Chart of the Week: All Time Highs for Cattle Futures

Steak pic

We fancy ourselves as steak experts here in Chicago, with the typical Chicago steak house cooking them up to perfection with just the right spices, the appropriate temperature (usually recommended medium rare), and NO steak sauce. Chicago Cut  is the new favorite among many these days, supplanting the title long held by Gibsons. But with both Feeder and Live Cattle futures at all time highs this week, should steak enthusiasts (not to mention hamburger and the rest) be concerned that the price of their favorite meat is about to go through the roof?

That’s not likely to happen any time too soon. The steak at your local steakhouse or McDonald’s hamburger is from cow’s already slaughtered and paid for (in McDonald’s case… maybe years and years ago…) We’re talking about prices being paid now for cow’s to be paid for and slaughtered in the future.  The typical beef at your dinner table comes from a cow slaughtered when about 3 years old, so we’re talking a bit of a delay until these high prices show up on your bill.

But it’s not every day a commodity market is at all time highs, and the move bears watching. Since December, Live Cattle have made a 14% increase, while Feeder Cattle have bumped up 9.68% {past performance is not necessarily indicative of future results}.

Live Cattle(Disclaimer: Past performance is not necessarily indicative of future results)
Source: Finviz

Feeder Cattle(Disclaimer: Past performance is not necessarily indicative of future results)
Source: Finviz

For those of you unfamiliar, there is a slight difference between Live and Feeder Cattle. Feeder Cattle are raised to a certain weight as calves, and then sent to feeding lots (hence feeding cattle), to gain weight before they are slaughtered. These cattle must weigh at least  650 pounds (with each contract representing 50,000 pounds). As for Live Cattle, they must wiegh under 650 pounds and the contract size is only 40,000 pounds. But the contract definition is a little more unique that most, as per the definition from the CME.

“Each futures contract shall be for 55% Choice, 45% Select, Yield Grade 3 live steers, as defined by the United States Department of Agriculture (USDA) “Official United States Standards for Grades of Slaughter Cattle”, or producing 55% Choice, 45% Select, Yield Grade 3 steer carcasses, as defined by “Official United States Standards for Grades of Carcass Beef”.

So what’s driving the move to all time highs?  On the supply side, there was the early winter storm in South Dakota, which wiped out 15% to 20% of the state’s cattle population because they hadn’t grown their winter fur yet. And now it is talk of the 2011 and 2012 drought conditions having affected cattle prices (years later), per CNBC:

 “Cattle supply is at an all-time low in the U.S. after nearly three years of drought, which led to more farmers killing off their herds earlier than planned. U.S. beef output will hit a 20-year low of 24.205 billion pounds this year, according to Department of Agriculture forecasts. It will be 2017 before production is restored, Peel predicts.”

As for the demand side, we’re not all going vegetarian just yet in the US, and the new Trans-Pacific Partnership Agreement is easing international trade barriers and tariffs on imported beef for Australia, Canada, and New Zealand, which may further build demand for beef.

Which leads us to commodities markets and its non correlation to the stock market. Things like a freak blizzard and years of drought causing an up trend in cattle prices simply aren’t part of the stock market world. Prices aren’t rising because of a good consumer confidence number, earnings report, or interest rate decision. Prices are rising because there are less cattle in the world (economics 101 = supply down, price up).  In addition, this very move in prices will likely affect future prices, as the high prices cause more farmers to birth more cows, leading to more supply in the future (supply up, price down).

In more sophisticated vernacular – the two markets have different price drivers, and the price driver for the cattle is about as far away from the price drivers for the stock market as you can get.

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