Harrington's Sort & Cull

Chicken Little's Panic Attack

John Harrington
By  John Harrington , DTN Livestock Analyst

Maybe you called the frantic fowl "Henny Penny" or "Chicken Licken."

I happened to grow up in a "Chicken Little" house. But regardless of the exact cluck the excitable chick of folklore answered to, we all remember her(?) infamous panic attack and desperate search for a big bottle of Prozac.

As the ancient story goes, Chicken Little was scratching around the barnyard one day when an acorn fell from a tree and landed right on her head. Addled by the concussion and more than a little cracked from the hatch, Chicken Little took off like a drunken Paul Revere to warn all who would listen: "The sky is falling! The sky is falling!"

Nervous traders of spring and summer cattle futures have been scurrying around like a flock of Chicken Littles since 2018 began. Is the market sky of the second quarter truly falling? The stubborn defense of deep April and June live discounts (i.e., $4-$5 and $14-$15 under spot cash, respectively) certainly suggests that many, many in the trading henhouse are committed doomsdayers wearing crash helmets.

I don't know about you, but I'm sick of craning my neck in search of market disaster and consistently "disappointed" by nothing but a large expanse of well-suspended blue sky. For example, over the last 10 weeks, the 5-area steer has averaged $125.30, 3% above the same period in 2017 (when the market had to digest 4% less beef).

So where's the evidence that the heavens are falling or even about to fall, Chicken Little? For purposes of discussion, let's give the panic-stricken the benefit of the doubt. I can imagine at least three lines of possible worry.

1) The threat of explosive beef production through the spring and summer ahead: This loaded gun may represent the best weapon fear mongers currently have in their holster. To be sure, thanks to aggressive placement activity through the last third of 2017, feedlots are set to market record numbers next quarter. USDA bean counters are officially projecting commercial beef production for the period at 7.2 billion pounds, as much as 13% greater than both January-March 2018 and April-June 2017. While I would argue this estimate is 200-300 million pounds too high given the way feedlot managers have pulled cattle forward through the first quarter, there's no denying that we seem to be on the threshold of a major increase in tonnage.

2) A sharp decrease in domestic beef demand: Needless to say, the road connecting supply concerns and demand doubts is always a short one. You can still have a decent party if both arrive in proportional strength and ready to boogie. But if the former arrives early and the latter cancels at the last minute, it could be a painfully long night.

More specifically, talk of accelerating inflation, slowing economic growth tied to trade wars and intensifying competition has got plenty of pessimists running for cover. I suppose you're obligated to stuff these possibilities in the "if-worst-comes-to-worst" file. Yet hysterical squawking about the immediate danger of imploding demand is far less likely to move me from bed to bomb shelter than more logical alarms triggered by building fed supplies.

3) The slowing pace of beef exports and the possible increase in trade barriers: As the expanding herd creates more and more beef for sale, the exact percentage of total production shipped abroad become increasingly critical (a record 12.9% of U.S. beef and variety meat production was exported in 2017). So between the impressive growth in U.S. exports in recent years and mounting threats to free trade since the election of Donald Trump in the fall of 2016, bearish misgivings are easily spread by the Chicken Littles of the marketplace whenever they see the latest off-putting headline on the renegotiation of NAFTA, the future of the TPP without the U.S., or possible retaliation tied to new steel and aluminum tariffs.

From Nostradamus to the Mayan Calendar to Harold Camping, I think it's fair to say that even the most earnest Chicken Littles of history have all been found guilty of exaggeration. While the naysayers currently rolling nearby cattle futures over the market cliff may not exactly be calling for total destruction, they do strike me as overly confident in the conflation of worst-case scenarios.

And when push comes to shove, futures don't have a very shiny record in predicting the market more than a few weeks down the road. Beyond that, the board may get the general price direction right, but rarely anything as precise as a falling sky.

For more of John's commentary, visit: http://feelofthemarket.com/…

(AG)

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