Sort & Cull

Whether the card game is Bridge, Pitch, or Liars' Poker, the most embarrassing thing you can do is forget what's trump.

Beef producers and processors have been dealing from the same deck now for nearly two months, but you get the feeling that even the sharkiest sharks at the table are now longer exactly certain about what card takes the trick.

Midway through the fourth quarter of 2012, there was absolutely no doubt through the cattle casino regarding the rules of the early year game ahead. Any bidder disciplined to cut feedlot placement by 1.4 million head over six months had the undisputed right to call trump: SUPPLY.

But even though a winning strategy seemed as much a no-brainer as Daniel Day-Lewis winning the Oscar for his portrayal of Lincoln, the 2013 market was still wet behind the ears when sagging cattle and beef prices played not according to Hoyle. What was trump again?

While everyone recognizes that supply and demand are opposite sides of the same coin, that the push and pull of these traditional market poles always shape each other to some extent, the conventional wisdom concerning the bullish dominance of historically small feedlot supplies was formidable enough to be shocked by extreme weakness of domestic and foreign demand.

In short, although beef production through the first six weeks of 2013 has been generally as tight as expected, demand has been much softer than anticipated.

The surprising early year ability of weak demand to over-trump tight supplies appears to stems from at least three realities: 1) tax increases paring consumer paychecks; 2) aggressive price-raising by national grocery chains; and 3) defensive consumer spending in the face of sequestration uncertainties.

According to the Wall Street Journal, Wal-Mart on Thursday joined a nervous parade of retailers and restaurants worried about the economic impact of the recently restored federal payroll tax that has left Americans with less money to spend.

Wal-Mart, Burger King, Kraft Foods, and others are lowering forecasts and adjusting sales and marketing strategies, expecting consumers with smaller paychecks to dine out less and trade down to less expensive purchases.

According to Citigroup estimates, the expiration of the payroll tax cuts that knocked 2% off consumers' take-home pay will ding a household with $65,000 in annual income $1,300 this year, shifting as much as $110 billion overall out of consumers' hands.

At the same time, the gov moved to more aggressively pick-the-pocket of Average Joe Taxpayer, meat department managers were proactively protecting retail margins by remarking butcher paper with sharply higher prices.

Updated meat spread data released Thursday indicated the average retail price of choice beef in January was $5.24, 2.5% above December, 3% higher than 2012, and representing a new all-time record.

Before you accuse the captains of Kroger and SuperValu of price gouging, keep in mind that they are just trying to play by the rules, assuming that trump was really trump. Whatever, challenging smaller consumer budgets to spend more on steaks and hamburgers has been like adding insult to injury.

Finally, the crazy game of sequestration is understandably causing millions of public employees and citizens in general to hunker down, spend less, and live smaller until the dust somehow settles.

I guess I don't believe Washington is dumb enough to furlough meat inspectors and thereby trigger a long line of falling economic dominoes. Many would say that's a bad bet.

But when it comes to the feckless beef demand seen this winter, a wild rumor about the sequestration does more harm than a sound fact.

If there's any promise in this broken card game, it may be that there's still time to cut the deck anew. At the risk of waving the "S" flag again, the tightest beef supplies versus 2012 should still be ahead of us.

While Jan-Feb fed tonnage has trailed last year's production by 2-4%, the Mar-Apr output could falter by as much as 10-15%. Furthermore, the negative trump of demand could well be eased as we move into the spring.

Grilling fever should help consumers feel more comfortable with their "adjusted" paychecks. And let's hope Congress and President Obama can lose the scare tactics of deficit and debt reduction, settling on a plan that somehow balances belt-tightening with economic confidence.

For more John Harrington comments, visit http://www.feelofthemarket.com/…

(AG)

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