If we’ve learned anything over the past week, it’s that volatility is a constant. Simple as that. One of my favorite movie quotes of all time is when comedic actor Will Ferrell screamed in absolute panic, “We can’t have anyone freak out, out there! We’ve got to keep our composure!” This is all just before he loses his mind and starts punching some lockers.
We must remember that our current financial system mixed with our current state of affairs is going to give us some major heartburn. It makes many want to panic and absolutely lose their composure. The hardest part of investing is holding true to your belief system, trading without emotion and knowing when to bail. It’s much easier said than done. Remember that in June, CME Group increased daily limits for both live and feeder cattle. It’s great for us cow-calf guys when it goes up, but it creates the opportunity for it to come down, which usually happens much more quickly. Many people ran to social media thinking the infamous black swan event was happening.
However, I maintain that the fundamentals are still in the production level’s favor. The inventory isn’t out there to support a crash. A correction is possible at any point and many times is needed. We must realize there will be stumbling blocks along the way. I see the past couple of weeks falling into this category. On the stock market side, we saw a solid investment rotation and carry trade hammer our exchanges.
Global politics and inflation worries have the markets walking on eggshells. Our stock market has been propped up by major tech stocks and AI (artificial intelligence) companies for the past several months. Many of the companies involved in this area haven’t had to rely on interest rates as heavily as most mid-level publicly traded companies. This has driven a large separation in stock values. As these tech stocks tripped recently, several factors came to light.
The first was the yen taking a sharp tumble, which fueled a large selloff in the U.S. Coupled with a weak jobs report and the Fed not lowering interest rates, it built a pretty sharp indicator that a recession might be looming. Investors were ready to sell, and they followed through. A massive selloff of stocks ensued. Now, we can’t forget about the fun and games happening in the presidential race that also played a small role. Candidate announcements and party games were in full swing as well.
As one economist put it, we had a market rotation. Investors took huge gains from propped up tech stocks and rolled their trades into lower-level, lower-risk positions and caused a huge shift away from tech. There are too many factors to talk about here, but the summary is that these tech stocks have always been viewed as high-risk, high-reward positions. We saw this in motion. For example, chip maker Nvidia saw over 20% peeled from their value in a matter of three days. Super Micro Computer, Inc. that went on a 246% run in 2023 and 117% this year saw almost a 50% reduction in stock value in just over a month’s time.
Unfortunately for the beef cattle market, we are tied to the overall stock market. Sometimes more so than we want to admit. We saw this happen recently too. In many cases, contracts took a major hit in trading. As May contracts became available, we saw a huge drop in all contract prices. Some as much as $4/cwt each day before the trend slowed.
Like traffic needing to merge, the cash and futures markets must come together at some point. Focusing on the fundamentals, we saw the cash market remain steady and avoid most of the chaos with paper trading. Most reporting facilities were steady to even a little higher. In Montana, markets were steady to $2/cwt higher on cows. California had a solid rally with cows mostly up $3-4/cwt across the state. Most states reported steady markets. By all indications, there isn’t enough supply to drive the cash market down.
Even with cattle imports up nearly 19% from Mexico, driven by a combination of lack of supply in the U.S. and extreme drought in Mexico, we aren’t seeing a fluctuation enough to drive this market downward. We can look at many factors, but the simple plight is that paper can blow in the wind much easier than we want to admit and it’s going to affect the market day to day, but not over the length of the contract.
Cash markets are strong and support continued on these levels for the cow-calf and yearling sectors. Now isn’t the time to panic, but it’s definitely time to stay alert. Know where you sit, what you have to sell and make informed decisions. The theatrics that happen with investors, politics and global economics definitely drive headlines, but we aren’t in a spot where we need to panic yet. — LOGAN IPSEN
