Meat
Market
And that's just bull. (Sorry, couldn't resist.) Certainly meats are risky, the same as any market. But they're also a vital market filled with many opportunities for your portfolio. Of course, you're not likely to hear about them from your broker. The sad fact is, most analysts on Wall Street only know cattle as it's served up to them at a Morton's or Ruth's Chris Steak House. Essentially, meats are traded on Chicago Mercantile Exchange. And as I said, all trading is done much the same as any other commodity. Of course, like all markets, meats have a very unique language. Traders concentrate on data that nobody else looks at. That's why it's important to have someone to guide you through these markets. I'll give you a brief overview here - but, if you're really interested in these markets, my strong recommendation is to find a broker or someone who can walk you through these markets every step of the way. In the meantime, here's a quick look at the major meat markets and the specifics of trading them. Cattle are used in a variety of products - leather, soaps, animal feed, even camera film. But of course, when we talk cattle, we're mostly talking beef - everything from steaks to hamburgers. As far as trading is concerned, cattle are broken up into two different categories: feeder cattle and live cattle. But don't let those names fool you. Feeder cattle - sometimes called lean cattle - are just as alive as live cattle. They're simply calves that will be sent to feedlots to fatten up. Once they've gained enough weight, they can become "live cattle" - ironically, the ones that get shipped out for slaughter. The slaughtered cattle meat is graded and sorted. If you've bought meat in a grocery store, you probably know a little something about that. The meat you buy is most likely labeled "Choice," "Select," or "Standard." In all, there are six categories of beef, and five yield grades, measuring how much beef came from the cow. About 50 % of the meat is sold as steaks and roasts, 5% as stewing beef, and the rest becomes hamburger. The butcher can then sell what's left of the cow to leather manufacturers and others that use cattle products. Not surprisingly, cattle are raised all over the world. At last count, there were more cattle in India than in any other country. Brazil runs a distant second, with China, the United States and Europe rounding out the top five. Beef doesn't have a very big import/export market - it's usually consumed in the country it's produced. Among exporters, Australia leads the way, followed by the United States. Most of the U.S. beef comes from just seven states - Arizona, California, Colorado, Iowa, Kansas, Nebraska, and Texas. Like everything else, beef prices are a function of supply and demand. And like all commodities, a variety of factors can affect both. You'd probably think weather doesn't play as big a role on cattle production as it does with other farm commodities. After all, with cattle there really isn't a planting, growing or harvesting season. Short of a severe drought or a major flood, the cows will always be there. But the fact is, it takes a lot of money to raise a cow. Feeder cattle need a lot of pasture. And live cattle need a lot of feed. If there's too much or not enough rain, the pastures won't be able to support as many cattle, so ranchers will have to cut back on the number of cattle they raise. That'll limit the supply of feeder cattle, which in turn limits the number of live cattle. Meanwhile, if grain prices are adversely affected by the weather, the feedlots may cut back on the number of cattle they buy. Again, this reduces the overall supply of cattle. Demand, on the other hand, can fluctuate wildly. The main factor is usually personal income. The more money people make, the more they're willing to plunk down $50 or $75 at for a steak at Morton's. Usually increased paychecks translate into increased demand for high quality beef faster than most other foods. If people are tightening their wallets, however, macaroni and cheese may be the meal of choice. Other demand factors are less than economic. I'm talking about people's diet and preference. The mad cow disease scare pushed some people away from beef. (You might remember that some cattle ranchers blamed Oprah Winfrey for starting an anti-beef drive.) More recently, diet fads like Atkins have brought people back. So if you're a beef trader, you have to keep an eye on pop culture. Keep track of what talk and tabloid shows are saying, what big celebrities say they're eating. You never know when a simple sound bite could lead to a big rise or drop in beef prices. As I mentioned earlier, most cattle in the United States trades on the Chicago Mercantile Exchange. Feeder cattle contracts are for delivery in January, March, April, May, August, October, and November. Each contract covers 50,000 pounds of cattle. Live cattle contracts have delivery months of February, April, June, August, October, and December. The contracts for live cattle are for 40,000 pounds of cattle - 55% choice, 45% select steers. Both contracts are priced in cents per pound. Some traders have a very difficult time trading the cattle markets because the volatility can be extreme and often changes from day to day. The market may seem tame as a grain market for a few days, then seem suddenly too risky the next. You can get some idea of the way prices will go by looking at cattle reports. Probably the most closely watched report by cattle traders is the cattle on feed report. There are three things to focus on - "number of cattle on feed" category and the amount "placed on feed" category represent the amount of cattle that will be available in the future. The "marketings" category, however, is a very short-term indicator of how much beef is ready to go to packers for slaughter. These reports can give you a clue about the supply and demand conditions for beef. Remember, today's feeder cattle will become tomorrow's live cattle - so a glut or shortage in the number of cattle on feed or placed on feed will affect live cattle prices down the road. Now that we have the cows out of the way, let's look at the pigs. Lean hogs are the other major meats contract... " Lean hog" may sound like an oxymoron. But as far as trading is concerned, it simply means a pig big enough to be slaughtered. So your pork chops, ham and even bacon come from lean hogs. In fact, 20% of a pig's meat becomes ham. About 17% becomes pork loins and chops. And 15% - the hog's belly - is used for bacon. (Let's just say the rest of the meat falls under the category of "Other" and leave it at that.) Just four states account for more than half of U.S. pork production - Iowa, Illinois, Indiana and Missouri. You may have noticed those are all Corn Belt states. That's not a coincidence... because farmers like to keep their pigs near their favorite food source. Yes, corn. So once again, weather plays a big factor in hog prices. If corn is expensive, farmers will feed their pigs less. In turn, it reduces the supply of lean hogs. And that drives prices up. In fact, a key report to keep your eye on is the Hog/Corn price ratio. Simply put, it's the price of hogs versus the price of corn. Naturally, the higher the price of corn, the lower profits a pig farmer will see. So you can expect farmers to cut back on the number of pigs they raise. The natural flip side is when corn prices are low compared to the price of hogs. More than likely, farmers will try to take advantage of the high prices to raise more pigs. Weather plays a role on pigs another way. Pigs have a habit of becoming lethargic when the weather gets too hot - just like people do. Not only do they eat less, they also breed less. That ultimately means lighter pigs are sent to the butcher, while the number of baby pigs decreases. Colder weather makes for better breeding conditions (go figure...), increasing the next generation of piggies. Like cattle, the majority of hog futures trade on the Chicago Mercantile Exchange. Each contract calls for 40,000 pounds of lean hog carcasses - or about 220 hogs. Delivery months are February, April, May, June, July, August, October and December. Hog contracts are also priced in cents per pound. The
demand for pork remains as strong as it ever was. Beef may be "what's
for dinner," but pig farmers are busy reminding people that
pork is "the other white meat." Meanwhile, the Atkins diet
and other fads have reversed people's bacon aversion. In fact, since
there's almost no market equivalent to bacon, demand has remained
fairly constant. Regards, Kevin
Kerr Editor's Note: With 15 years of experience, Kevin Kerr is a true veteran of the commodities markets. A licensed commodities trader since 1989, he's worked the trading pits in Chicago and New York with legends like Paul Tudor Jones, and he's even traded commodity derivatives in London. Over Kevin Kerr's career he's dealt with everything from cotton to currencies to oil and natural gas. Kevin
Kerr's unparalleled expertise in futures and commodities has made
him a regular contributor to news outlets like CNN fn, CNBC and Marketwatch,
where he's been quoted in over 500 articles. |
Few
markets conjure up as many images from investors as the meat futures
markets do. Some people will think of Old West cattle auctions, with
cowboys and ranchers bidding on prized bulls. Others know the meat
markets are just like any other market, though they still hold on
to the notion that it's exotic and full of risk.