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Bryan Doherty: High livestock

04/08/2011 @ 3:36pm

After the devastating earthquake that Japan suffered, the commodity markets as a whole took a setback as caution prevailed. Once prices found a bottom, most commodities began to move higher, and soon the Japan news was no longer center stage. Commodities, however, mounted a strong comeback with livestock at the forefront. Expectations that a weak dollar and limited supply would help provide underlying support was magnified on beliefs that the world would need additional protein inventories, and the U.S. would be a key supplier. Exports have been outstanding, with the cattle market showing the type of product movement that hasn't been seen since 2003, the year mad cow disease crippled the export market. It's taken a long time for cattle prices to return to those levels, and now that enough time has passed and the market needs inventory, prices are reflecting this through higher values. 

However, has it been too much? Since bottoming in mid-March at 110.50, the April live cattle contract quickly managed to mount a 12.00 rally with a high of 122.60 established on April 5. In a mere three weeks, the market picked up nearly 11% in value, pushing into all-time new highs. Strong speculative buying is, in part, behind the rally, though it's the fundamental picture that continues to provide for the long-term belief that cattle prices can move higher. 

Yet, both domestically and worldwide, one of the major factors that can affect the consumption of any commodity is energy. Energy prices have continued to grind upward with crude oil challenging 110.00 a barrel. Since bottoming last summer, the June crude oil market has gained 49%. While the world needs energy products as well as food, it's unlikely that beef and pork demand can continue to climb as long as the energy market remains higher. Energy affects all countries worldwide, not just the U.S. This may be stating the obvious, though at some point, the export market may slow. 

The ultimate bullish argument for livestock, however, is probably more in the demographics of who's producing. While the hog industry has turned to large corporate farms, the bulk of cattle is still produced by the cow-calf operator. There are some estimates that the average age of the cow-calf producer is near 58 years old. There is no doubt that these producers are probably questioning the idea of trying to buy 6.00 corn and spend February and March calving in lousy weather. Cow cull numbers are up, and we expect that will continue to be the case. Yet, from a long term perspective, the efficiency per animal has improved and, therefore, the declining cow numbers that have been prevalent for nearly 50 years isn't as strong of an argument as perhaps the efficiency that the average animal produces compared to the past. Still, it's unlikely the cow herd will expand any time soon. 

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