Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Pre-COVID US Economy Wasn’t All That Great Either - 4th Dec 20
Bitcoin Breath Taking Surge - Crypto Trading Event - 4th Dec 20
Platinum Begins A New Rally – Gold & Silver Will Follow - 4th Dec 20
Don't Let the Silver (and Gold) Bull Shake You Off! - 4th Dec 20
Stronger Risk Appetite Sends Gold below $1,800 - 4th Dec 20
A new “miracle compound” is set to take over the biotech market - 4th Dec 20
Eiro-group Review –The power of trading education - 4th Dec 20
Early Investors set to win big as FDA fast-tracks this ancient medicine - 3rd Dec 20
New PC System Switch On, Where's Windows 10 Licence Key? Overclockers UK OEM Review (5) - 3rd Dec 20
Poundland Budget Christmas Decorations Shopping 2020 to Beat the Corona Economic Depression - 3rd Dec 20
What is the right type of insurance for you, and how do you find it? - 3rd Dec 20
What Are the 3 Stocks That Will Benefit from Covid-19? - 3rd Dec 20
Gold & the USDX: Correlations - 2nd Dec 20
How An Ancient Medicine Is Taking On The $16 Trillion Pharmaceutical Industry - 2nd Dec 20
Amazon Black Friday vs Prime Day vs Cyber Monday, Which are Real or Fake Sales - 1st Dec 20
The No.1 Biotech Stock for 2021 - 1st Dec 20
Stocks Bears Last Chance Before Market Rally To SPX 4200 In 2021 - 1st Dec 20
Globalists Poised for a “Great Reset” – Any Role for Gold? - 1st Dec 20
How to Get FREE REAL Christmas Tree 2020! Easy DIY Money Saving - 1st Dec 20
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Impact of Grains Bull Market on Meat Prices

Commodities / Livestock Jul 03, 2008 - 12:47 PM GMT

By: Zeal_LLC

Commodities

Best Financial Markets Analysis ArticleAs Americans enter the July 4th weekend they have a lot to look forward to. First and foremost is the celebration of this nation's independence marked by a federal holiday. Then of course are the customary traditions of parades, fireworks, baseball games, and carnivals among the many. But one timeless tradition that nicely ties into the topic of this essay is the almighty barbeque.

Barbequing is near and dear to the hearts of hundreds of millions of Americans. And millions of grillmeisters don their aprons and arm themselves with extra-long stainless-steel-forged tongs and spatulas as they prepare to strut into their backyards for their moments of glory. These champions of grilling take pride in the delectable cuisines they skillfully prepare for friends and family.


Travel around any neighborhood in the US this weekend and you are sure to get a whiff of aromatic bliss. Millions of coal-, gas-, and wood-burning barbecues will be busy at work cooking the premier ingredient of choice, meat. And meat is synonymous with being an American, as the US has long been the meat capital of the world.

More meat is consumed in the US per capita than any other country. In fact since 1950 meat consumption has increased by over 50%! You vegetarians may be revolted by this number, but per-capita meat consumption is running about 220 pounds per annum according to the US Department of Agriculture. And I know that I'm on the far right side of the bell curve, likely covering for more than one of those folks that don't eat any meat at all.

Well since more meat will be consumed this weekend than any other in the year and it is at the forefront of the minds of many people, I thought it would be appropriate to discuss it not from a culinary angle but as a commodity. And where meat ranks as a commodity is in the softs group.

Soft commodities are those resources that are renewable. If it can be grown, whether plant or animal, it is considered a soft. But as I discussed last week in profiling the grains , even though softs are renewable it doesn't mean they can't experience economic imbalances. And due to a variety of factors we are finding the meats to be in imbalances of their own.

Interestingly rarely throughout history have soft commodities seen bull markets of the secular sort. Of course softs' prices do flow and ebb in response to such interim factors as weather, disease, and supply/demand imbalances among the many. But prices have remained stable all things considered.

If you look at grains for example, you will see that prices have been range-bound in a sideways trend channel for decades on end. But this price “stability” that we are so used to in the softs is likely to come to an end as the market dynamics of our current commodities supercycle are unprecedented. And it is not the US consumers that are going to drive what I believe will be the next great powerful bull markets of the softs.

By now everyone with a pulse is familiar with the global growth story. And it is indeed this story that is driving these markets. The emerging economies of the world are going through a modernization process that is prompting insatiable demand for natural resources.

Asia in particular hosts 60% of the world's population, and its developing economies were never major players in past commodities bulls. The world is finding that the structural changes going on within the borders of these countries are crushing the abilities of the suppliers of commodities to keep up with demand.

The 21st century is indeed turning out to be the age of consumption. But this consumption is not necessarily that of excess or overindulgence. Rather it is more or less a movement of economic progressivism. Forget the fact that the world's population has doubled since the 1950s. The simple truth is there is a large section of the world vying for resources that had never done so in the past.

First it began with the hard commodities. Hards are those resources that are finite in nature. And the energy and metals complexes took the lead of this commodities bull as sharply growing demand well-outpaced supplies. Other commodities followed suit and eventually the softs joined the parade. And we are now seeing that this widespread economic growth is leading to per-capita income growth that is having a radical impact on the global food markets.

The grains are the bellwethers of the foods and are the staples of the simplest of diets. Whether rice, bread, or tortillas the grains provide even the lowest-income people of the world the necessary calories to live. But when historically low-income folks take part in economic growth, one of the first things they do when they get disposable income is change their diets.

And when diets diversify, protein is always the first thing added in quality and quantity. The meats, dairy, and eggs are among some of the softs that will greatly thrive in an environment of diet diversification. And when demand for animals and their byproducts grow, the suppliers must have the means and incentive to keep up.

Last week in my grains discussion I talked about the trickle-down effect that one commodities bull could have on another due to the fact that it takes commodities to produce commodities. With the input costs to produce grains skyrocketing, it was only a matter of time before their market prices followed suit.

This effect has led to corn, wheat, and soybeans gaining 271%, 234%, and 202% respectively since their lows in 2006. So since grains happen to be the major input costs for the meats and demand is continuing to rise, these softs should be the next group of commodities to see their prices shoot to the moon right? Well by the looks of it, not yet.

For the purpose of this essay I'll just be looking at cattle and hogs. Though the broilers (chicken and turkey) are an important part of the meats trade, to compare the four-legged to the two-legged I'd need a whole lot more room than I have in this essay. Besides, when most people think meat it is beef and pork that come to mind, not chicken.

As for the data I decided to go with some of the more popular futures contracts traded on the Chicago Mercantile Exchange. For beef I went with the CME Feeder Cattle Index. Feeder cattle are young steers that are sent to feedlots for their final fattening before slaughter. This index reflects a seven-day weighted average of prices for feeder cattle sold in a defined region.

While feeder cattle do not have as much direct grains exposure as other cattle futures closer to slaughter, these cows reflect supply and demand very well. The supply of these younglings translates well into current and future demand, as driven by their rotation into the feedlots. And the price of feed is a major factor in controlling the population of feeder cattle. Just to note, for comparison a live steer (heavier and slaughter ready) price chart has the same general pattern as the CME Feeder Cattle Index.

For pork I went with the CME Lean Hog Index, reflecting a two-day weighted average of prices of hogs sold. And since I only had daily price data for the CME Lean Hog Index back to 1996, this is my cutoff for the chart.

Beginning with cattle, you can see in this chart that there was an orderly rise from the 1996 low to the 2004 high. In fact thanks to growing global beef demand cattle prices have been slowly trending higher over the last 40 or so years. The developing countries have been scrambling for imports and this trend is expected to continue to accelerate.

Interestingly even though the US is the largest beef producer in the world it is also contending for imports. In fact, the US is the world's largest importer of beef. If it weren't for Brazil , the largest exporter of beef, ramping up its cattle industry over the years, the price of beef would be a lot higher than what we see today.

But even though beef prices have trended higher allowing a strong upleg in cattle to the 2004 high, how do these prices compare historically? Provocatively if we inflate the nominal price history of cattle using the US Consumer Price Index, it becomes apparent that cattle prices are actually cheap from a historical context.

Since my daily cattle data only went back to 1991, I pulled monthly historical prices from the USDA that go back to 1970. And the inflation-adjusted high for the farm value of cattle is 155% above the nominal highs of 2004. The price of cattle has a long way to go before it reaches real price highs.

Moving on to pork you can see that hog futures had a powerful run higher from their 1998 lows to their 2004 highs. Interestingly this upleg appears as an anomaly when a hog price chart is stretched farther out, which is why the trend channel is drawn in horizontally. Unlike cattle, hog prices have been range-bound for decades on end.

The 1998 low seen on this chart was actually a 40-year low resulting from a massive oversupply of hogs. As economic woes built up in Asia hog prices tanked and nearly took out the US hog industry. You may recall that during these dark times for hog farmers former President Jimmy Carter publicly petitioned President Bill Clinton to provide the farmers with emergency low-interest loans just to keep them afloat.

So this massive 367% gain simply brought hog prices back within their long-term sideways trend. And using the CPI to inflate the nominal price history of the farm value of hogs, today's prices are cheap. Again using monthly data that goes back to 1970, the inflation-adjusted high for hogs is 334% above the 2004 nominal highs. And this makes sense since hog prices at the farm and wholesale levels are at the same nominal prices today as they were in the 1970s.

Well the most interesting observation we get from this chart is the price action of cattle and hogs since their 2004 interim highs. Surprisingly meats prices have been grinding in a sideways trend channel for nearly four years. And this is happening with skyrocketing feed prices!

Just to understand the importance of feed in producing meat, about half the global supply of grains (corn and wheat the bulk) are consumed as feed with soybean meal also a big component of animal feed. And the demand for animal feed greatly leverages the demand growth for meat. Interestingly cattle and hogs require about seven pounds of feed to produce one pound of meat.

This obviously varies farm by farm based on location, seasonality, and slaughter weight among many factors. But with the demand growth for meat and animal byproducts likely to grow at a blistering pace, more and more feed will be required to satisfy the addition of protein into more diets.

This brings us to our next quandary. If meat prices aren't going up fast enough for farmers to cover their growing costs, how will this segment of the market find a balance? Well subsidies aside, from a pure economic standpoint it is obvious that supply is not scarce enough yet to warrant higher prices.

But this supply-side issue is stealthy in nature. In reality supplies are still lagging demand. But due to the high grains prices, feeder animals are sold at a cheaper price to pare inventory and slaughter rates are increasing so the animals do not take residence in expensive feedlots any longer than necessary.

In relation to cattle a USDA commentator puts this into perspective. “ This would be like a house builder selling finished homes cheaper while the cost of his building materials skyrocket. But, unlike cattle, new homes don't continue to consume lumber and labor as they become less efficient with each passing day.”

So near-term supplies are indeed hitting the markets faster, and this is causing prices to remain stable. But with inventory clearing unnaturally fast, this will result in higher prices down the road as supplies dwindle and production slides.

The simple fact is meat producers have to find a way to pass on these rising costs or doing business will be a losing effort. And this stealth supply issue is an effective way to sustain their future. As long as grains prices remain high, farmers will do what they need to in order to educate consumers about the economic reality of the meats industry. Similar to the old adage of achieving peace through superior firepower!

The USDA is also on top of the prevailing trends and forecasts declining meat production over the next three to four years in response to these rising grains prices. With decreased supply, or slower supply growth, this will force prices to rise throughout the farm, wholesale, and retail chain as demand continues to rise.

And this growing imbalance will eventually spur global meats production to rise again. With higher prices more likely down the road, the producers will be able to absorb the sharply rising input costs and once again profitably produce their commodities. The markets will adjust to growing feed costs. And I suspect like the grains, the world will have to accept higher meats prices on balance going forward.

A recent anecdotal observation to this phenomenon comes from an interview with the chief of the largest meat processor in the world. Tyson Foods CEO Richard Bond was very lucid in voicing his concerns that meats prices through the entire cycle are not reflecting the drastic rise in input costs.

Bond made known this industry's frustration with rising grains prices and their inability to pass the costs on to the consumer. He is actually quoted in saying that meat inflation hasn't even begun to hit the consumer yet. He also suggests that while slow they are working on putting through increases to the consumer.

Ultimately I believe the meats bull markets will continue to unfold for decades to come. Aside from the adjustments this industry will need to make for higher feed prices, the per-capita income growth from the developing economies will continue to increase per-capita meat consumption.

Even the Food and Agricultural Organization of the United Nations has performed studies supporting this reality. The FAO specializes in third-world countries and developing nations and it forecasts global per-capita meat consumption to double in less than 40 years. This will have a huge impact on the agricultural industry!

So as food demand rises at a pace where suppliers struggle to keep up, commodities prices should continue to rise as well. And of course the main reason a non-farmer guy like me would even begin to research the industry that feeds me so well is to look for investment and speculation opportunities.

Up until recently only the futures traders have been able to play the meats game. For the average stock trader there just hasn't been a medium to trade or leverage the actual commodities in question.

But with the emergence of ETFs and ETNs, trading soft commodities is now possible for stock investors and speculators. There are now over two dozen ETFs/ETNs that focus on the agricultural commodities. Some of these trading vehicles are diversified and cover a broad range of agricultural commodities, while others specifically focus on cattle and hog futures.

At Zeal we believe there are still fortunes to be won trading the softs, even the meats. In our newsletters we have long discussed the impending global food inflation crisis. And these new agricultural ETFs/ETNs allow us to invest and speculate in a sector that we have not had access to historically.

In recent months we have deployed newsletter trades to test the softs markets and we continue to formulate future trading strategies with the help of these excellent new exchange-traded tools. And the commodities bulls are nowhere near their ends, so if you are looking for top-shelf commodities-market analysis and high-potential stock recommendations, subscribe today to our acclaimed monthly and/or weekly newsletters.

The bottom line is as the developing countries develop, so are their eating habits. Per-capita income is increasing at staggering rates in many of these countries, and this is reshaping the meats markets as diets are diversified to incorporate foods that had never before been an option from an economic perspective.

Ultimately the meats markets are still trying to find a balance and adjust for their sharply rising input costs. And while costs are not yet being passed on to the consumer, adjustments are being made that are likely to soon cause these markets to launch into massive bulls of their own. And stock traders can now capitalize on these trends with the new and exciting ETFs and ETNs.

By Scott Wright

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research as well as provides in-depth market analysis and commentary. Please consider joining us each month at … www.zealllc.com/subscribe.htm

Thoughts, comments, or flames? Fire away at scottq@zealllc.com . Depending on the volume of feedback I may not have time to respond personally, but I will read all messages. Thanks!

Copyright 2000 - 2007 Zeal Research ( www.ZealLLC.com )

Zeal_LLC Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules