HardAssetsInvestor

Written by Brett Owens  |

February 08, 2011

Where's The Beef: Cattle Prices Hit Record Highs

Details

With live cattle prices at all-time highs, is it too late to hop aboard?

Cattle prices are at all-time highs, thanks to a strong 25 percent rally over the last 12 months. Just look at prices over the past 25 years:

You want price strength? How 'bout live cattle futures hitting all-time highs? (Source: Barchart.com)

Several long-term factors have provided a significant, sustained tail wind to meat prices, starting with grain prices. Grains have rallied quite a bit over the past year; the iPath DJ-UBS Grains Subindex Total Return ETN (NYSE Arca: JJG), whose index tracks a basket of corn, wheat and soybeans futures, has risen 59 percent year-over-year.

It takes a lot of grain to produce a pound of beef—roughly 8 pounds of grain per pound. Thus any rise in grain prices means it becomes more expensive to feed a cow, which inevitably gets passed along to the cattle buyer. Since 2006, feedstock prices have skyrocketed—and stayed higher—and the elevated costs have forced ranchers to pare back their herd levels to acclimate.

But it's not just bigger input costs keeping herd inventories down. In fact, herds have shrunk steadily since 2004, due to a combination of drought and mad cow disease shocks. Collectively, the 2011 herd is the smallest in 53 years.

At the same time, demand has never been as high. As consumers in emerging markets like China and India become more prosperous, their diets are quickly becoming "more American"—as in, they are consuming a lot more meat. According to Eric Ocrant, vice president of Oak Investment Group, there are three times as many beef consumers now as there were 10 years ago.

Therefore it's clear that, unlike in 2008, this current trend isn't the result of a short-term market shock. Rather, it's more the culmination of a slow, developing trend bubbling up to the surface.

After taking a bath for the last decade, ranchers are now taking advantage of high cattle prices while the going is good. High prices have persuaded many recession-strapped ranchers to sell their stock now—rather than maintain heifers for breeding. A recent U.S. Department of Agriculture report surprised many industry analysts and insiders by reporting a 5.4 percent decline in replacement heifers.

Of course, selling breeder heifers now leaves ranchers with even fewer head of cattle for tomorrow, so prices are likely to keep rising until herd numbers begin to replenish.