Are cattle prices heading higher? Why or why not?
Contemporaneous articles from two of the most respected business reporting outfits in the world–the Wall Street Journal and Bloomberg–have diametrically-opposed views, or so it seems. And neither media outlet considers their reports to be opinion pieces. Both are treated simply as journalists reporting facts. From today’s Wall Street Journal (subscriber content):
Cattle prices are soaring toward records, pushing up the cost of beef in grocery stores and adding to the risk of a broader wave of food inflation.
The gains are being fueled by rising appetites globally and a dwindling U.S. herd. Purchases of U.S. beef around the world have surged as emerging economies become more prosperous. At the same time, ranchers hit in recent years by drought and the financial crisis have cut the number of cattle to the lowest level in decades.
The rally has driven up the futures market for cattle by 11% since early July to reach …
Now, today, from Bloomberg:
Wholesale choice-beef prices have climbed 8.5 percent in the past three weeks, as retailers filled freezers before the holiday weekend next month, a time when many Americans grill outdoors. Meatpackers shipped 5.73 million pounds of choice beef in the first two days of this week, 26 percent less than a week earlier, according to U.S. Department of Agriculture data.
Grocer “buying is pretty much past,” said Lawrence Kane, a market adviser at Stewart-Peterson Group in Yates City, Illinois. “We had a peak of demand when the packer was trying to fill orders, but now the packer will be looking at some idled plant time” for the Sept. 6 holiday, he said.
Cattle futures for October delivery fell 0.4 cent, or 0.4 percent, to 99.05 cents a pound at 9:40 a.m. on the Chicago Mercantile Exchange. The most-active contract is up 4.8 percent this month.
So, which is it? Are cattle prices being dragged inexorably higher by demand and supply problems, as the Journal opines (even if not on the opinion pages)? Or can we expect sluggish demand to keep prices tame, as Bloomberg attests? Is this simply a difference between perspective, with the Journal taking the long view and Bloomberg reporting on the short-term?
Economic science says that if all other things are held equal (ceretis paribus), increased demand will yield increased prices, and vice versa. This downward-sloping demand curve is the assumption upon which each reporter bases his evaluation. But what if “all other things” aren’t equal? Given enough time, nothing can be considered equal, but supply and demand metrics should determine short-term price moves in any commodity such as cattle futures. Commodities markets are especially good examples of the economic abstraction known as “perfect competition” where individual buyers and sellers have insufficient market concentration to affect prices, while each has perfect information about all the potential factors affecting the markets. In such abstractions, it is expected that prices will always resolve to where marginal cost (i.e., the cost of one additional unit) and marginal revenue (i.e., the revenue derived from that last additional unit) are just equal. Commodities markets come the closest to the economist’s abstraction of perfect competition that the real world has to offer. (Incidentally, don’t include gold and silver as commodities in this regard. Gold and silver are each part-commodity and part-substitute for fiat currency.) The products within each type commodity (i.e., cattle futures, pork bellies, tons of iron ore, bushels of wheat, etc.) offered for sale are virtually indistinguishable; they are traded on open and active exchanges where information freely flows, and no individual producer or buyer has market power sufficient to single-handedly move the markets.
So changes in prices on commodities markets seem to be safely attributable to movements along the supply and demand curve. But are they? In the short run, when all other things can reasonably be expected to be stable, it is not usually error to attribute changes in price to fluctuations in supply and demand. But what about the long run? That’s where it gets tricky. Supply and demand metrics rarely change much. The world economy will demand roughly the same amount of wheat or cattle next year as now, with an adjustment upward or downward due to increases or decreases in population or some marginal change in consumer preferences. But these are minor adjustments that suppliers are well able to anticipate.
Then why are commodities prices so volatile? Commodities are priced in fiat currencies–mainly the dollar–and are very sensitive to fluctuations in the supply, and thereby value, of dollars. If cattle futures are trending exceptionally higher, it is likely that the reason has more to do with the currency in which the future is priced than it does with the underlying supply and demand metrics. When dollars are cheap, cattle futures will, ceteris paribus, be expensive.
Are dollars cheap? Indeed they are. The Federal Reserve’s near-zero interest rate policy has been in place for roughly two years now in an attempt to forestall deflation. But as I’ve explained again and again, price declines due to declining demand are not deflation, and will not yield to an anti-deflationary monetary prescription. In the short run, cheap money will delay price declines that wish to happen because of the underlying supply and demand metrics, but in the long run cheap money just exacerbates the problem, sending improper signals to the markets to produce more than is demanded.
In commodities, especially agricultural commodities, whose demand is relatively stable across time and space (people have to eat, and roughly the same amount each day), the cheap money will operate to increase prices because demand is holding relatively stable. This is classic inflation. With commodities, the cheap money is not having to fight the forces of decreased demand pushing prices lower. This sends the same improper signals to commodities producers, who then flood the market with oversupply (after the time lag for production), ultimately depressing prices, yielding the characteristic volatility so often seen in these markets.
So, both articles are probably right in their perspectives, but Bloomberg’s article explaining short-term moves in cattle futures also gets causation right. Short-term price moves are almost always the result of movements along the supply and demand curve. “All other things” remain more equal in the short run.
The Journal’s article on cattle futures gets its explanations wrong. The exceptional increase in cattle futures lately has a lot more to do with the price of money than it does with significant changes in cattle supply or demand. Interestingly, the Journal article described the increase in cattle futures as “inflation” and then went on to describe its causes as pinched supply amid increased demand. They happened on the right description of the problem, but didn’t get the explanation right. It is inflation, i.e., a cheapening of the currency, that is to blame for the exceptional increase in cattle futures because the price increases are a monetary phenomenon, which is what inflation, everywhere and always, is.