Cattle at All-Time Highs: The Price Outlook for 2011 and How to Play the Trend

Cattle at All-Time Highs: The Price Outlook for 2011 and How to Play the Trend

With cattle prices hitting all-time highs, I decided to take a look at the broader causes for the trend – both short term and long term.

To read the full article, please hop over to Hard Assets Investor.


Where’s the Beef? Cattle Prices Hit All-Time Highs

Cattle prices are at all-time highs, thanks to a strong 25 percent rally over the last 12 months. Just look at prices over the past 25 years:

Live Cattle Futures Price Chart 2011

Source: Barchart

Several long-term factors have provided a significant, sustained tail wind to meat prices, starting with grain prices. Grains have rallied quite a bit over the past year; the iPath DJ-UBS Grains Subindex Total Return ETN (NYSE Arca: JJG), whose index tracks a basket of corn, wheat and soybeans futures, has risen 59 percent year-over-year.

It takes a lot of grain to produce a pound of beef—roughly 8 pounds of grain per pound. Thus any rise in grain prices means it becomes more expensive to feed a cow, which inevitably gets passed along to the cattle buyer. Since 2006, feedstock prices have skyrocketed—and stayed higher—and the elevated costs have forced ranchers to pare back their herd levels to acclimate.

But it’s not just bigger input costs keeping herd inventories down. In fact, herds have shrunk steadily since 2004, due to a combination of drought and mad cow disease shocks. Collectively, the 2011 herd is the smallest in 53 years.

At the same time, demand has never been as high. As consumers in emerging markets like China and India become more prosperous, their diets are quickly becoming “more American”—as in, they are consuming a lot more meat. According to Eric Ocrant, vice president of Oak Investment Group, there are three times as many beef consumers now as there were 10 years ago.

Therefore it’s clear that, unlike in 2008, this current trend isn’t the result of a short-term market shock. Rather, it’s more the culmination of a slow, developing trend bubbling up to the surface.

Please click here to read the rest of my article: Where’s the Beef? Cattle Prices Hit All-Time Highs