Commodity Insight: Bullish lean toward cattle market

Thus far, the outstanding feature of the new year is the money flowing into the commodity markets, per se. There is a growing belief among several major financial institutions that the commodity markets will do better this year than they did last year.

Last year, while stocks, bonds and the crypto markets experienced a horribly bearish 12 months, commodities gained 21%. And one prominent financial institution, in particular, is predicting commodities will improve as much as 43% this year.

As you know, I am firmly in the camp that believes stagflation, thanks to the U.S. economy having the largest labor force in history, coupled with a record boost in economic growth from China, will support higher commodity markets.

However, I also believe that not all commodities will rise this year. The commodities that will do best are the ones with the most bullish fundamentals that in turn attract the most aggressive buyers.

Moving forward, picking out a bull or bear market requires a rifle approach, not a shotgun.

Despite the hoopla coming out of Wall Street about a 43% rise with commodity values this year, it will not be that easy. It never is because some markets possess bullish fundamentals while others simply do not.

Also keep in mind the Fed and other major central banks are pushing interest rates higher and higher to break the back of inflation. Most expect further rate hikes in February up to 4.5% to 4.75%.

But two of my most reliable research firms are on record calling for rates to hit 6% before the Fed pivots and changes course in mid-year.

There are a number of commodity markets I favor on the long side of the ledger moving forward. The one I favor first and forecast is cattle.

I emphasized my bullish lean towards the cattle market in early 2021, as well as in late 2022. My bullish outlook remains unshaken.

And a few days ago, the U.S. Department of Agriculture released the January Cattle on Feed report that was most viewed as neutral. However, I did not view that particular report as neutral.

I viewed the report and the data it held as bullish for one primary reason: The data in the report was not bearish.

Yes, the report was bullish because it was not bearish. And here are some highlights from the report you may judge for yourself.

From the Cattle on Feed report, released on Jan. 20, the Jan. 1 feedlot inventory was at 97% of last year, the fourth consecutive year-over-year decline. It was also the largest yearly January decline since 2014.

The report also pegged total fed beef production to be 7% less than a year ago due smaller slaughter rates and lighter carcass weights.

On Jan. 31, the USDA is scheduled to release a semi-annual Cattle Inventory report which may prove to be a bullish surprise.

The report will estimate the total inventory, beef cows, milk cows, bulls, replacement heifers, other steers and heifers, and number of calves born in the previous year by state and in the United States.

Historically, a Cattle Inventory report is a yawner. But this year that report may provide the marketplace with red-hot fireworks because cattle numbers and supplies are poised to tighten considerably.

However, there are always two sides to a story, as well as to a market. A potential negative for cattle prices would be if the producers begin to expand their herds sooner than expected.

If that scenario unfolds while interest rates are on the rise and the economy suddenly slows, it will be a big negative for cattle prices. Also keep in mind if the economy does slow substantially, domestic demand for beef will suffer greatly.

Another bullish tidbit fell into place this week that is also bullish cattle, but it concerns the hog market. Hog prices have been under heavy selling pressure most of this year due to heavy slaughter rates and tepid demand.

This week, front month lean hog prices fell to a new 13-month low, but recovered. And then the cash hog market posted two daily gains in a row, something not seen this year.

Based on how the hog market performed this week and keeping in mind the latest Pig Crop report from the USDA shows little, if any, herd expansion by pork producers, I am sticking my neck out and saying loud and clear: The U.S. hog market has bottomed and sharply higher prices are coming soon.

If that forecast turns out to be accurate, it will be another bullish tailwind for the cattle market.

I believe the stage is set for cattle prices to reach all-time historic high prices. My upside price objective is $180 to $185 for cash and futures.

I am bullish commodities for this year — and my top pick remains cattle.