Home on the Range

“Home on the Range” is regarded as the unofficial anthem of the American west. It’s also a slogan available on vanity license plates in Kansas – where few Buffalo now roam. The wide-open spaces are now rangeland for the final installment of commodity critters: chicken, hogs and cattle.

As I’ve said before, it’s important to know the market relationship between livestock and the grain market. The price of livestock plays an important role in the grain market and vice versa. That’s exactly why this chart caught my eye:

Chicken vs. Beef Consumption

As you can see from the chart, livestock demand has been tricky to forecast over the past few years. That’s partially because so many factors influence consumption: income, diet, price, just to name a few. Overall livestock consumption since 2006-2007 is down – but a resurgence looks to be on the horizon, led by strong demand for chicken.

And that’s only one side of the story – the other side is supply.

Much like the expedited hog harvesting mentioned last week, cattle farmers also stepped up slaughter when economic conditions turned bad with the financial crisis. The cycle from birth to maturity is longer with beef than with chicken. So it’s difficult to increase supply quickly. The dramatic herd reduction in 2008-2009, sending off even milk cows, is being felt now in reduced supply.

US Beef Cattle Since 1986

As the chart above shows, we’re at the lowest supply level of beef cows in 25 years. And even though beef consumption is lower, the mass reduction in cattle head has now supported price recovery that looks to pressure $100 per hundredweight on the upside once again.

This from The Financial Times:

Americans face higher beef prices for their traditional end-of-summer Labor Day barbecues following a late-night stampede by meat packers this week that helped send cattle futures to their highest levels in nearly two years.

Negotiations between slaughterhouses and feedyard operators with cattle to sell took on a frantic tone this week, with talks stretching late into the night on Wednesday – a rare occurrence for cattlemen used to wrapping up their affairs by sundown.

“[Wednesday] night may have been the latest bidding I have ever seen,” said John Josserand, president of AzTx Cattle in Hereford, Texas, which operates facilities that can feed 250,000 cattle at a time. By Thursday, the frenzy spread to the Chicago Mercantile Exchange, where live cattle trading volume broke records and futures prices jumped to $1 a pound, the highest level in 22 months.

The tumultuous trading came after rallies in markets for other agricultural commodities have raised fears about global food price inflation. Wheat prices have soared as a drought in Russia destroys grain crops. CME pork bellies, used for bacon, have hit all-time highs this month.

“There is growing concern that food prices are going to head north,” said Bob Goldin of Technomic, a Chicago food industry consultant. US cattle supplies have declined as ranchers culled herds to offset losses during the recession and calves emerged from the hard winter with less meat on their bones than usual.

However, exports from the US, the world’s largest producer, are expected to rise 13 per cent this year, led by shipments to Japan and South Korea. Americans also appear to be regaining a taste for beef after cutting back during the economic downturn.

“What’s exciting is beef demand has stabilised into the summer,” said Rich Nelson, director of research at Allendale, a futures broker in McHenry, Illinois. Meat packers bought heavily this week to secure supplies for the September 6 Labor Day holiday, Mr Nelson said.

By Thursday, meat packers had bought 201,000 head of cattle across the central US, up 11 per cent from the previous week, the agriculture department said. Cargill, JBS, National Beef and Tyson Foods account for three-quarters of US beef packing activity, analysts say.

Supply and demand will help show the way for livestock – but pricing and risk/reward payouts will ultimately decide if we should saddle up and wrangle a cattle position. I’m watching this situation closely.

Alan Knuckman
for The Daily Reckoning