“Home on the Range” is regarded as the unofficial anthem of the American West. It’s also a slogan available on vanity license plates in Kansas — where few Buffalo now roam. The wide-open spaces are now rangeland for the final installment of commodity critters: chicken, hogs and cattle.

As I’ve said before, it’s important to know the market relationship between livestock and the grain market. The price of livestock plays an important role in the grain market and vice versa. That’s exactly why this chart caught my eye:

As you can see from the chart, livestock demand has been tricky to forecast over the past few years. That’s partially because so many factors influence consumption: income, diet, price, just to name a few. Overall livestock consumption since 2006-2007 is down – but a resurgence looks to be on the horizon, led by strong demand for chicken.

And that’s only one side of the story — the other side is supply.

Cattle farmers stepped up slaughter when economic conditions turned bad with the financial crisis. The cycle from birth to maturity is longer with beef and with less offspring per animal harder to speed up or slow down production as quickly. The dramatic herd reduction in 2008-2009, sending off even milk cows, is being felt now in reduced supply.

As the chart above shows, we’re at the lowest supply level of beef cows in 25 years. And even though beef consumption is lower, the mass reduction in cattle head has now supported price recovery that looks to pressure $100 per hundredweight on the upside once again.

This from the Financial Times:

“Americans face higher beef prices for their traditional end-of-summer Labor Day barbecues following a late-night stampede by meat packers this week that helped send cattle futures to their highest levels in nearly two years.

“Negotiations between slaughterhouses and feedyard operators with cattle to sell took on a frantic tone this week, with talks stretching late into the night on Wednesday – a rare occurrence for cattlemen used to wrapping up their affairs by sundown.

“‘[Wednesday] night may have been the latest bidding I have ever seen,’ said John Josserand, president of AzTx Cattle in Hereford, Texas, which operates facilities that can feed 250,000 cattle at a time. By Thursday, the frenzy spread to the Chicago Mercantile Exchange, where live cattle trading volume broke records and futures prices jumped to $1 a pound, the highest level in 22 months.

“The tumultuous trading came after rallies in markets for other agricultural commodities have raised fears about global food price inflation. Wheat prices have soared as a drought in Russia destroys grain crops. CME pork bellies, used for bacon, have hit all-time highs this month.”

With the Labor Day weekend ahead of us I’ll be keeping tabs on the cattle market. Supply and demand will help show the way for livestock – but pricing and risk/reward payouts will ultimately decide if we should saddle up and wrangle a cattle position.

[Ed. Note: For investors who want to take a crack at a cattle play right now, the most direct option is a trade on the iPath DJ-UBS Livestock ETN (NYSE: COW). The exchange-traded note is tracks a position that’s weighted 63% in lean cattle and 36% weighted in hogs.]

It all comes back to commodities,
Alan Knuckman
Penny Sleuth

September 2, 2010

[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]

Alan Knuckman

Alan Knuckman brings two decades of commodity trading experience to his role as managing editor of Resource Trader Alert, a weekly newsletter providing analysis and real-time updates on current and evolving market conditions. His options, futures, and currencies experience have made him a sought after commentator on issues shaping both hard (extracted or mined) and soft (grown or produced through the agriculture industry) commodities. He is a frequent guest on major international media outlets including CNBC, Sky News, MarketWatch, Bloomberg, Fox Business Network, CNN Money, and Reuters.

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