It’s interesting that a couple of banks we’ve never heard of have a run on their banks. Silicon Valley Bank was dealing with venture capitalists and regular depositors, and Signature Bank was dealing with cryptocurrency. Both were in high-risk investments and certainly had the right to fail. I imagine these banks were a bit loose on who they loaned money to.
This bank failure episode produced the effect of a major sell-off in broader markets and commodities. Commodity markets were all down this last week; fed cattle, feeder cattle and corn markets all suffered a bit.
Fed cattle trade was slow, and it appeared that packers had enough contract cattle to produce a larger fed slaughter. The middle of March and April is when beef demand picks up. The Choice cutout is at the $285 zone. When folks are able to enjoy outdoor activities, the cutout value should rise—I’m thinking over $300. This should allow fed cattle prices to continue their advance. Last week’s trade was mostly $165 live and $286 dressed.
The Cattle on Feed report that was to be released March 17 was expected to show all segments of the supply chain down in numbers: cattle on feed down 5%, placements down 6-8% and marketings down around 5%. Supply is getting smaller, and demand remains good for now.
Now that inflation is starting to back off, the talking heads want us to think we’re walking into a recession. With what I see around my corner of the world, there is plenty of development going on. It’s still hard to find skilled labor, and as most of us old guys know, 6% interest is reasonable; 2% is better, but not sustainable.
Kirk Donsbach, who publishes the Cattlemen’s Advisory newsletter for StoneX, said, “Exports sales were alarmingly disappointing this week, along with boxes not being able to hold the $190 level. In addition, the DOW and S&P indexes aggressively sold off on the Silicon Valley Bank closure. Whether the bank closures are the first step into a recession or not, they confirm to me that higher interest rates are stressing the system. That same stress will show up in personal debt and the housing market at some point. There are two things driving this market right now, a known declining supply and a higher trending chart pattern. This will continue, regardless of the clear demand concerns, until it doesn’t.”
Derrell Peel, Extension economist at Oklahoma State University, said, “Challenges for beef exports are likely to increase in 2023 as the headwinds due to the strong dollar will continue. Additionally, anticipated decreases in beef production began in February and will decrease beef availability and keep wholesale beef prices strong. Beef demand, including international demand, remains a significant concern going forward as declining beef production will pressure beef prices to push even higher than current levels.”
We’ve been told that our export markets contribute $500 per head on fed cattle. Export markets are important to the U.S. cattle industry. Most of the tongue, livers, kidneys and other variety meats are the foundation of our export markets. Many economists are saying the high value of the dollar is slowing markets down. But I’ve also been told that export markets are more about needing the product vs the price.
According to the Ag Center, “A recession will threaten some special beef programs like the Never/Never marketing programs for no hormones or antibiotics. These programs require over $300/head extra cost to produce and fail to deliver any extra real value to the customer. They are at heart a marketing program with no substance or science behind the product. They will be replaced with programs that assure no hormones or antibiotics within 100 days of harvest.
“Maintaining customer satisfaction during the coming period of smaller supplies of beef will be critical to the future of beef as the herds rebuild. Beef already is facing headwinds from the media asking people to eat less red meat to help reduce climate change. The largest threat to the future is a permanent change in eating habits of the consumer and rationing beef is aiding that threat. As the facts start to surface of a decline in the per person beef consumption, the media will be quick to jump on the story as one showing consumers have responded to the alert to help save the planet.”
I’m not so sure about recession, but if the news media talks about it too often, it will happen, just the same as with inflation. Look around you and monitor your local economy and see who is investing in projects. — PETE CROW
