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Paragon Commentary

Futures File: Brazilian Beef, Oil, and USDA

Mar 24, 2017

Searing Brazilian Scandal Sends Steaks Higher

April cattle futures exploded this week to the highest level in over a year, nearing $1.23 per pound. The price rally is a welcome relief for ranchers who have seen prices rise over 25% from bankruptcy-inducing levels under $1.00 per pound last fall.

Buying was prompted by reports that Brazilian police recently busted two of that country’s largest meat producers in a probe dubbed “Weak Flesh.” The companies are accused of bribing health inspectors and politicians, selling rotten beef, and mixing impurities like cardboard and soybeans into meat to stretch it and boost profits. These allegations have prompted buyers around the world to restrict Brazilian meat imports.

Brazil is the second-largest beef producer in the world after the United States; with the loss of Brazilian exports, foreign buyers may become more dependent on U.S. meat.

However, this rally may be short-lived if the scandal is contained to the 21 Brazilian meat processing plants currently implicated. Furthermore, many nations may not reduce imports for long, opting to increase inspections on imports, which would prevent a sharp increase in demand for U.S. beef. Worse yet, news of the scandal may cause a drop in beef demand, ultimately sending prices lower, which means that U.S. beef producers may need to act fast to capture the current high prices.

 

Oil Flows Lower on XL Pipeline Approval

On Friday, President Trump approved the Keystone XL pipeline, paving the way for more Canadian crude oil to flow to U.S. refineries. This move was widely expected, but would increase oil supplies by 800,000 barrels per day, exacerbating a domestic oil glut.

Oil markets fell near a four-month low, trading Friday under $48 per barrel, taking gasoline and diesel fuel prices lower by about two cents per gallon as well.

 

Perdue Heads toward USDA Position

Sonny Perdue, the nominee for Secretary of Agriculture, received a warm welcome this week in the Senate at his confirmation hearing. Perdue, the former governor of Georgia, addressed bipartisan concerns about budget cuts, immigration curbs, and limits on free trade.

If confirmed by the Senate, Perdue would oversee the USDA, an agency with nearly 100,000 employees that focuses on agriculture, forestry, rural development, and the Supplemental Nutrition Assistance Program, commonly known as food stamps.

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