US trade tariffs set to commence on Saturday

Happy February market watchers!  

And just like that, we’re already one month into the new year!  It is also Lunar New Year of the Snake in China that is celebrated throughout Asia with many of those markets closed for half of this last week. 

There were plenty of headlines out of DC this week, but the most unexpected and unfortunate was the collision of an American Airline flight from Wichita, Kansas, with an Army Blackhawk helicopter.  We are learning the names of the victims, some of which I knew, and it is such a tragedy that could have been avoided.  How and why do these things happen, we all continue to ask ourselves.  Our thoughts and prayers go out to all the victims and their families.  If you’re like me, you’re thinking, that could have been any of us.  

The FOMC paused further rate cuts on Wednesday awaiting further confirmation that inflation has been tamed before additional reductions. Friday’s Personal Consumption Expenditures (PCE) index for December, the Fed’s preferred inflation gauge, came in 2.6 percent higher than last year, in line with expectations, but still above the 2.0 percent target.  Core PCE came in at 2.8 percent, also in line with expectations.  Income and spending rose by 0.4 percent and 0.7 percent, respectively, in line with forecasts.  

Post-inauguration, the Trump Administration has been busy with Executive Orders to enact its campaign promises while tariffs have so far been rhetoric.  Late this past week there was talk that tariffs may be delayed by one month to March 1^st that were originally targeted for February 1^st.  However, it was confirmed by President Trump on Friday that February 1^st will in fact be the day that 25 percent tariffs go into effect for inbound products from Canada and Mexico and 10 percent from China.  

Regardless of timing, such tariffs can add inflationary pressures.  The uncertainty surrounding these tariffs and potential retaliation or simply supply chain disruptions was enough to jolt markets this week and it likely just beginning.  We saw some profit taking across the grain complex on Friday, which was also the end of the month in addition to finishing the week.  Having said that, the concern around tariffs was part of risk-off sentiments especially after the recent rally.  

The same could be seen across the equity markets with the Dow Jones chart showing a key reversal, higher high and lower low, along with a close near session lows.  The S&P 500 also finished near the lows of the day.  I’m feeling we will see weaker, but choppy markets next week as we see headlines of tariffs actually going into effect over the weekend.  

The Volatility Index, VIX, has been weaker recently barring the surge on Monday following the Chinese ‘DeepSeek’ announcement that they had developed rival technology to ChatGPT at much cheaper cost.  The VIX began to strengthen Friday from recent lows, but I foresee some upward movement over the coming weeks as trade and policy uncertainty begins to play out.  

Wheat and soybean markets faired relatively well by the close on Friday after overnight weakness.  Both contracts closed well off the day’s lows.  Corn managed to fight off the lows and close in the top half of the day’s range, but the weaker contract of the grains for the time being after gapping lower from Thursday’s low to Friday’s high.  Crude oil’s weakness recently hasn’t helped.  

Brazil’s soybean harvest is trailing the average pace, but progressing. The planting of safrina corn is slightly ahead of average.  The markets are watching South America soybean harvest closely as well as China’s buying pace that was slow this week due to the Chinese New Year.  

The EU announced this week implementing tariffs on fertilizers and farm products from Russia and Belarus.  While this is done in an attempt to punish Russia for the war in the Ukraine, it will also be inflationary for EU farmers.  

I’ve also been thinking about implementations of moving illegal migrants out of the country.  It seems sensible that a country’s laws should be respected and enforced, those involving our border seem no different.  Otherwise, the law should be changed and if not, then enforced. Aside from the ideology of that argument, the impact on food and agriculture supply chains could be profound and also inflationary to consumers.  It should be no surprise that migrant workers on work visas dominate the processing of agricultural products into consumer products.  Migrant families, not all of which may be legal, stay together.  Therefore, legal migrant workers will follow illegal family members.  

Shortages will be seen in the harvest fields of fruit and vegetable crops as well as meat packing.  Just as we saw during COVID, a shortage of workers in the packing plants can distort the supply chain by slowing the demand for live animals while creating shortages of finished products to consumers.  The result can be lower cash cattle prices while simultaneously higher consumer meat prices.  The potential leverage for cattle producers is the fact that we’re also in a cyclical shortage of inventory numbers that could help prices remain firm even if packers slow purchases somewhat.  

Conveniently, the USDA released its now annual cattle inventory report on Friday at 2 PM, after the market close.  The overall cattle and calf inventory report as of January 1^st came in at 99.4 percent of last year at 86.662 million head versus expectations for 99.1 percent.  This is the lowest number since 1951.  The beef cow numbers were reported at 99.5 percent of last year at 27.864 million head, but higher than the 99.3 percent expected by trade guesses.  This is the lowest number since 1961.  Dairy cow numbers were reported as the same as last year at 9.349 million head despite expectations for 0.2 percent higher.  The annual calf crop came in at 99.9 percent of last year or 33.530 million calves compared to trade guesses of 98.5 percent of last year.  

January feeder cattle futures and options expired Thursday at $281.90.  Markets rebounded Friday after a weakness mid-week and closed strong, but still below Thursday highs.  Live cattle contracts were weaker to finish the week and made lows below Thursday session lows.  Cash fed cattle trade developed this week, but topped out at $210 in Nebraska and some traded at that level in Colorado.  There were hopes this week of $215 further north in Iowa, but these numbers out of reach this week.  Keep in mind my comment regarding packing plants and potential labor issues ahead, which also serves the packer’s interest to buy cheaper cattle.  

Ultimately, tariffs on imported meat and livestock could be supportive to domestic prices, but the funds are long the market and may choose to de-risk through liquidation if the broader market environment warrants a risk-off attitude.  At some point, the Mexican border will reopen to live cattle, but this will likely get caught up in the broader border conflict that is now emerging and could prolong access. It will be interesting to see if trade disputes ever develop with other meat importers such as Brazil and Oceania although the nature of Trump’s fight with them is not yet evident or a priority. 

Inside day chart action in feeder cattle, lower high and higher low versus prior session, on Friday suggests that Monday’s move could see follow-through in that direction.  Stay tuned and protect your assets.  

Sidwell Strategies is the one-stop shop to protect cattle with futures, puts, LRP or a combination of all, which is probably the best strategy overall.  If you’re ready to trade commodity markets, give me a call at (580) 232-2272 or stop by my office to get your account set up and discuss risk management and marketing solutions to pursue your objectives.  Self-trading accounts are also available.  It is never too late to start and there is no operation too small to get a risk management and marketing plan in place.  

Wishing everyone a successful trading week!  Let us know if you'd like to join our daily market price and commentary text messages to stay informed!

Brady Sidwell is a Series 3 Licensed Commodity Futures Broker and Principal of Sidwell Strategies.  He can be reached at (580) 232-2272 or at brady@sidwellstrategies.com.  Futures and Options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at https://www.sidwellstrategies.com/fccp-disclaimer-21951.