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A post-U.S. election discussion

Market Talk with Jerry Klassen

I’ve received many calls from cattle producers regarding the outlook of the U.S. election. At the time of writing this article, it appears that Joe Biden will be the next U.S. president. This is a large unknown but barring any trade barriers, the cattle market should function normally. President-elect Biden wants to improve the U.S. image on the world stage but what does this actually entail? Time will tell. In any case, I think it is important to back up and start with a history lesson. Let’s look at the market environment on a macro scale.

In 1992, Bill Clinton ran a campaign based on a platform for no tax increases. In the next budget, Clinton proposed corporate tax hikes and personal tax increases on the higher income bracket in an effort to bring down the deficit and balance the budget. It was a very risky manoeuvre. The budget passed with the tax hikes. Over the next couple of years, the economy was still in a contraction phase, but growing investor confidence to balance the federal budget caused bond yields to decline. This caused interest rates to also decline, which resulted in increased spending from businesses and individuals.

The increase in consumer spending resulted in the creation of about 10 million jobs during Clinton’s first term. During his second term, the U.S. economy moved into an expansion phase and added an additional 11 million jobs. Cattle feeding was difficult from 1993 to 1996, as grain prices made record highs (for that time) in the spring of 1996. Feed grains trended lower after the summer of 1996. From the middle of 1996 and through 2000, the U.S. cattle herd was in contraction and the U.S. economy was in full-fledged expansion, which was a favourable period for cattle feeding.

Whenever the U.S. economy adds 21 million jobs and the U.S cattle herd is in contraction phase, this is positive for Canadian cattle prices. There is no doubt about it. Energy prices were low; crude oil traded under $20 per barrel for much of the latter ’90s. The economy had cheap energy prices during Clinton’s second term, which by itself is also considered a tax cut, and enhanced consumer spending. Lower interest rates and cheap energy were the main causes of the economic expansion. The increase in taxes didn’t seem to hurt the economy but, rather, boosted investor confidence.

What is the current economic situation? The U.S. and Canada both have very high budget deficits. While this usually results in higher bond yields, we have the central banks with huge quantitative easing and credit easing programs. These programs have the U.S. Federal Reserve and the Bank of Canada buying bonds, which drives up the price and lowers the yield. We’ve seen multiple stimulus packages on both sides of the border in an effort to support the low-income earner and businesses in general.

The U.S. unemployment rate for October fell to 6.9 per cent from 7.9 per cent during September. The Canadian October unemployment rate came in at 8.9 per cent, down slightly from the September number of nine per cent. The lower unemployment rates decrease the need for another stimulus package, unless we see severe shutdowns. The U.S. job increases in October were in hospitality and leisure, the industries most affected by the COVID-19 pandemic.

President-elect Biden has stated he will increase taxes but the actual layout is uncertain for corporations and higher-income individuals. We’ve learned in the past that a minor tax increase to bring down the deficit will increase confidence in the government. One can actually make the argument that this is needed because the central banks (the Federal Reserve) cannot continue the rate of quantitative easing. Once we’re past this pandemic, there is no doubt we will head into a major inflationary period, with significantly more money, chasing fewer goods.

The U.S. energy policy is a question mark. I graduated from the University of Alberta in 1996. We were taught a country needs cheap energy and low-cost food to enhance the standard of living for all individuals. This was a common belief at the time. Currently, the common belief and value system amongst a large portion of the U.S. and world population is to cut back on all carbon emissions, even if there are severe economic costs. If energy and food prices increase significantly, this is a consequence of greater good in the longer term.

I would say this is a major difference from the Clinton era to the Biden era. Economic theory will tell you this hurts the lower-income bracket more than the middle- and higher-income brackets. What type of aid will go to the lower-income bracket to alleviate this consequence?

By the way, the lower-income bracket grows when food and energy costs increase. If consumer spending does not increase, this is a problem for beef demand. Food and grocery stores sell packaging, not food. The price of food is a small portion of the cost when considering labour, energy, transportation, etc.…

The U.S. cattle herd is in a contraction phase and will likely shrink over the next couple of years. Barley prices are nearing historical highs in Alberta although corn and wheat are near five-year averages. We’ve learned over the past year that the world is no longer comfortable with previous stock levels of grain. We saw how quickly shelves can go bare back in the spring.

In conclusion, the current policy framework suggests that the U.S. cattle herd will shrink by another couple million head over the next four to five years. A growing lower-income bracket will result in lower demand. The first cattle operations to suffer from left-wing economic policies will be the “holistic and natural” type producers. We learned from the wheat market in 2008 that when commodity spring wheat goes to $21/bushel, there are no questions about production practices and there are very few people in the world willing to pay $40 per bushel for organic wheat. When a sirloin steak goes for $30 per pound and ground beef goes to $10 per pound, the population willing to pay this price decreases significantly.

The price of a Mama Burger at A&W is about $5. Are you willing to pay $10 for a Mama Burger? The time will come, trust me.

About the author

Columnist

Jerry Klassen

Jerry Klassen manages the Canadian office of Swiss-based grain 
trader GAP SA Grains and Produits Ltd., and is president and founder 
of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Klassen consults with feedlots on risk management and writes a weekly cattle market commentary. 
He can be reached at 204-504-8339.

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