As I write this in mid-August, the World Bank has just issued dire warnings regarding economic instability worldwide. The events in Europe and in the United States have spurred huge swings in investor confidence. So, what did happen anyway and why do we care? In Europe, the shift to one currency, the euro, set the stage for the current financial crisis because independent countries did not have the dignity to face their own financial problems.
In the words of Glen Hodgson, chief economist of the Conference Board of Canada, it was like the rest of Europe giving Greece, Spain and Italy their credit card without a spending limit. The raging financial fire facing Europe can only be stopped with forgiveness or writing down of debt, casting doubt on the strength of other European economies. This is portrayed in the volatility of markets each and every day, as investors are not sure of how to proceed in such an uncertain environment.
Read Also
Horns aren’t unlocking anytime soon on livestock transport standards
Standards good enough meet the definition of “humane” animal transportation still vary widely between what what industry wants, what animal rights advocates want and, between the two, what federal regulators decide is good enough.
If you follow markets at all, it is the volatility that is so overwhelming, and dramatic moves are not uncommon. A few weeks ago, the world went underground when the credit rating of the U.S. was downgraded from an AAA to an AA+. The rating was established by Standard &Poor, an economic watchdog that publishes opinions on the creditworthiness of an obligor, the country who has a legal agreement to pay up. When the smoke cleared, investors were back in the game at the bottom of the market, propping it up and stocks, equities and commodities have rebounded. News of semi-stability in developing countries, those who are poised to become ready consumers of manufactured goods and of commodities, is keeping a somewhat weak floor on global investment.
On the global scene, many cast their eyes for solutions to China. It remains elusive as it guards its currency, the yuan, to keep it from appreciating. This makes them an attractive country to buy from. I expect the overall objective is to keep everyone employed and thus maintain support for the ruling party. To do this, the currency is kept in check, inflation is controlled and essential foodstuffs are price protected. If you turn the glass upside down it is clear that China wants us more than we need them. Most countries can cut interdependence with China, but China needs that steady stream of buyers to keep its voting population happy.
It is important to keep this in mind when looking at the world’s largest consumer base, the U.S. The U.S. has a federal debt that is 100 per cent of GDP, compared to Australia with seven per cent and Canada with 34 per cent. The projected debt in the U.S. is 150 per cent of GDP within five years. That in itself is nasty, but the lack of a fiscal plan and the government’s recent move to flatten interest rates are reflective of pre-recession strategies. This raises the question of future investment into the U.S. and right now America is heavily indebted to Asia. Will America survive without a fiscal road map? Only by a thread.
Will China call the U.S. debt? Hodgson thinks not; as countries are so intertwined in trade, they basically need each other. Most certainly the American public will suffer, especially the middle and lower class, as they make radical adjustments to survive, but trade is trade and that is likely to continue. In the interim, the streets and all markets will remain volatile.
What happens on the street, the demonstrations against the rising cost of living and the political parties of the day, also deeply affects markets. Just as we are poised for growth, particularly in Canada, Germany, Australia, Japan, Brazil, China and India, other economies are failing and many have weak knees from internal strife. All of these things lend themselves to consumer contraction in the marketplace and investment jitters.
What does this mean for beef? Our largest consumer is the U.S. and the domestic demand is unlikely to gain any traction as consumers cut spending. The uptake of ground beef also changes a market dynamic and may be the foundation for further investigation into alternate production systems for beef. These negative factors can be offset by the low U.S. dollar and that makes them an attractive country to trade with. This will continue to put a price floor on beef in the U.S. When there is a price floor on beef in the U.S. there is a price floor in Canada. Our best-case scenario is the status quo with our worst-case scenario watching the American economic bubble burst and we are left with a severe financial hangover.
Our ability to access other countries will only be hampered by the strength of the Canadian dollar and that is something we are learning to deal with. Hodgson fully expects the dollar to appreciate to average $1.04 for the rest of the year. This makes Canada a hard country to buy from and an easy one to sell too. Although Canadians stand on fairly stable economic ground and Albertans are solid with a debt of 10 per cent of GDP, the daily economic news and the word from the street will continue to stir markets, making them highly volatile. The best advice is to remain disciplined in our approach to the beef cattle market as global forces dictate much of our future at home.
BrendaSchoeppisamarketanalystandtheownerandauthorofBeeflink,anationalbeefcattlemarketnewsletter.Aprofessionalspeakerandindustrymarketandresearchconsultant,sheranchesnearRimbey,Alberta. [email protected]
———
Theuptakeofgroundbeefalsochangesamarketdynamicandmaybethefoundationforfurtherinvestigationintoalternativeproductionsystems.
