Cattle Market Climbs as Demand for U.S. Beef Increases

Reddit

A year ago in the cattle market, the average choice grading steer fetched around USD$85.50 per cwt to the meat packer. (The abbreviation “cwt” stands for hundredweight. Hundredweight simply means “per 100 pounds specified weight.” It is always qualified as the type of weight used for cattle.)

Two weeks ago, the average was USD$94.44 cwt, an increase of USD$3.32 over the previous week. Translation: Prices for cattle in the cash market are climbing fast and they will most likely continue to do so. Demand is the driver. As more countries reopen their markets to U.S. beef, demand will increase. Meat packer margins are hovering at break-even levels. Right now, tight cattle market supplies and plentiful inexpensive feed will likely result in a firming up of the cattle price. This holds true especially for cattle producers and feedlot operators.

Then, of course, there’s avian flu. If one case of bird flu migrates to the United States and infects one person, people will swear off poultry and head right to the meat aisle in the supermarket. In reality bird flu is not actually spread by eating poultry, but often in trading perception is reality and just the threat of bird flu is enough to get the general public to shun poultry. Even though eating it isn’t the cause of the illness, the general public won’t differentiate. And who would want to bite into a chicken of death when they could opt for a nice juicy steak?

What mad cow? Typically, market participants have a short memory, so it’s important to act on fear while it’s still in full swing. The cattle and meat markets in general are the butt of many jokes in the investment world – Hillary Clinton’s infamous cattle market trade comes to mind, as does the aforementioned question about pork bellies. Truth be told, the meats are a good agricultural market with solid fundamentals and can be a great learning market for the novice trader – just make sure no one knows you’re a novice.

In 2006 I carried October live cattle positions and made some very good profits on the 86 call options, and later on the 88 call options. The cattle market is a volatile one and relatively illiquid, so it can be a difficult market if you’re just starting out. You may want to avoid it until you get some experience.

The coffee, sugar, and cocoa markets are near and dear to my heart. These three commodities are also known as the tropicals, because most grow in the tropics, or softs, I guess because they’re all soft in texture. But whatever you want to call them, these are some of the best performing and least understood or talked about markets. I spent much of my early career running between the pits of the coffee, cocoa, OJ, and sugar markets, and let me tell you, these are markets that trade like no others. Gold and oil may get the lion’s share of the sound bites and headlines, but if excitement is what you’re looking for, these markets have it.

Sugar, for example, is one of my favorites. It is growing exponentially in demand as a result of ethanol production and being widely used in foodstuffs; meanwhile the supply is shrinking due to factors such as European subsidies being curtailed. Sugar is likely to double in a couple of years, in my opinion, and the writing is already on the wall. Much the same can be said for markets like cocoa and coffee.

Worldwide demand is sucking up supplies faster then these commodities can be harvested. I know the coffee market well – very well, in fact. It’s one of the first markets I traded when I started out in commodities 18 years ago. It’s also one of the fastest-moving and most volatile markets, which means it’s loaded with opportunity for you to make a lot of money. This is a good example for talking about one of the best features of trading commodities: the ability to short a market just as easily as going long. That’s correct – unlike equities, you can short commodities futures just as easily as going long.

A market like coffee is particularly important because of its volatility but also because a new Starbucks pops up on every corner from Maine to China and every farmer who could possibly grow coffee beans is doing so, resulting in a glut of beans on the market. Even Juan Valdez, from the TV commercials, hung up his sombrero in 2006. Coffee is thus one of those markets you can play from both directions to get maximum profits – something futures allow you to do, with astounding results.

Cotton gave this maniac trader his start. My first full seat was on the New York Cotton Exchange (now the New York Board of Trade). My badge was 8015 QUEST, as in Jonny Quest. (I was young and had blonde hair and a dog named Bandit; when the guys on the floor found out I had done cartoon voiceovers as a kid, the name just stuck. Everyone gets a nickname down there, and it usually isn’t something you’d choose for yourself.)

In any case, cotton is an “old boy” market, much like the cattle market or the grain market – not old as in stale, but old in that it has been around a very long time and the people who trade it have been doing it a very, very long time. Cotton is a great market to trade, but you must understand the fundamentals at work and the differences between old crop and new crop. This simply means that two different cotton crops are produced each year in cotton, and you must make sure you know which crop you’re looking at and then make your decisions based on that. Cotton is one market that’s crucial not to underestimate and, much like the ocean, never turn your back on. Trust me, I worked in there for a number of years.

Right next door is another very active market, especially in the winter and during hurricane season: orange juice. Orange juice is a perfect market for learning about fundamentals the hard way. Many of you have seen the movie Trading Places, with Eddie Murphy and Dan Aykroyd. If you haven’t seen it, do – it will give you a good laugh. The movie was filmed on the old World Trade Center trading floor and was about trading OJ, but the reality stops there (or does it?). Actually, with tongue in cheek, I can say that it’s probably a fair depiction of the old trading pits.

Today, however, the OJ market is tightly controlled by supply and demand and is certainly ruled by weather factors – not just winter hard freezes, either. It may surprise you to know that hurricanes in Florida are the biggest factor influencing this market, not only before the hurricane hits but after, too. The main concern is citrus canker; after the winds and rain die down, this fungus can develop on the crop. Fundamental information like this is important to know and take into consideration when initiating a position.

Every market is different, so you must study the fundamentals for all of them. For example, you must understand what soybean meal is used for as opposed to soybean oil. Soybeans are used for biofuel, among many other things, so nowadays soybean prices more closely parallel those of crude oil and heating oil than those of the regular crop reports.

Keep in mind that these markets move on the basis of supply and demand. Right now, the demand for soybeans is picking up in a big way due to biofuel consumption, which in turn relates to how high heating oil prices are. It’s not hard to connect the dots to identify what affects a specific commodity, but sometimes you’ve got to do a little research first. Biofuel is used primarily for home heating, and as ethanol is derived from corn, biofuel is derived from soy. The bottom line is that you must know, inside and out, the basics about whatever commodity you choose to trade, whether it’s rough rice or natural gas.

More importantly, you need to know new factors that may affect a particular market – and these can change.

Regards,

Kevin Kerr
for The Daily Reckoning Australia

Kevin Kerr
Kevin Kerr's unparalleled expertise in futures and commodities has made him a regular contributor to news outlets like CNN fn, CNBC and CBS Marketwatch, where he's been quoted in over 500 articles. Now, as a contributing editor to Outstanding Investments, he uses his extensive knowledge and connections to uncover blockbuster natural resource investments.
Kevin Kerr

Latest posts by Kevin Kerr (see all)

Reddit

Comments

  1. I read that “Cattle market climbs…” and it is very well. Why? According to the recent science findings, and also, according to my understanding prion diseases are “not infectious”- in connection with „infectious meat and bene meal. Why? For example recently I read another “Canadian article” that the Alberta “BSE positive animal” was born in 2000, three years after a ban on using cattle remains in feed went into effect to guard against the spread of mad cow…. So, there is the evidence (see the same in European countries…) that meat and bone meal- it is not „an origin about the BSE“. So, beef is safe in the all world, because the BSE is not an infectious disease. For example according to the recent article in Guardian Unlimited „Should we still be worried?“ (January 10, 2007), there is a “britain agreement” about the „BSE no infectiosity“. My alternative “BSE ecological view” can be well documented concerning the example about the “Chronic Wasting Disease” (CWD)- see one Chapter in my website http://www.bse-expert.cz.

    In general, I think that beef – deer meat “is safe in the all world”, because the BSE (CWD…) is not an infectious disease. Really, also according to the recent research; BSE can be “not infectious disease”. Why? At first, authors in „Journal of Pathology“ (March, 2006) found that prion proteins implicated in the development of transmissible spongiform encephalopathies, such as vCJD, may be markers for disease rather than the infectious agents. So, under laboratory circumstances prion-protein can be absorbed across the gut, it also shows that this is unlikely to occur in real life (http://www3.interscience.wiley.com/cgi-bin/abstract/112568745/ABSTRACT).

    And what is about the possibility of sporadic mutations- transmission of the disease gene? There is the explanation from Dr.Murphy (President of the International Committee on the Taxonomy of Viruses), he says;
    „Recent research has shown that the scrapie PrP protein differs from the BSE PrP protein at only seven amino acid loci, whereas the BSE PrP protein differs from the human CJD PrP at more than 30 loci. These differences explain the concept of strains and help explain why prions from one species might jump more easily into another species than another. It is difficult to find the terms to discuss prions — for example, can we talk about mutants when there is no DNA? What would Watson and Crick think of all this? There is a familial form of CJD, accounting for about 10% of cases. In the familial disease there is are mutations in the gene encoding the normal protein such that the protein tends to fold in the abnormal way and tends to pile up into aggregates in brain cells with lethal consequences….. The prion protein in familial cases is the same in each family member that has it, and different in all other families. Sometimes the difference is as small as one amino acid, but these differences can be used to determine the pedigree of the prion. I’m sure such analyses are being applied to the 10 cases just reported in the UK“ (http://www.accessexcellence.org/WN/NM/madcow96.html).

    Other authors in „Journal Biol. Chem.“ (November, 2006) found that small amounts of detergent-insoluble PrP aggregates are present in uninfected human brains, so insoluble aggregates and protease-resistant conformers of prion protein in uninfected human brains (http://www.jbc.org/cgi/content/abstract/281/46/34848).

    More recently (February, 2007); Authors in “Neuron” wrote; “Early functional impairments precede neuronal loss in prion disease…they occur before extensive PrPSc deposits accumulate…supporting the concept that they are caused by a transient neurotoxic species, distinct from aggregated PrPSc .“ (http://www.neuron.org/content/article/abstract?uid=PIIS0896627307000086). The prion protein infection from transmissible BSE is then thought to travel to the brain via peripheral nerves, perhaps with assistance from the lymphoreticular system. In 2004, a study of 13,000 appendix and tonsil samples revealed that thousands of people may be unknowingly harbouring vCJD (http://news.bbc.co.uk/2/hi/health/6334215.stm). However, recently scientists find connection between nerve cells and immune system. They have made visible an astounding number of contacts between immune and nerve cells. These include some of the most important immune cell types, such as B-lymphocytes, T-lymphocytes and dendric cells – all of which form connections to the nerves (http://www.news-medical.net/?id=21792). The new findings, offer significant insights into normal folding mechanisms as well as those that lead to abnormal amyloid fibril conversion (http://www.sciencedaily.com/releases/2007/02/070212182836.htm). Until about five or six years ago, everyone assumed that the large amyloid plaques, or neurofibrillary tangles, that were found in the brains of Alzheimer’s victims were the cause of the disease. However, recent scientific discoveries indicate that these large, insoluble aggregates might merely be markers of the disease—they do not cause the disease (http://www.sciencedaily.com/releases/2007/02/070215110558.htm).

    According to the article „Should we still be worried?“ (January 10, 2007) (http://www.guardian.co.uk/g2/story/0,,1986657,00.html), there is an agreement about the „BSE no infectiosity“ – see following text from this article; „ But despite billions spent on efforts to save Britain’s beef industry and protect its citizens, all the major questions remain unanswered. The origin of the disease? A mystery. The number of people infected with vCJD? A mystery. The risk that those harbouring the disease will infect others? Again, a mystery…. The politicians didn’t know what to do and the scientists didn’t know what to do. We didn’t know where it came from, what caused it, how bad it might be. We didn’t know anything…. „The danger now is not from cattle, it’s from other human beings,” says another expert in vCJD ….“.
    This can be in connection that the story of BSE in Britain is a consequence of „intensive farming“ (metabolic disease disease and „neurotoxicity“) and belongs in the „Organic Research“ (http://organicresearcher.wordpress.com/2007/01/06/bse-an-alternative-theory/). So, I described an alternative “BSE ammonia-magnesium” theory (http://www.agriworld.nl/feedmix/headlines.asp?issue=3). See also my “opinion- article”; about the link between BSE and Alzheimer´s disease (http://www.medicalnewstoday.com/youropinions.php?opinionid=11677). This theory is based on the chronic Mg-deficiency- potentiated by hyperammonemia (high protein intake…). These mechanisms have a strong influence on CNS, especially in ruminants and carnivora animals. My alternative “BSE ecological view” can be well documented concerning the example “Chronic Wasting Disease” (CWD) http://organicresearcher.wordpress.com/bse-the-work-of-josef-hlasny/. See also one Chapter in my website ( http://www.bse-expert.cz).

    Reply
  2. In regards to your comment about Juan Valdez, he didn’t “hang up his sombrero” but just passed it to another younger Juan Valdez. Juan Valdez Coffee and its Juan Valdez stores around the world has been growing dramatically in the last year, although still dwarfed by the size of Starbucks, it is getting a lot of attention wherever a store pops up and you can now buy Juan Valdez Coffee and pods in Walmart all over the United States.

    MIGUEL RUBIO
    April 21, 2007
    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au