The Market's Fine Print

It's the same old story. Some things you just never miss until they're gone.

Where's Morley Safer to help me sort through this bizarre election year? What do you mean Ali has taken off his gloves for the last time? Did they move "American Idol" to a different channel?

Come to think of it, who gave Elvis permission the leave the building?

Along these lines of "Where have all the flowers gone?" I woke up on Monday with the strangest sense of market absence and neglect. With July speeding to a hasty conclusion (many cattle feeders would shout "hallelujah"), it felt like some traditional midsummer market card was still buried in the deck, some trail-marking stone of basic fundamentals left unturned.

Fortunately, I didn't have to stew long before the MIA data link dawned: The midyear cattle inventory. It seemed so natural that I immediately clicked to the online NASS calendar, momentarily expecting to find the report's release date close at hand. But, of course, in noting important events in July, the USDA would be on more justifiable ground in marking the birthday of Earl "The Pearl" Butz. (July 3, for those of you who want to light a candle next year.)

Although official efforts to estimate the size of the cattle herd on July 1 go back to the early 1970s, the midyear inventory is now as dead as the political aspirations of Ted Cruz and Bernie Sanders. Government penny-pinchers late last year announced in the name of fiscal responsibility (since when did these guys find Jesus?) that total herd assessment would henceforth be reduced to one report (i.e., January 1).

Actually, this represents the second time the midyear has received the budgetary axe. It was first sent to the cost-cutting paper shredder in 2013, but somehow briefly reinstated in 2014 and 2015 when USDA janitors turned in loose change found in the waiting room sofa.

I suppose I'm exaggerating a bit regarding the ridiculously small amount of money saved by pulling the July 1 cattle count. You be the judge.

The NASS 2016 budget for agricultural estimates totals $134 million, roughly $10 more than the previously year. Assuming that the agency issues approximately 500 estimates, total spending per report is roughly $270,000. Since the lion's share of this expenditure is no doubt tied to personnel, it seems reasonable to suggest that per-report cost would be lower the more estimates are generated within the same production category (i.e., cattle, hogs, row crops).

Furthermore, the non-labor costs would also skew the per-report expenditure based upon the size and scope of a particular sampling. The midyear inventory has historically been a much more modest sampling than the January 1 herd assessment.

Excuse the WAG accounting, but I think it unlikely that Washington is saving much more than $100,000 to $200,000 in dry-docking the midsummer cattle count. Given total federal spending of $4 trillion, such token frugality may simply border on the silly.

Now before the FBI launches an aggressive investigation of my e-mails, let me quickly admit that I have not always treated the midyear with seriousness and respect. You don't have to be a Russian hacker to know that at times I've dismissed it as a "waste of paper" and "exercise in yawning." Yet the value of timely information is always a function of market context.

Maybe that's exactly why I find myself currently troubled by the hole in the July calendar. The market context of herd size, as well as the yin and yang of expansion and liquidation, seems to be shifting even as we speak. Specifically, while the long-term realities of "expansion" remain locked in place for several more years (the production base is more like an oil tanker than a speed boat), I would argue that the market will to "expand" is soon to come to a screeching halt.

For starters, just look at the breathtaking discounts of 2017 live cattle futures. Next June closed today at 105.22, as much as $18 below the 5-area steer average of June 2016 (i.e., $123.51). This ugly reality can only steel equity-strapped feedlot managers to secure calves and yearlings this fall at sharply lower money. Furthermore, ranchers are already puking in detox with the wild drunk of 2014 quickly fading in the rearview mirror. Per-head calf returns over cash outlay this year are set to fall at least $500 short of that party.

If you think of the market as a Ouija board, the bearish spirit seems to be repeatedly driving the pointer to "S-T-O-P-E-X-P-A-N-S-I-O-N." I think it will be very important for producers and traders to track the progress of this seance. It just a shame that they'll be getting less help in that regard from accountants at the USDA more interested in half-hearted belt tightening.

For more from John see www.feelofthemarket.com

(CZ/)

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