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.

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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:

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

Runaway Inflation in...Chicken Wings?

The New York Times reports that chicken wing prices are - pardon me - flying high!

Reason being, restaurants have cut back on their orders for higher priced chicken breasts in favor of wings, which are more perceived as a "cheap luxury", according to the article.

Higher demand, coupled with falling supply...you know what that means - higher prices!

In the interest of full disclosure, I must reveal that I actually have wing royalty in my blood - Drew Cerza, the Buffalo Wing King, and founder of the Buffalo Wing Festival (pictured next to Bobby Flay above), is my uncle. I have not yet connected with Uncle Drew for the inside story on the price boom in chicken wings - but when I do, you'll be the first to know, dear reader!

Perhaps its time for us to look into a futures exchange for wings...imagine what'll happen when the Chinese have their first bite! They're already crazy for KFC...imagine what a real wing with some Frank's red hot sauce dripping off it will do...mmmmm...

Hat tip to my buddy, wine expert, and honorary Buffalonian Doug for sending this piece along.

Why Agriculture Prices Have Held Up Remarkably Well

A recent piece in The Economist highlighted the recent strength of agriculture prices in the face of the downturn, and the reason for it.

Though prices of the meats, grains, and softs are still off their 2008 highs - they're not off by much anymore - as commodities such as cotton, soybeans, and sugar are starting to rally in a big way. 

How could this be?  Aren't we in a Depression?  Perhaps, but supply has come offline in a big way, while demand has remained strong.  As the Economist piece points out: "No matter how bad things get, people still need to eat."

It's looking like, though there were many bubbles in 2008, China's food consumption was not one of them.  Back to the article, with some staggering numbers:

China’s role has been profound, reflecting its enormous economic progress and huge population. In the past decade, says Carlo Caiani of Caiani & Company, an investment-advisory firm based in Melbourne, the consumption of milk has grown seven-fold, and that of olive oil six-fold. China is consuming twice as much vegetable oil (instead of less healthy pork fat), 60% more poultry, 30% more beef and 25% more wheat, and these are merely the obvious foods. Scores of niches have expanded dramatically: people are drinking four times as much wine, for example.

And yet even with all this growth, people in China still, on average, consume only one-third as much milk and meat as people in wealthy countries such as Australia, America and Britain. The gap is even larger with India, which is also growing fast. Overall, protein intake in Europe and America is unlikely to expand much, but a combination of rising incomes and population in developing countries could increase demand by more than 5% annually for years to come. “Once people are accustomed to eating more protein, they won’t take it out of their diet,” says Mr Caiani.

And remember, many food stock levels are at historic lows.  Unless new supply comes online soon - and I don't know where that supply is going to come from - we could be in for a whale of a rally in food.

Read the full article in The Economist...

Further reading about investment opportunities in agriculture:

• Soft Commodities are Starting to Scream: "Inflation!"
• Sugar Futures Rally, OJ Takes a Breather
• Time to Invest in Orange Juice?

Food Shortages Discussed at G8 Summit

On Saturday, agricultural ministers from the world's (roughly) eight most industrialized nations, met in Italy to discuss the looming threat of food shortages and a global food crisis.

America's agricultural secretary warned that unless many countries take substantative steps to increase food production, there will be increasing shortages and social unrest around the world.

For more details, you can click here to listen to Stratfor's short podcast summary of the event.

Are you also skeptical these world improvers will be able to have their way?  Me too - and I think the day will soon come again when us "evil speculators" can profit from skyrocketing food prices...muhahahahaha.

Deflation? What Deflation? Girl Scouts Adjusting for Cookie INFLATION

As our Fed prints money to battle this current "deflationary spiral", the economically pragmatic Girl Scouts are bracing their sales force for the very real effects of inflation.

Here are some "Fingertip Facts for Girls and Families" listed on the Girl Scouts website, so these brave girls can educate their neighbors about the very real effects of inflation on Girl Scout Cookies.

A decision by Girl Scouting
• The national Girl Scouting office said it was okay to change the weight of some licensed Girl Scout
cookie packages.
• Rising costs of food and gas have made baking cookies more expensive.

It costs more to make a cookie than it did one year ago
• You probably know that your family’s grocery bill is rising. The same is true for the bakery’s food bill for
ingredients like flour, baking oils and cocoa.
• It’s expensive to fill a car’s gas tank nowadays. Imagine the cost of filling the tanks of all the trucks that transport ingredients and deliver baked cookies.

Some things never change
• The taste is as great as always!
• The average consumer is still expected to buy 2-4 packages according to national consumer insights research.
• The number one reason consumers do not buy Girl Scout cookies is simply because they are not asked.

Why the new sizes are the right sizes
• Even if money is tight, consumers want to support you! Share your goal with customers when asking themto buy Girl Scout cookies.

What if a customer asks: Is this cookie package smaller?
• Always tell the truth. Here’s a great way you might respond:
Yes, the packages are a little smaller. That’s because the cost of baking cookies has gone up along with food and gas prices. Of course, the delicious taste of your favorite Girl Scout cookie is exactly the same!

Brett again - I'm wondering if some of the TARP funds could have been better spent subsidizing girl scout cookies. These tasty delights were already quite expensive!

We'll let CBM readers weigh in - has anyone bought the "newly sized" Girl Scout Cookie Box this year?

Lean Hog Prices Poised to Climb in 2009

Bloomberg reports that "In the worst year for commodities in at least five decades, hogs rose 6.6 percent, the second-biggest gains on the Reuters/Jefferies CRB Commodity Index, behind cocoa."

The article quotes fund manager Mark Greenwood: “We’re going to have 3 to 4 percent less pigs next year, and that should be very supportive to higher pork prices."

“In the middle and latter stages of recession, energy and base-metals markets tend to underperform,” Barclays Capital said in its 2009 commodity outlook report to clients on Dec. 18. “Gold, agriculture and livestock tend to outperform other commodities, and it is these sectors that could prove most robust in early 2009.”

The 2008 commodity rally petered out before rising meat prices had a chance to join the party, as we had hypothesized back in May. Our theory was that higher feed inputs (corn, soybeans) would eventually pass through and result in higher meat prices. Interestingly, the Bloomberg article mentions one producer who unfortunately is locked into $6 corn until the end of 2009.

Stratfor: Fall in Food Prices Likely Temporary

Stratfor reports that the current drop in food prices is likely to be temporary, because falling prices and the credit crunch will reduce supply next growing cycle.

The article confirms something we've been discussing here at length - the trends which originally brought about the supply/demand imbalance in the grains markets are still firmly in place, and that these supply constraints will remain until there is a large structural change in supply or productivity.

Bud Conrad: Why Food Prices Will Continue to Rise

Bud Conrad is the Chief Economist at Casey Research, an offbeat, very insightful, investment research service that I subscribe to. Folks from Casey Research are rarely quoted in the mainstream press, as their level of thinking is a bit too deep for the dolts on regular financial news.

Here's a nice clip of Bud being interviewed on Fox Business of all places, where he explains why he believes food prices have a great deal more room to run.

Corn and Live Cattle News and Thoughts

Tom Dyson writes in DailyWealth that he believes corn prices are set to drop sharply - and reiterates his favorite plays are live cattle.

After thinking about corn a bit, I also now believe that there is more risk on the downside. Potential catalysts for sending corn lower are the impending bust of corn-based ethanol, and a bumper crop. Catalysts that would send corn higher would be a wiped out crop. However with the bearish news that has come out in the past couple of weeks, it's looking more and more like the crop is fine.

I recently dipped my toe in this trade, and shorted the Dec Mini-corn contract yesterday. I may look to add another Mini contract or two on further weakness, and will close the position on any significant sign of price strength.

On the live cattle front, here's a quick take by Dennis Smith over at Barchart.com. He believes the recent sell-off in live cattle is overdone, and is looking to re-enter the position when support is found.

I still have one live cattle contract that - somehow - I have not been stopped out of yet. Hanging on by a thread. But I am also looking at the longer dated live cattle and lean hog contracts closely.

DailyWealth: Hogs to Hit Records Soon

The DailyWealth team has been all over this story - record corn prices, which will soon produce record hog prices.

Agree with the hypothesis 100%, but not sure if I completely agree with the way to play it. My plan is to keep an eye on those mid '09 contracts...wish I had kept an eye sooner, as I now see they have been moving up aggressively. However they look to be in the middle of a consolidation, and I'll look to enter on the next leg up.

NY Times: Hoarding Nations Drive Food Costs Even Higher

According to a recent NY Times article, at least 29 nations have recently curbed food exports.

Take a wild guess what happens when nations curb exports of something - I'll give you a hint, it's not bearish for prices.

Also this quote struck me in the article:
“The main cause of rising rice prices is the rising cost of rice planting,” said Surapong Suebwonglee, the finance minister of Thailand, the world’s largest rice exporter.

No more cheap energy means no more cheap food.

Money Morning: 3 Ways to Profit From Record Meat/Dairy Prices

Full article

Basics on Trading Meat Futures

Nice article here by Kevin Kerr on the basics of the meat markets and trading meat futures.

Everything sure is setup for higher meat prices. I think this is a temporary breather this week, as the live cattle charts were going parabolic for the last couple of weeks.

I have not checked my account since Sunday - I don't want to see the raw $$$ I'm off. Instead I'm just watching the charts and trying to keep perspective on things - by later next year and early next year, these prices are most likely higher, so I want to ride this through thick and thin.

Jim Rogers on Bloomberg

Full video

Quick notes:

• Short investment banks - all investment banks go to "8" in a bear market
  
• Short Fannie Mae and Citibank
• Still likes Japanese Yen, Swiss Franc, Chinese Renminbi
• Recently bought airlines hand over foot (I find this very interesting) - says bankruptcies are a sign of a bottom rather than a top
• Still likes agriculture, but is cautious short term - believes gov't is hell bent to sent down agriculture prices, and if they do, he will buy with both hands
  

Bernanke's Recent Dollar Jawboning

Chuck Butler gives a fantastic rant on Bernanke's recent tough talk in his morning column. Not much too add to Chuck's commentary - nicely done Chuck!

From a trading perspective - I'm trying to pare back all position sizes, and I still can't seem to do it fast enough. Meats have taken a turn down this week, erasing many gains from the previous couple of weeks.

Proceed with caution is all I can say - it looks like this commodity correction is not through yet. Remember oil will probably have to come down from the high 120's. Fundamentally there's no reason for it to be there. Long term, yes, it's going higher. But there's plenty of oil right now - this one really was a speculation run-up, I think.

Inflation Deflation Chaotic Mix

Good piece by Christopher Laird on the ongoing inflation/deflation battle.

I found this bit particularly interesting:

There is a report that 25% of the world wheat crop is at serious risk of a new virulent wheat rust that chokes the wheat before it comes to head. (Mid-East to Asia). The US has its own concerns over a wheat rust spreading through the Mid West. So, what are the chances of a record grain harvest in 08?

Just to give an idea of the concern about food, China just spent a $400 a ton premium on fertilizer that used to cost $170 a ton Jan 08. It was a huge order. Reason? They are afraid that if they don’t have great harvests this year, tens of millions may starve in 09. It is a grim situation. Other poor countries in Africa, Asia, South America, are also very concerned about grain shortages.

Corn down on impressive planting progress, but still lagging behind

Corn futures have been whacked this week. Dry weather over the weekend helped farmers make impressive gains, but plantings are still behind.

This may be a nice buying opportunity. All the "on the ground" intelligence I've seen still indicates this crop could be in serious trouble. These could be some deceiving positive numbers that are driving down the futures prices.

Who’ll be next to the party at the commodity rager?

Note: This article was also published on Seeking Alpha.

Bull markets, like college fraternity parties, usually begin in relatively quiet fashion – with small participation, initial awkwardness, and some doubters. In both cases, things have a tendency to quickly kick into gear when they are driven by supply and demand fundamentals – be it alcohol, sorority women, tech stock IPO’s, or soybeans. Soon enough, the unlucky party hosts have a real rager on their hands, with better judgment being tossed out the window with the empty beer cans.

Energy (most notably, oil) tapped the first keg and kicked off the current commodity bull market. True to form, the acting University Dean, our United States Government, stepped in with a plan to “do something” and quell the drunken party revelers. And in the process, not only did their bone-headed plan not make a dent in the original energy party, but it kicked off another megabash next door – this one in the agricultural markets.

The government’s wise idea to divert our food supply into the fuzzy science that is corn-based ethanol lit a fire under the grain markets like a Flaming Dr. Pepper. And so we have $6 corn, $13 soybeans, and a limit on the rice available to Costco shoppers.

The super seniors at this commodity bash realize it has some room to run. Historically, the average commodity bull market lasts 17 years – better make another beer run soon.

So who’s likely to crash the party next? Well, the softs, such as coffee, cotton, and sugar, still haven’t made much of a showing. And judging by their run-ups in previous bull markets, we know these guys can party. Keep an eye out for them.

But my money is on the meat heads. High grain prices must force cattle and hog prices higher. In fact, farmers are slaughtering their herds early and sending their meat to market now, rather than fattening up their herds on sky-high grain prices. This has temporarily pushed down prices, but is setting the stage for a dramatic upcoming shortfall in supply – Don Coxe alludes to this in an interview on BNN. Also check out the CEO of Tyson Foods on CNBC saying that their meat prices must rise, as 60% of the cost of raising an animal is feed.

How should you play this? As a consumer, you may want to load up your freezer with some cheap meat. As an investor, the most direct way to play this trend is by buying longer-dated futures in the meat markets. In lieu of a futures account, you could also consider the ETF COW, which holds a mixture of live cattle and lean hog contracts.

But you’d better act soon to lock-up your late night snack. Live cattle futures have broken out recently –and meat may be off to the races already.

Related resources:
· Blogging Stocks – COW: Resources expert turns bullish on meat
· DailyWealth – How to buy high-profit corn
· Growth Stock Wire - A Commodity the Bull Market Forgot

Financial Times: IMF warns on global inflation

In an indication the commodities boom may not be the bubble imagined, Mr Lipsky said the forces pushing prices up “appear to be fundamental in nature” – and these were being amplified by lower US interest rates and the dollar’s decline.

Full article

Mises.org: Are We Running Out of Food?

Full article

In vintage Mises fashion, Kel Kelly points out that government is the root problem here, not the solution. Amen!