Mixing Farming and Politics: A Rocky Road Ahead

The U.S. government is often seen as the go-to fix for problems in the agriculture sector. However, this approach can create more issues than it solves. Many in the ag community agree that stepping away from government intervention will be tough but necessary.

Unintended Consequences

The government's well-intentioned fixes often lead to unintended consequences, making it hard to predict if a freer market would be more or less volatile.

Corn Market

Take corn, for example. The government incentivizes farmers to grow corn through subsidies and insurance programs. This has led to overproduction and consistently low prices, with only a few exceptions where prices spiked so high that farmers couldn't fully benefit.

Cattle Market

The cattle market is another example. The Livestock Risk Protection (LRP) program, enhanced in 2017, offers ranchers insurance to limit downside price risk. While this seems helpful, it also emboldened market participants and created an upward price vacuum, leading to increased volatility.

Future Considerations

Fast forward to 2025, and the government is considering opening the border to foreign-raised meat and reducing tariffs to fix a problem they might have created with the revamped LRPs. Cattle producers fear they will bear the brunt of this, but the full extent of the impact won't be known for years.

Pandemic's Role

The pandemic also played a role in market volatility. Massive liquidity injections led to speculative bubbles in grains from 2020 to 2023 and in livestock in 2025. These bubbles did more harm than good, as neither humans nor small businesses can handle such extreme price swings.

Market Correlations

Looking at market correlations, it's clear that a significant portion of the cattle rally was driven by speculation. Gold and cattle have settled in the same direction about 85% of the time over the last 180 trading days, indicating algorithmic trading or bandwagon speculation.

Dollar's Strength

The dollar's strength is also a factor. Historically, the dollar and corn have moved inversely, but recently they've been moving in the same direction due to the trade war with China. If the dollar's uptrend continues, we could see the spread between cattle and corn narrow, with cattle prices likely to bear the brunt.