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CME: Steep Decline in Livestock and Grain Markets

by 5m Editor
30 September 2008, at 6:45am

US - CME's Daily Livestock Report for 29th September 2008.

Livestock and grain markets posted steep declines on Monday following the defeat in the US Congress of a rescue package for the financial industry. Live cattle futures were limit down (300 points) on some contracts while other contracts closed only a few points short of the daily permissible limit. Feeder cattle futures similarly declined the daily limit on the most traded contracts.

Lean hog futures were lower but the decline was not as significant as in cattle given recent evidence that overall supplies will be curtailed in 2009 while overall domestic and export demand remains strong. As for grain markets, corn and soybeans contracts were down the daily permissible limit (30 and 70 cents, respectively).

The sharp decline in agricultural commodity futures reflects the impact of short term shifts in trading strategies of market participants as well as a longer term transformation of the outlook for commodity markets. From a more immediate point of view, the decline in equity and currency markets likely caused significant loses for market participants with exposure to them. There are plenty of stories about hedge funds and other such players that were squeezed by the almost 10% drop in equities and thus had to reduce some of their exposure in commodities. For every contract that is sold, there needs to be another party to buy it and in these times when cash is king and there is little appetite for risk, the number of willing buyers seems to have dwindled. But from a broader perspective, the decline in agricultural commodities reflects the market’s negative reading of business prospects going forward.

A lot of the analysis about the negative impact of the credit crunch focuses on the consumer. Their reduced purchasing power is expected to negatively impact demand for meat protein prices and make it harder for companies to pass along higher costs. Little attention, however, is paid to the impact that the credit crunch is having on companies along the supply chain. Meat companies, be this packers, distributors, or retailers, tend to be significantly leveraged. The credit crunch will take an immediate toll on the weakest link (i.e. those with the most debt on their balance sheets) and the impact will reverberate across the system, in the process negatively impacting the amount of product that can move through. Pilgrim’s Pride, the top broiler processor, is fighting for its survival (its stock is down 80% in last month). Other companies also could find it more difficult getting credit and, as credit dries up, so does their ability to buy raw materials, further pressuring prices.

5m Editor