Why Beef Prices Are Primed to Sizzle
By Simon Constable, Barron's
Jan. 4, 2019
A little beef could put some muscle in your portfolio.
African swine flu, possibly brutal winter weather, and falling beef production could propel prices for cattle futures more than 15% higher over the next two quarters or so.
“It’s a perfect situation for a pretty wild price move higher,” Shawn Hackett, CEO of Hackett Financial Advisors, told Barron’s.
He sees little impediment to a substantial price rally. Hackett expects August-dated live cattle futures to move to $1.20 a pound, up from $1.14 recently. After that, there could be a further push as high as $1.35, he adds.
One way to profit from any move would be to buy August-dated live cattle futures on the CME futures exchange. Alternatively, try the iPath Bloomberg Livestock Subindex Total Return exchange-traded note (ticker: COW), which tracks the prices of hog and cattle futures. The ETN gives a 69% weight to cattle, with the remainder to hogs.
First, an outbreak of African swine flu in China and elsewhere is likely to result in a switch away from pork consumption in favor of other proteins, such as beef. China is by far the world’s largest pork consumer, which means that even small consumer-preference changes can have a large impact on the beef market.
“Chinese consumers have a problem because they know they can’t trust the government with the safety of their food,” says Hackett. Consumers who can afford to do so may decide to switch to another protein food. “There are significant numbers of people who can afford to buy uncontaminated meat [such as beef] in China,” he says. While infected pork and human illness aren’t linked, some people are aware that the deadly 2003 SARS virus outbreak was born of a mutation of an animal virus.
In any event, many infected hogs will get slaughtered to prevent the spread of the disease, so there will be fewer pork chops to go around.
The increased demand will coincide with falling world supplies of beef. Globally, 41.2 million cows are forecast to get slaughtered this year, down from 41.5 million in 2018, according to the U.S. Department of Agriculture. Slaughtered animals get processed into steaks and related products.
A further supply problem is headed our way in the form of a severe winter, at least partially a result of the so-called solar cycle. Surface temperatures on Earth are highly correlated with the number of spots appearing on the surface of the sun. Currently, the solar surface spot count is near zero, meaning that the Earth’s temperature will tend to be lower than usual.
“Since 2014, the sunspots have just plain collapsed, and NASA projections say that will continue,” says Don Coxe, chairman of financial firm Coxe Advisors. “We are entering into a new cold cycle, and it will continue into 2022 or 2023.”
Frigid winters generally mean lower beef production...