Where’s the Beef?

04/23/2008 12:00 am EST


Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says meats have lagged badly amid the commodities rally of the last few years, but he thinks they’re ready to break out.

With virtually all commodities soaring over the last several months, the meats have been a disappointment—until about ten days ago, [when] I think we finally broke out.

Live cattle and lean hogs have been poor inflation-adjusted investments or speculations since the bull market in raw materials was set afire in 2002. Over the last six years, live cattle and lean hogs have gained just under 30% in nominal terms, or up barely 4% adjusted for inflation. That pales compared to the huge gains logged by the base metals, precious metals, the grains, and other commodities.

Now the tide is finally [turning, and] I'm convinced we're finally at a turning point in 2008 as farmers continue to cull their herds. At some point, I'm expecting beef and pork prices to surge.

Livestock producers are slaughtering more animals due to soaring feed costs. According to the US Department of Agriculture, the weekly slaughter rate of hogs was up 7% in March from 12 months earlier. Feeder costs are literally skyrocketing as grain prices have tripled since 2006. So for livestock producers, it's either downsize or go out of business.

But as livestock herds begin to decline, supplies are bound to follow. Beef production is expected to fall 3.7% in the fourth quarter compared to 2007, according to the government's supply report. Plus, South Korea's announcement last week that it has lifted its ban on US beef imports should drain whatever surplus currently exists in US beef supply right at the same time seasonal consumption rises in North America amid the barbeque season. Those steaks won't stay cheap for much longer.

If hog-breeders in the United States have their way, the government might copy Canada's recent policy initiative that promises to pay Canadian farmers $50 million not to produce more hogs. The objective is to reduce the supply of pork on the market and drive up prices. Ottawa is hoping to reduce the hog supply by about 10% so farmers can boost their incomes.

It's quite obvious to me that Canada, and probably the United States want to raise meat prices and give breeders a taste of the commodities bull market as they've been badly wounded by soaring feed costs, fuel prices, and labor.

I think the big picture for the meats is finally changing this spring and that's why I want you to open a new position in the iPath Dow Jones Livestock Sub-index ETN (NYSEArca: COW). It [closed Tuesday above $43]. Buy up to $46.50.

Like the grains, livestock maintain a negative correlation to common stocks. It's a great portfolio diversification tool, especially in 2008 when equities cratered during the first quarter and most commodities rallied.

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