Meat Market

The commodities market has some great opportunities for profit, and smart investors are taking notice. Unfortunately, there is an overlooked segment in that market – meat. The meat market can be tricky, but Kevin Kerr guides us through…

Few markets conjure up as many images from investors as the meat futures markets do. Some people will think of Old West cattle auctions, with cowboys and ranchers bidding on prized bulls. Others know the meat markets are just like any other market, though they still hold on to the notion that it’s exotic and full of risk.

And that’s just bull. (Sorry, couldn’t resist.)

Certainly meats are risky, the same as any market. But they’re also a vital market filled with many opportunities for your portfolio. Of course, you’re not likely to hear about them from your broker. The sad fact is, most analysts on Wall Street only know cattle as it’s served up to them at a Morton’s or Ruth’s Chris Steak House.

Essentially, meats are traded on Chicago Mercantile Exchange. And as I said, all trading is done much the same as any other commodity.

Of course, like all markets, meats have a very unique language. Traders concentrate on data that nobody else looks at.

That’s why it’s important to have someone to guide you through these markets. I’ll give you a brief overview here – but, if you’re really interested in these markets, my strong recommendation is to find a broker or someone who can walk you through these markets every step of the way.

In the meantime, here’s a quick look at the major meat markets and the specifics of trading them.

Meat Futures: Cattle

Cattle are used in a variety of products – leather, soaps, animal feed, even camera film. But of course, when we talk cattle, we’re mostly talking beef – everything from steaks to hamburgers.

As far as trading is concerned, cattle are broken up into two different categories: feeder cattle and live cattle.

But don’t let those names fool you.

Feeder cattle – sometimes called lean cattle – are just as alive as live cattle. They’re simply calves that will be sent to feedlots to fatten up. Once they’ve gained enough weight, they can become “live cattle” – ironically, the ones that get shipped out for slaughter.

The slaughtered cattle meat is graded and sorted. If you’ve bought meat in a grocery store, you probably know a little something about that. The meat you buy is most likely labeled “Choice,” “Select,” or “Standard.” In all, there are six categories of beef, and five yield grades, measuring how much beef came from the cow.

About 50 % of the meat is sold as steaks and roasts, 5% as stewing beef, and the rest becomes hamburger.

The butcher can then sell what’s left of the cow to leather manufacturers and others that use cattle products.

Not surprisingly, cattle are raised all over the world. At last count, there were more cattle in India than in any other country. Brazil runs a distant second, with China, the United States and Europe rounding out the top five.

Beef doesn’t have a very big import/export market – it’s usually consumed in the country it’s produced. Among exporters, Australia leads the way, followed by the United States. Most of the U.S. beef comes from just seven states – Arizona, California, Colorado, Iowa, Kansas, Nebraska, and Texas.

Like everything else, beef prices are a function of supply and demand. And like all commodities, a variety of factors can affect both.

You’d probably think weather doesn’t play as big a role on cattle production as it does with other farm commodities. After all, with cattle there really isn’t a planting, growing or harvesting season. Short of a severe drought or a major flood, the cows will always be there.

But the fact is, it takes a lot of money to raise a cow. Feeder cattle need a lot of pasture. And live cattle need a lot of feed. If there’s too much or not enough rain, the pastures won’t be able to support as many cattle, so ranchers will have to cut back on the number of cattle they raise. That’ll limit the supply of feeder cattle, which in turn limits the number of live cattle.

Meanwhile, if grain prices are adversely affected by the weather, the feedlots may cut back on the number of cattle they buy. Again, this reduces the overall supply of cattle.

Demand, on the other hand, can fluctuate wildly. The main factor is usually personal income. The more money people make, the more they’re willing to plunk down $50 or $75 at for a steak at Morton’s. Usually increased paychecks translate into increased demand for high quality beef faster than most other foods.

If people are tightening their wallets, however, macaroni and cheese may be the meal of choice.

Other demand factors are less than economic. I’m talking about people’s diet and preference. The mad cow disease scare pushed some people away from beef. (You might remember that some cattle ranchers blamed Oprah Winfrey for starting an anti-beef drive.)

More recently, diet fads like Atkins have brought people back.

So if you’re a beef trader, you have to keep an eye on pop culture. Keep track of what talk and tabloid shows are saying, what big celebrities say they’re eating. You never know when a simple sound bite could lead to a big rise or drop in beef prices.

As I mentioned earlier, most cattle in the United States trades on the Chicago Mercantile Exchange. Feeder cattle contracts are for delivery in January, March, April, May, August, October, and November. Each contract covers 50,000 pounds of cattle.

Live cattle contracts have delivery months of February, April, June, August, October, and December. The contracts for live cattle are for 40,000 pounds of cattle – 55% choice, 45% select steers.

Both contracts are priced in cents per pound.

Some traders have a very difficult time trading the cattle markets because the volatility can be extreme and often changes from day to day. The market may seem tame as a grain market for a few days, then seem suddenly too risky the next.

You can get some idea of the way prices will go by looking at cattle reports.

Probably the most closely watched report by cattle traders is the cattle on feed report. There are three things to focus on – “number of cattle on feed” category and the amount “placed on feed” category represent the amount of cattle that will be available in the future. The “marketings” category, however, is a very short-term indicator of how much beef is ready to go to packers for slaughter.

These reports can give you a clue about the supply and demand conditions for beef. Remember, today’s feeder cattle will become tomorrow’s live cattle – so a glut or shortage in the number of cattle on feed or placed on feed will affect live cattle prices down the road.

Meat Futures: Pork

Now that we have the cows out of the way, let’s look at the pigs. Lean hogs are the other major meats contract…

“Lean hog” may sound like an oxymoron. But as far as trading is concerned, it simply means a pig big enough to be slaughtered. So your pork chops, ham and even bacon come from lean hogs.

In fact, 20% of a pig’s meat becomes ham. About 17% becomes pork loins and chops. And 15% – the hog’s belly – is used for bacon. (Let’s just say the rest of the meat falls under the category of “Other” and leave it at that.)

Just four states account for more than half of U.S. pork production – Iowa, Illinois, Indiana and Missouri. You may have noticed those are all Corn Belt states. That’s not a coincidence… because farmers like to keep their pigs near their favorite food source. Yes, corn.

So once again, weather plays a big factor in hog prices. If corn is expensive, farmers will feed their pigs less. In turn, it reduces the supply of lean hogs. And that drives prices up.

In fact, a key report to keep your eye on is the Hog/Corn price ratio. Simply put, it’s the price of hogs versus the price of corn.

Naturally, the higher the price of corn, the lower profits a pig farmer will see. So you can expect farmers to cut back on the number of pigs they raise.

The natural flip side is when corn prices are low compared to the price of hogs. More than likely, farmers will try to take advantage of the high prices to raise more pigs.

Weather plays a role on pigs another way. Pigs have a habit of becoming lethargic when the weather gets too hot – just like people do. Not only do they eat less, they also breed less. That ultimately means lighter pigs are sent to the butcher, while the number of baby pigs decreases. Colder weather makes for better breeding conditions (go figure…), increasing the next generation of piggies.

Like cattle, the majority of hog futures trade on the Chicago Mercantile Exchange. Each contract calls for 40,000 pounds of lean hog carcasses – or about 220 hogs. Delivery months are February, April, May, June, July, August, October and December.

Hog contracts are also priced in cents per pound.

The demand for pork remains as strong as it ever was. Beef may be “what’s for dinner,” but pig farmers are busy reminding people that pork is “the other white meat.” Meanwhile, the Atkins diet and other fads have reversed people’s bacon aversion. In fact, since there’s almost no market equivalent to bacon, demand has remained fairly constant.

Remember, the meat markets can be tricky, so proceed with caution and find a good guide. We will likely be looking at equities related to these markets and possibly some indirect plays. So it’s always a good idea to understand the basic facts of the market.


Kevin Kerr
for The Daily Reckoning
March 01, 2005

With 15 years of experience, Kevin Kerr is a true veteran of the commodities markets. A licensed commodities trader since 1989, he’s worked the trading pits in Chicago and New York with legends like Paul Tudor Jones, and he’s even traded commodity derivatives in London. Over Kevin Kerr’s career he’s dealt with everything from cotton to currencies to oil and natural gas.

Kevin Kerr’s unparalleled expertise in futures and commodities has made him a regular contributor to news outlets like CNN fn, CNBC and Marketwatch, where he’s been quoted in over 500 articles.

Nothing keeps happening. In the sense that nothing is new. What happened yesterday happened again today, more or less.

But if you go back a few years, what is happening today is not only extraordinary, it is preposterous.

“Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it,” said Mark Twain. We wondered today, too.

What makes us wonder is the latest news from The Economist. The U.S. monetary base has been expanding at the fastest rate in 30 years, the magazine tells us. It rose at 20% or more in 2003 and 2004. Why is the money supply increasing so rapidly? It is the work of our central bank, which has been desperate to avoid a long, deflationary Japan-style slump. So far, it has avoided the slump, but at the price of creating a bubble in the entire U.S. economy – centered on residential real estate. Guess how much prices of houses rose in California over the last two years? Twenty-percent per year…equal to the increase in the money supply.

Today’s news tells us that friends are teaming up to buy houses – they have become too expensive for a single couple to afford on its own. We have been saying that standards of living in the United States must fall. Here is evidence that the fall is beginning. Want to lower your standard of living fast? Buy a house with another couple!

But the phenomenon is not limited to America. Real estate bubbles have been spotted all over the world. And money supplies are bubbling up as well – particularly in Asia. What happens is this: U.S. consumers spend more than they can afford buying Asian-made goods. This leaves billions in extra dollars in the hands of Asian exporters. They turn the money in to their central banks, which convert it to local currency – thus raising their own money supply too.

“Central banks were supposedly the guardians of money. Yet, they have created the biggest liquidity bubble in history,” says The Economist.

If this news had come out in the 1970s things would have been different. The “bond vigilantes” would have panicked. They would have dumped bonds. Yields would have soared. All of a sudden, mortgage rates would have spiked up and the house bubble would be over.

But now, no one pays much attention to the money supply figures. Now, everyone knows what no one knew or would have believed 30 years ago – that central banks can create as much money as they want without causing consumer price inflation.

Since consumer prices didn’t rise, the bankers felt free to inflate. So, now house prices are rising at 20% per year – with no end in sight. And consumers are putting themselves further and further in debt, in the fantasy belief that the Bank of Everlasting House Price Increases will continue to fund their excess spending, forever.

We know how it began. What we don’t know is how and when it ends.

Here in Nicaragua, we are tempted to buy more property. It is stunningly attractive. Compared to North American prices, it is cheap. But there is a bubble here too. Lots that sold for $40,000 five years ago now sell for $120,000. Yet, the same lot in California or Florida would sell for five to ten times more. We can all imagine that the development that we practically launched ourselves will continue. We can imagine that the roads will be paved and the electricity will work properly. We can imagine that Americans will flock to the area and spend their retirements here and that people will build restaurants, bars and hotels. We can imagine that prices will continue to rise. At the same time, we know that buyers and sellers can already see the hotels along the water’s edge. They can already feel the smooth road taking them right up to the beach. They can already count the money they will make as prices here rise to Southern California…or even Costa Rica…levels.

We know that prices are already inflated by bubbleheaded expectations. And we know that if the bubble pops in North America, the shock waves will knock down prices here too.

What to do?

We await revelation.

More news, from our team at The Rude Awakening…


Eric Fry, reporting from Wall Street:

“An overconfident cabbie in South Beach thinks house prices there can never fall. After 10 years of real estate investing in Turkey, this guy has finally decided to sell his properties and move the proceeds into Florida’s booming market. It’s a recipe for disaster…”


Bill Bonner, back at Rancho Santana…

*** Consumer spending rose 8% in Japan during the month of January. Manufacturing output rose. Hey wait…isn’t Japan supposed to be in recession?

*** We received this note from Kevin Kerr:

“It is official – the bull market in real assets that began in the spring of 2000 is still a force to be reckoned with and a way for investors to reap substantial profits over the next three to five years.

“In fact, we need look no further than the oil price, which soared to record highs throughout August, to see that the commodity markets are still breathing fire.

“Oil is setting record highs, and we believe it will still go higher. The biggest reason for this is that the world is hopelessly addicted to crude oil. Like a junkie who can find no relief except for a spike in his arm, the only energy panacea for most of the world is a spike in the ground – the kind that pulls millions of barrels of oil and trillions of feet of natural gas.”

*** We went into Granada yesterday. The city was built by the conquistadors in the 16th century. It is a model of handsome Spanish colonial architecture. But when we got here a few years ago, the place was practically in ruins. Everywhere you looked, a house in need of renovation.

Now, many of the old buildings have been purchased by foreigners and are being renovated. Around the town square, the horse drawn carts have been upgraded. They used to be used for transportation. Now, they are for tourists. One of the old hotels on the square has been gutted and is being re-outfitted. Another has already been renovated. New SUVS are parked all over town. Much of the city is still a dump. But compared to what it was five years ago, it has become a very expensive dump.

*** It is snowing in Baltimore. It is snowing in Virginia. It is freezing in Paris. In Stockholm, according to the Swedish ambassador, it is 14 degrees Centigrade below zero.

But here! The sun shines. It is 80 degrees F.

Tommy: “I put out a piece of paper to all the guests and homeowners every day. It’s like a newsletter. I tell them what the weather will be. I don’t know why I bother. The weather is always the same. Sunny and warm.”

The Daily Reckoning