Bullish on Grilling

Montreal, Canada

U.S. livestock prices may reach records in the next two quarters as farmers reduce herds while China imports the most pork since at least 1992 and the largest amount of beef in three years, according to French bank, Societe Generale.

Only one sub-sector of the commodities bull market remains more than 35% off its best levels in 2008. And adjusted for inflation since its peak more than thirty years ago, it’s down almost twice that number. I’m talking about live cattle and lean hogs, otherwise known as the “meats.”

Since January 1966, when the Chicago Mercantile Exchange began trading livestock futures, cattle prices have dropped 0.93% annually on a constant-dollar basis, adjusted by the producer price index. Live hogs have fallen 0.88% each year.

For cattle to reach the inflation-adjusted high from the early 1970s, prices would need to climb roughly 164% from their current levels. Hogs would have to climb about 168%.

Since 2006, feedstock prices have skyrocketed. Corn, an important input used to feed cattle, has almost doubled year-over-year, resulting in higher supermarket prices for USDA beef. Near-record highs in corn prices may exacerbate the constraints in cattle supply as they’re likely to prevent a sizable herd expansion anytime soon.

According to Hard Asset Investors.com, it’s not just bigger input costs keeping herd inventories down. In fact, herds have shrunk steadily since 2004 because of drought and mad cow disease. Collectively, the 2011 herd is the smallest in fifty-three years. Nominal live cattle prices are currently trading at their highest levels since 1987.

Though higher grain prices have historically weighed on livestock, I’m bullish on live cattle due to high rates of herd liquidation and the lack of available calves to replenish the herd. As of January 1, all cattle and calves in the United States totaled 92.6 million head – a 1% decline over the last 12 months and the lowest January 1 inventory count since the 91.2 million recorded in 1958.

Finally, the all-American barbeque grilling season is approaching as we head into Memorial Day later in May. Seasonal patterns favor live cattle each summer as demand rises amid balmy summer days and outdoor gatherings. Combined with shrinking herds, this could finally be a sweet spot for live cattle speculators in 2011.

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