Call the Market

There are times when the market rallies to new highs, there are times when the market falls to new lows, and there are more times than not when we have to make sense of the middle ground and what it means for the market's trajectory.

Even though the cattle complex remains at near all-time high prices for both live cattle and feeder cattle, the recent regression has the market on edge and its participants wondering how the power war between the market's fundamentals and technicals will play out.

I'm a fundamental analyst but understanding how the market ebbs and flows based on its fundamentals is far more second-hand for me than it was to learn the intricacies of CME contracts -- its rules and guidelines -- and the fickle nature of traders in general. Regardless of how you view and track the markets, we live in a day and age where one can't function without the other, so viewing the market one-sidedly would be choosing to look at the marketplace half-blind.

Today, let's spend some time doing a little analysis of where the market sits and where it could potentially be headed soon.

BEEF DEMAND: Years from now, when we look back and talk about the success the market had in 2023, one won't be able to do so without mentioning the market's relentless beef demand. Despite consumers being pressured with inflation in all sectors of the economy, one place they continue to allocate their hard-earned dollars for is beef. The positive market reaction here is that strong beef demand keeps packers engaged in the cash cattle market and actively procuring more cattle to ensure their upcoming kill schedules are fulfilled. However, we must be aware that, in the near future, boxed beef prices could see some downside pressure that comes as both an expected and seasonal trend but could affect the market nonetheless.

TIGHT SUPPLIES: Another undeniable reason why the cattle market has been able to rally is because of the change in the market cycle that produces fewer cattle. The market's lack of profitability and severe drought had a negative effect on the beef cow herd, which in turn affects the number of feeder cattle produced, and later the number of fat cattle available through the fed market. When looking to the second half of 2023 and into 2024, the beef cow herd hasn't begun to rebuild yet, which should imply that supplies will remain thin and prices could remain elevated. The vulnerability in this point lies in imports -- and imports of feeder cattle have been significant in recent months, especially from Mexico.

WASDE DATA: A way to gauge upcoming demand, both domestically and internationally, is through the World Agricultural Supply and Demand Estimates (WASDE) data. The latest report was released on June 9, and although the report didn't share changes in beef import and export expectations, it did paint a rosy picture for production speeds in the second half of the year. June's WASDE report shared that beef production for 2023 was raised slightly, as throughput is expected to remain snappy on both fed and non-fed cattle classes. Beef production for 2023 grew by 165 million pounds from the previous month's report. Quarterly steer prices were raised from May's report, as relentless beef demand and thin supplies continue to push the cash market to new all-time highs. For 2023, the second quarter is estimated to average $179, which is $7 higher than last month; the third quarter is expected to average $173, which is $9 higher than last month; and the fourth quarter is expected to average $174, which is $5 higher than last month. There were no changes made to beef imports or exports compared to May's report. For 2023, beef imports are expected to total 3,501 million pounds, and exports are expected to total 3,224 million pounds.

SUMMER PRESSURE: Over the last two weeks, the market has endured some pressure that has pushed both the live cattle and feeder cattle contracts lower. Last week, cash cattle prices traded $3 to $4 lower, and a steady regression was seen in both the live cattle and feeder cattle contracts. The onset of this market pressure seems to have traders wondering if the market's rally has been overdone, as they've elected to take an extremely distant approach to trading early this week. However, the question here needs to be: Is this problematic long-term for the cattle market? And I'd be foolish not to remind you that even bull markets have spells when prices trade lower.

In conclusion, I remain optimistic about the market's long-term outlook, as the fundamentals remain incredibly strong. Often, we as market participants become hypersensitive and reactionary to any downside pressure, which causes us to actually contribute to the market's anxiousness.

When you take a step back and evaluate the marketplace as a whole, the market's strong foundation remains intact.

ShayLe Stewart can be reached at ShayLe.Stewart@dtn.com

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