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Get Ready For Economic Expansion

The U.S. has gone through one of the worst recessions since the 1930s but there are signs that the economy is stabilizing. Consumer confidence appears to be improving which is a positive signal for beef demand. Unemployment numbers are also coming in better than expected as major layoffs come to an end. The U.S. housing sector is starting to turn around. Lower interest rates are allowing people to refinance with lower payments. Major equity indexes are well off their lows and moving higher. The fundamentals of the energy complex are also turning around and there is potential to see crude oil strengthen throughout the summer. The Federal Reserve expects the U.S. to move into expansion in the first quarter of 2010.

During an expansion phase, there are many factors to consider. The U.S. will face a major inflationary period due to government spending and quantitative easing by the U.S. Treasury, which has been printing money to buy long-term bonds. This will also cause the U.S. dollar to weaken, tempering import demand of products while driving prices like crude oil higher. Secondly, there is growing beef demand as incomes improve and consumer confidence strengthens.

I’ve studied cattle prices and margins back to 1960. The most bullish periods of the cattle market are during the expansion phase of the U.S. economic cycle. Inflationary factors along with growing consumer demand resulted in a surge in cattle prices. When the economic cycle starts to expand, cattle prices trend higher for a two-to three-year period and feedlots have the most consecutive positive feeding margins; however, there are also larger risks during these periods which can be a double-edged sword.

I am going to discuss three past expansions shown on the continuous CME live cattle chart.

Case 1

There was a recession from December 1969 to November of 1970. The economy then expanded from November of 1970 to November of 1973. Fed cattle prices ran from a low of 26.60 in November of 1970 to a high 59.50 in August of 1973.

Case 2

The next major recession was from November of 1973 through March of 1975. From March of 1975, the U.S. economy continued to expand through January of 1980.

The March 1975 low on the CME cattle was 34.30. There was a quick three month rally to a high of 56.50 in June. The market did settle back but then there was a huge rally from September of 1977 to April of 1979. During this expansion phase of the economy, the cattle market increased from the lows near $35 to highs of $80.

Case 3

The next recession was from July of 1981 to November of 1982. The U.S. moved into expansion from November of 1982 through July of 1990. The cattle market consolidated from 1982 to 1985 but the when the real economic expansion occurred from 1985 to 1990, the market was basically on a straight upward trend from $52 to $80.

The U.S. recession is expected to bottom in the fall and move into expansion during the spring of 2010. This is going to be very interesting given the contracting cattle herd, lower calf crops, and lower beef production. All these factors along with inflationary policies of the central banks and growing consumer demand could cause live cattle prices to become very strong.

Gerald Klassen analyzes markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For further information, comments or questions, he can be reached at[email protected]or 204 287 8268

The material contained herein is for information purposes only and is not to be construed as an offer for the sale or purchase of securities, options and/or futures or futures options contracts. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. The risk of loss in futures trading can be substantial. The article is an opinion only and may not be accurate about market direction in the future

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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