Kay’s Cuts: Politics, trade and volatility

Steve Kay, US Cattle Buyers Weekly, 08/07/2016

A monthly column written exclusively for Beef Central by US meat and livestock industry commentator Steve Kay, publisher of US Cattle Buyers’ Weekly

Steve Kay 2013 conference

MARKETS abhor uncertainty and unpredictability. An analogy can thus be drawn between the political chaos in the UK and Australia, the subsequent tremors in local and global financial markets, and the impact on cattle prices in the US because of the aberrant behavior of the futures market.

Few would have predicted a month ago that Britons would vote to leave the European Union and that it would leave such a shocking political leadership vacuum. Few would have predicted that Australia’s election result would also leave a vacuum, albeit temporarily.

Businesses of every kind, whether in the UK or Australia, can’t help but be affected by what’s happened, simply because of the uncertainty that political chaos creates. Retail butchers in Australia frequently comment on the impact on turnover due to uncertainty up to, and during an election.

It’s far too early to know if Australia’s meat exports to the EU and to the UK will be impacted by an eventual BREXIT or if US beef exports will be affected. In the latter case, one might hope that after the UK leaves the EU, the US might be able to renegotiate with the UK to remove the so-called HGP ban imposed in 1986 on US beef exports to the EU.

It’s also too early to know if an eventual political outcome in Australia will affect the country’s involvement in the Trans Pacific Partnership. That’s also the case in the US, with presumptive Republican presidential nominee Donald Trump vowing to pull the US not just from the TPP but from the long-running North American Free Trade Agreement.

Democratic nominee Hillary Clinton used to support the TPP, then said during the primary campaign that she opposed it. However, should she become president, she might decide to support it again. But she would then have to persuade both Houses of Congress to support it as well.

Everyone in the global beef industry knows how important open and free (of tariffs) trade is. The US beef industry strongly supports the TPP because it knows it would reduce the current 38.5pc tariff on US beef imports into Japan down to 9pc over 15 years. This would help level the playing field in Japan for US beef versus Australian beef, which has got a big head-start in tariff reductions. But such is the complicated and regrettable intersection of politics and trade that no one in the US is expecting such a move anytime soon.

Meanwhile, the futures market in the US continues to play havoc with the cash fed cattle market and cattle feeders’ ability to hedge cattle. Its irrationality and volatility have caused producers to lose hundreds of million of dollars in the past 18 months. This amount might be even more if you consider that gross income from cattle and calves in 2015 totaled US$78.8 billion.

The futures’ destructive behavior continued unabated in June. In just two weeks, it caused cash prices to decline US$10.78 per cwt and for cattle feeders to lose US$145 million. I use the word ‘caused’ because there was no fundamental factors for the June live cattle contract to lose 795 points in six trading days.

Supply factors much more positive

In fact, the fundamentals strongly suggested the futures should rally. Supply factors in the US beef industry have been much more positive this year than last. Cattle feeders are selling cattle far more aggressively than last year. US packers have put together their largest kills (over 600,000 head per week) in two years. Steer and overall carcase weights are running below year ago levels for the first time in nearly two years. Feedlots are more current in their marketings than in at least three years.

Meanwhile, beef sales at US retail and foodservice are much better than this time last year. Sales during the Memorial Day holiday week (at the end of May) were robust and were even better in June. That’s because wholesale beef prices are significantly lower than last year, allowing retailers to feature beef more aggressively.

Beef sales for the July 4 holiday week were also much better than last year. July beef sales typically slow down because of the hot weather. But analysts expect to see strong retail beef features this month and throughout August.

The futures market the last week of June was finally forced to acknowledge that its earlier sell-off was unjustified. The June live cattle contract rallied 419 points in three days and cattle feeders enjoyed much higher cash prices. These though were still well short of the prices the second week of June before the futures collapsed.

Why the futures market is ignoring positive supply and demand fundamentals remains a mystery. The urgent question though is: What, if anything, can be done to address the US futures market’s dysfunctional and volatile behavior?

With this in mind, I recently posed four questions to some of the industry’s most prominent agricultural economists. All agreed that the futures are not functioning effectively. But they also agreed that the futures should not be ignored. More telling, they suggested there are no easy or obvious solutions.

That’s rather frightening, considering that the futures market is causing even more chaos in the US cattle markets than the US’s first BSE case in 2003.




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  1. Ross Ainsworth, 09/07/2016

    Gday Steve
    This is a question I have also asked myself but in a much simpler form – how does the American market appear to defy the laws of supply and demand? Prices have eased back even though the national (and international) herd remains extremely low.
    My armchair analysis with minimal information and from far away is that real supply and demand is being corrupted by the forces created by the numerous and complex financial instruments commonly used by the US industry, especially by the big players who, through their massive financial power, have the capacity to push the market in directions they desire even if this is against the natural forces of supply and demand.
    Is this possible?

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