aren’t many people willing to catch them going down.”
Not knowing when the COVID-19 situation will lessen or stop bears resemblance to the Tyson fires and uncertainty about the time the plant would remain offline.
“Once you get some of that fundamental information into the marketplace, the markets will digest it rather quickly, but without good information looking ahead, this is not atypical about how markets unravel,” he said. “This is what markets do. Markets go down to the point where people have to adjust, especially the futures market.”
The brutal economics, he said, is the lack of a marketing plan to solve the problem of feedyard calves that weren’t hedged against the June prices.
“For black swan events, the risk management thing is very little about marketing, it’s very little about production, but it’s mostly about having a financial house in order where you can get through it,” he said.
In cow calf country, there is more flexibility than in feeder or stocker operations, despite a dismal cull cow market, as calves are born and spend the summer growing before fall marketing time.
MGM Resorts International announced they will temporarily close buffets at seven of their well-known Las Vegas properties, followed by the announcement that Mandalay Bay, an MGM property, will close three restaurants on March 16. This on top of the cancellation of major sporting events and suspension of the NHL and NBA seasons, cause major concern in food service.
Kate Miller, a tenured food industry analyst in Oklahoma City, Okla., said this is going to be a problem for consumption but the bigger challenge lies in the disruption of supply chain lines. Miller said higher number of cattle on feed could spell bad news for feeders as supply backs up and cattle get heavier.
Clay Patton, market anchor for Nebraska’s Rural Radio network, said August live cattle contracts fell below where they were following the Tyson fire this week. The option pits remain open, he said, offering a second round of liquidity to those markets that Patton said may not be found electronically. Once the slide is stopped, he anticipates sideways trade for a couple of weeks before markets stabilize.
“We have destroyed so much equity right now, but on a positive note, slaughter numbers,” he said. “We’ve killed 20-22,000 head more cattle every day this week than this time last year so packers are feeling there’s demand and margin. Meat is staying steady.”
The Chicago Mercantile Exchange announced Thursday trading would move to online in order to slow the spread of the virus. Robin Varelman, owner, Livestock Exchange in Brush, Colo., said some bred heifers sold lower this week compared to two weeks ago but demand is still there. F
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