The market bears have plenty of reasons to growl, but the bulls are definitely gaining momentum.
One can still build a case for pessimism in the cattle industry. After all, drought continues to be widespread. The overall economic picture continues to be dismal. The GDP actually shrunk in the last quarter of 2012, and unemployment levels – or at least the percentage of the eligible workforce actually working – are unprecedented since the days of the Great Depression. Meanwhile, spending continues to grow at unprecedented rates and the federal debt is growing at a rate that threatens the very survival of our economic system. In addition, demand will remain constrained unless the macroeconomic situation is addressed and that doesn’t appear likely. Input price risk remains so large as to make expansion largely unfeasible. Thus, there are some real issues for market bears to growl about.
A Closer Look: BEEF Reader Survey Finds Both Optimism And Concern
At the same time, the bullish sentiment continues to grow – to the point that many are predicting a stampede once the bulls are really let loose. There was certainly some good news this week. For instance the Jan. 1 cattle-on-feed numbers were down almost 6% compared to a year ago, and nearly 3% below the five-year average. That’s even more impressive when one considers the widespread drought conditions, which had most experts predicting that we’ve placed a higher percentage of the calf crop than we normally would have. All the market has been talking about for 18 months is the tightening of fed supplies, and still the number came in lower than what was expected. At this point, there’s no way to stop the trend – supplies are going to be tight and tight for a considerable time.
The placement numbers were more telling. We are placing significantly fewer lighter-weight cattle; the only category that was up was 600-799 lbs., which means we’re actually pulling more cattle ahead than is typical. That can only go on for so long; at some point, supplies will constrict even more.
But it isn’t just supply. The announcement that Japan will drop its 20-month age requirement on Feb. 1 and begin accepting cattle that are 30 months of age or less removes a major obstacle to exporting product to what used to be our number-one customer (and still our second largest market). The U.S. Meat Export Federation estimates this will equate to an increase of around $20/head for every fed animal in the U.S.
So, despite the global economic outlook, the demand side remains positive. The bulls have the bears on the run.