Sort & Cull

Mount USDA erupted Friday with a lava flow of red hot livestock and meat data: the monthly Cattle on Feed report, the quarterly Hogs and Pigs inventory, the monthly Cold Storage report. As a professional numbers-cruncher and shameless member of the market paparazzi, I should be nursing a major buzz.

But now that Brexit has suddenly turned livestock and grain futures into a complete state of chaos (wild price action that would make a black swan blush), I might not even bother turning a single rock on the new mountain of data. Why bother? Fundamental analysis has become as useless as an EU library card in Liverpool.

At least that's how it seems today. Maybe calmer market waters early next will coax me back to the traditional comfort of spreadsheets and S&D logic. Old habits die hard.

I suppose if I'm completely honest, Brexit per se shouldn't take all the blame. Let's face it, livestock markets (especially cattle) have been wading in irrational water for months. Live and feeder prices since the third quarter of 2015 have in many ways made a mockery of fundamental implications suggested by realities of the previous three years.

But if that was the old chaos, this new anarchy threatens to be even worse. Why? In a word, exchange rates.

As global investors stampede toward safety in the wake of the Brexit vote, the U.S. dollar is soaring, surging ahead of the British pound, the euro, and almost all international currencies. And with so many unanswered questions now proliferating upon the world economic stage, the dollar is likely to become more and more muscle bound at least through the balance of the summer.

Needless to say, a strengthening dollar only works to make U.S. meat exports increasingly expensive to foreigner buyers. The vigor and growth of export demand is absolutely crucial for the success of profitable cattle and swine expansion, exactly the context within which many will be interpreting this afternoon's reports.

Attempting to anticipate Russia's pre-war actions, Winston Churchill once shrugged and said: "It is a riddle, wrapped in a mystery, inside an enigma." That description seems apt as the livestock market considers the Brexit fallout.

Consider just one facet, one set of possibilities.

The big export story of 2016 has been the surprising hunger of China, both in terms of feed grain and pork. Although China is a growing customer of U.S. pork producers, it currently received most of its take-out from the European Union (i.e., Germany and Denmark).

What do you suppose happens going forward as the Euro sags and the dollar remains on steroids? If that sounds sadly simple enough, know that the EU currently represents China's largest market for its own exports. A troubled EU economy could quickly soften economic strength in China. And when China sneezes...

You can almost hear the wave machine crank-up.

(CZ)

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