Multiple Factors Impacting Markets
The roller coaster we call the cattle markets are providing a heart-stopping ride, thanks to fears of the coronavirus (COVID-19) and the Russia-Saudi Arabia oil price war. In the U.S., broad market fears started with coronavirus news related to beef exports, which were impacted by the virus. Other global markets also responded with a knee-jerk reaction, which is leading to a possible global economic slowdown. Add to that the fact that OPEC and Russia could not come to an agreement on crude oil prices this weekend, and it’s a big “what if” for many aspects of the economy.
Decision making during almost any market can make one second-guess or hope they are on the side of “right,” but decision making during turbulent markets can tip the stress meter past the red danger zone. Dr. Derrell Peel, Oklahoma State University extension livestock marketing specialist says the coronavirus is another example of a “black swan,” — a rare, unforeseen event that has a sudden, unexpected and dramatic impact on markets. Other “black swans” that had a major impact on the cattle business include the packing plant fire last year, or the first BSE case in December of 2003. But Peel says this situation is slightly different.
“First, those events were within the beef industry whereas the coronavirus is a much broader and varied set of effects in U.S. and global economies. This makes it much harder to assess the multitude of different impacts that are occurring or could occur,” he said.
Complicating the matter, Peel said the packing plant fire and BSE case were both single events. Afterwards, it was relatively easy to figure out the time lines of recovery.
“The current situation is not a single event; is still developing; and will end over a period of time at some point in the future. Clearly, the uncertainty has not peaked yet and the best we can hope for, from a market perspective, is that there will come a time when it appears the worst is over and we can see a path to a lengthy recovery in markets,” he said.
Couple that with the rapid drop in crude oil prices, and it gets complicated. West Texas Intermediate crude oil, the U.S. benchmark for oil prices, plunged as much as 33%, rivaling the price drop during the 1991 Persian Gulf War. Layoffs for oil-related workers were rippling through the industry.
Dr. Stephen Koontz from Colorado State University’s department of agricultural resource economics says although the broader U.S. macro economy looks reasonably good, the protein balance sheets show a problem for the first quarter of 2020 for beef.
“Numbers of animals and carcass weights are higher through the first quarter and have the potential to be higher for the rest of the year for the competing meats,” Koontz says. Pressures on protein prices with additional supply and weaker export demand, coupled with global economic uncertainty, leads to price pressures in the cattle markets through April and possibly into may, he says.
Increased beef production is the result of a 1.3 percent year over year increase in slaughter numbers, coupled with increased carcass weights, according to Peel. Steer carcasses are averaging 19.6 pounds heavier while heifer carcasses are at 10.6 pounds heavier, year over year.
“These factors, and the broader macroeconomic concerns, suggest persistent weakness in cattle prices through the spring. And until the dynamics of the health crisis are more certain there will be considerable volatility,” Koontz says.
Peel agrees. “Near term, I don’t see good prospects of waiting this situation out for a sudden market recovery. Cattle producers who have to make marketing decisions in the next 30-60 days for sure, and perhaps longer, should look for markets to remain weak with a decent prospect of getting weaker. Obviously, the news about COVID-19 is changing constantly and may support brief short-lived market bounces.”
Although Peel says it’s hard to tell if the coronavirus has impacted beef demand, it has appeared to hurt export demand.
The backlog of exports started mid-February when the Chinese government imposed travel restrictions that kept tens of thousands of workers in their homes. Ports were at a virtual standstill because workers were told to stay home to avoid the spread of infection. Reefer plugs to power refrigeration units were at 100% capacity, according to multiple sources.
Italy has placed much of the country in a “red zone,” restricting movement of its citizens. Schools and universities are closed, and public events are halted, according to the Washington Post. Measures of mass quarantining will likely lead to further export backlogs.
Marketing strategist Robyn Volkening says the impacts could reach beyond the obvious. Items like packaging tape, labels, ink and other mundane items could affect production lines in several industries.
“Something mundane like packaging may seem silly, but if you can’t ship your product correctly and it’s damaged, what will you find for an alternative? Do you have an alternative printer for your labels if they are required on your product?” she asks.
At press time, many U.S. businesses and schools were modifying plans or canceling large events, which will ultimately restrict commerce. Analysts predict this will lead to shortages of some items and an overflow in others. It will likely affect the disposable income of workers in some industries, such as oil field and entertainment.
Peel says impacts on domestic demand may be yet to come.
“It will be important to watch both demand and supply in the coming weeks to see if the current beef and cattle market expectations will have to be revised significantly. There are a multitude of market factors to sort out including: new trade agreements, macroeconomic changes (stock market, interest rates, etc.), exchange rates, African Swine Fever, and others that will make it more difficult to determine the more direct impacts of COVID-19 on international and domestic beef markets,” he cautions. “Stay tuned.”