Caution flag is up

Apr 16, 2010

I hate to say it, but what goes up usually comes down. The stock market has been on a roll in recent weeks and the Dow has passed that magical 11,000 mark, hopefully providing fuel for improved consumer attitudes and increased discretionary spending. On the other hand, the past few employment reports have shown the number of people who are filing for first-time unemployment compensation has been creeping back up. It’s clear that the federal government wants us all to think that the fundamentals of the overall economy are improving. They are hoping to give folks the green light to spend, spend, spend in the hopes it will boost the economy.

It’s going to be interesting to see what happens when the home buyer’s tax incentives end on April 30. Many market watchers think this entire program has accelerated the purchase of homes. But there are also concerns that all we did was pull sales forward. If that’s the case, then home sales may dry up a bit over the next few months.

It still seems debatable whether the $787 billion stimulus bill has done much to correct the economy. I’m one of those who thinks the economy would have found its new foundation quicker if we just left most things alone and let the markets work our way out of it. But that’s just my humble opinion.

There are some positives in the economic picture, too. For example, the restaurant industry is starting to see some renewed vigor. This sector’s decline has been very tough on the meat business, especially the rib and loin markets which have been lagging behind chucks and rounds, which have managed to post price gains during the past 18 months. Paul Westra, a restaurant market analyst for Cowed and Co., a restaurant analytical firm, said, "We officially declare that the restaurant consumer recovery began in March 2010." Same-store sales appear to be rising at restaurant chains, a phenomenon he witnessed in 2003 as the industry came out of a prior recession. Stock prices have also been advancing for many of these restaurant companies which often have multiple brands of chain restaurants.

Cattle markets are obviously what we are more concerned about and, again, they have shot up on a very optimistic upward trend, one that is likely to reverse at some point. The question I’m asked most by cattlemen is, "When will this thing come down?" Seems like most cattle and hog contracts have corrected about $3 to the down side, but it’s still a great market compared to the past couple years. Spotting signs of softness in the futures markets may be a function of closely watching what the speculators are doing. When they decide to reverse their current long positions to short the market, we could see a repeat of what happened in the late summer and fall of 2008.

Aside from fed cattle markets, the cow and bull markets have been on fire. We’ve been seeing reports of those big dairy cows with some flesh trading well into the mid $70s and slaughter bulls up to $85. The boneless beef market may have a better foundation to it than the fed cattle markets. The big question is whether consumers will trade up for their summer grilling meats. Ground beef and other lower priced grilling meats have been strong aspects of the market. The cow beef cutout is around that $130 mark. Fresh 90 percent lean is trading at $166 and the 50 percent trim was at $88.93 last Thursday. There is a shortage of manufacturing beef for many reasons, mostly a tight domestic and import inventory. We’re not getting a lot of beef from Australia and New Zealand, major sources of manufacturing beef, which is helping to boost our markets here.

We’re getting close to the end of the winter/spring bull buying season, which has been awfully good, much better than many of us expected. Cattlemen have been careful to add quality bulls to their breeding programs this spring. Cattlemen are buying the good ones and ignoring the lesser quality bulls altogether. But in many cases, these lower quality bulls are as good or better than the medium-quality bulls we sold just five years ago at prices at or below what they’d be worth as steers. There are still good bulls left out there, but the best ones are going quick. If you haven’t upgraded your genetics this spring, now’s the time.

The entire cattle market spectrum has exceeded expectations this spring and producers are smiling, but the caution flag is up; proceed with care and manage your risk. — PETE CROW