Meat - Hog, Cattle, Poultry etc.

[winston]

By Tom Dyson
May 7, 2008

Last night, I had dinner with Gary, an Iowa commodities broker...

As we sat down to steaks, Gary told me two large hog businesses had gone under this week in Sioux City. "I saw the banker down at the farm counting [livestock] heads," he said. "The banker in this town never leaves his office. It's the first time he's ever had to get s**t on his shoes."

Gary lives in one of Iowa's most productive farming counties. He helps local farmers sell their harvest using the futures and options markets in Chicago. He also makes million-dollar speculations of his own.

Gary really knows the "ag" markets. He used to be the head stock buyer in a cattle yard, he's traded ag commodities every day for the past 40 years, and he spends all day talking with farmers.

The last time I met Gary – in November 2006 – he told me this:
"Corn is going to $5 a bushel, up from its current price of $3.33. Soybeans are going to $9, from their current $6.45. And Iowa farmland is a bargain at $5,000 an acre."

Today, corn is $6 a bushel, soybeans are $13, and prime Iowa farmland is $10,000 an acre.

Back then, it was obvious grain prices had to rise. They were too cheap, and with the ethanol boom in full swing, it was plain to see corn and soybean prices would rise. Now it's not so clear...

Gary says a bad crop could send corn to $10. But that's not likely. The farmers are planting their fields right now, and Gary thinks there's going to be a big crop this year. That could push grain prices down.

Gary wouldn't predict a fall or a rise in the grain markets. He can't know the future. But he did tell me he had sold all the grain production from his own farm, locking in corn prices at $5.80 and soybean prices at $12.80.

While it isn't clear what's going to happen to the grains... Gary said hog and cattle prices have to rise. Here's why:

A knife is made out of steel. The knifemaker simply turns a raw material into a more expensive "value added" product. The hog and cattle farmer does the same thing. Corn is the raw material. Hogs and cows are a value-added corn product. Think of livestock as corn bins with four legs.

When steel prices rise, the knifemaker has to raise his knife prices or he'll go out of business. Farmers haven't been able to raise hog and cattle prices. Years of cheap corn have built up large inventories of meat.

Now the hog and cattle farmers are going out of business. Soon there's going to be a shortage and prices will rise. "There's going to be drastically higher meat prices when all this washes out," Gary said.

To invest directly in hog and cattle prices, you have three choices: You could make friends with a farmer and ask him to buy livestock for you. You could open a futures trading account and buy live hog or feeder cattle futures. (Prices are volatile. Make sure you use plenty of margin and retain a broker who knows the agriculture markets well.)

Finally, you can buy a publicly traded meatpacker like Tyson, Hormel, or Smithfield. But be careful... other "corporate" variables may influence the prices of these stocks and ruin the trade, even if livestock prices rise.

[winston]

The Largest Freezer in the World
By Tom Dyson

The largest freezer in the world is in Le Mars, Iowa. The freezer is six stories high and shaped like a cube. The local newspaper calls it a "high rise freezer."

The freezer belongs to Wells' Dairy. Wells' Dairy is America's largest private producer of ice cream. It owns the Blue Bunny brand, but it also produces ice cream for Haagen-Dazs, Weight Watchers, and Walt Disney.

No other town in the world produces as much ice cream as they produce in Le Mars. Le Mars is the ice cream capital of the world.

Last week, I went to Iowa to research agriculture. While I was there, I passed through Le Mars and saw the Wells' dairy plant. One of the locals I talked to knows someone who works in the freezer. He says the ice cream freezer is full of frozen pork. I asked the local why. "The Wells brothers must be speculating on a rise in pork prices," he answered.

The Wells are making a smart move. I think we're approaching a major bull move in hogs and cattle (although there is probably a little more liquidation to come first).

You see, livestock farmers go broke when grain prices are high and meat prices are low. That's the way it is right now. Take a look at this chart my colleague Ian Davis put together...

Two large hog farming concerns went bankrupt last week in Le Mars. Eric, a hog farmer I met, says hog producers are losing $40 on every pig they raise. I heard stories of farmers killing their cows and pigs at birth... They use females for breeding. They use the males for meat. Right now, it's cheaper to kill the males than it is to fatten them up and sell them as meat.

Smithfield Foods, the largest hog producer in the nation, is cutting its herd. Earlier this year, Smithfield announced it would reduce its output of hogs by 800,000 to 1 million heads.

Eric said he knew trouble was coming and sold his hogs last year. Now he uses his hog farm as a "hog hotel." He receives rent for taking care of another person's hogs, but takes no risk (except the credit risk of his customer). He has an option to buy a piece of these hogs later in the year if he wishes. He says he'll wait about six months to buy hogs... when the herd reductions start to bite.

When the gold price rises, jewelry gets more expensive. It's the same way with farm animals. When the corn price rises, livestock must get more expensive. Corn has doubled in the past 18 months, but livestock prices are still in the same range they were six years ago. They will catch up with corn.

Here's how you play it: Buy a livestock ETF. Two trade in London under the symbols CATL.L and HOGS.L. They track the Dow Jones AIG sub-indexes for live cattle and hogs.

[winston]

Cattle Surge on Improved Beef Demand, Shrinking Herd; Hogs Rise
By Molly Seltzer

June 20 (Bloomberg) -- Cattle rose to the highest since at least 1986 as U.S. beef prices surged and high corn costs prolong losses for feedlots, encouraging some producers to shrink their herds. Hogs also rose.

Wholesale beef prices are the highest in 13 months, and domestic shipments of select and choice cuts yesterday totaled 14.94 million pounds, the most since Jan. 24, U.S. Department of Agriculture data show. The USDA probably will report today that feedlots cut their purchases of young cattle for a third month in May, according to 11 analysts surveyed by Bloomberg.

``When grain prices are this high, the cattle should be staying out in the pasture,'' said Mark Schultz, a vice president at Northstar Commodity Investments LLC in Minneapolis, Minnesota. Livestock producers will ``try to keep them in the pasture longer, to feed them less corn,'' he said.

Cattle futures for August delivery rose 1.4 cents, or 1.4 percent, to $1.0485 a pound on the Chicago Mercantile Exchange, after earlier reaching $1.0615, the highest for a most-active contract since at least April 1986.

The price of cattle has jumped 19 percent since the end of March as corn surged to a record and feedlots began to reduce the size of their herds to curb losses. Corn futures traded on the Chicago Board of Trade are up 86 percent in the past year.

Feedlots buy year-old animals that weigh 500 to 800 pounds and fatten them on corn for about four to six months, until they weigh about 1,200 pounds (544 kilograms) and are sold to slaughterhouses.

Feedlot Losses

Commercial feedlots from Nebraska to Texas lost an average of $48.47 on each steer or heifer sold for slaughter in May, compared with a loss of $137.66 in April and a record $169.80 in March, said Erica Rosa, an economist at the Livestock Marketing Information Center in Lakewood, Colorado.

U.S. processors including Tyson Foods Inc. and National Beef Packing Co. slaughtered 128,000 cattle yesterday, up 0.8 percent from a week earlier, the USDA said yesterday.

Wholesale beef prices rose 0.74 cent, or 0.5 percent, to $1.5912 a pound today, up 11 percent from a year earlier, the USDA said.

``The packers made a real effort to get a lot of beef sold, which they did,'' said Walt Hackney, owner of Omaha, Nebraska- based Hackney Ag.

Feeder-cattle futures for August delivery rose 2.475 cents, or 2.2 percent, to $1.13575 a pound in Chicago.

Hogs Rally

In another livestock market, hog futures jumped by the CME's daily limit on signs of improved pork demand and expectations that U.S. livestock producers will reduce the size of their herds.

Rising corn costs led to a loss in the hog-producing unit of Smithfield Foods Inc., the largest U.S. pork producer, in the three months ended April 27. The company said Feb. 19 it would reduce its breeding herd by as much as 5 percent. Wholesale pork prices are up 44 percent since the end of March.

``Even with prices going higher today, you still cannot make money buying corn and meal in the open market and selling pigs,'' Schultz said. ``It still does not turn a profit.''

Hog futures for August settlement rose 2.925 cents, or 3.9 percent, to 78.375 cents a pound, after earlier rising by the CME's daily limit of 3 cents. The price has gained 35 percent this year on signs of improved demand for U.S. pork.

Wholesale-pork prices rose 1.7 cents, or 2.2 percent, to 79.33 cents a pound yesterday, the highest this month, USDA data show.

[kennynah]

i say, watch the beef discussion between usa and south korea....not settle yet right? or has the americans arm twisted the koreans to accept whatever, mad or sane, cows ?

[winston]

i say, watch the beef discussion between usa and south korea....not settle yet right? or has the americans arm twisted the koreans to accept whatever, mad or sane, cows ?

Still don't understand this situation. Why don't they just allow the US Beef to go into Korea ? Thereafter, they don't have to buy it..

Ah... but once they come in and if they are very cheap compared to their local beef, then the Koreans would certainly be buying it, especially if you are a restaurant owner

[winston]

Stats of the Week:-

21% - Increase in the price of beef since the end of March.

Corn is the primary source of feed for the U.S. cattle industry.

[winston]

This Commodity Will Hit Record Prices Soon
By Tom Dyson

I just read the story of an anonymous hog farmer who spent 21 years accumulating land and paying off debt to create a dream farm for his wife and two sons.

A few years ago, the farmer decided to build a "contract facility" on his 378-acre property to increase the family income. A contract facility is like a hog hotel. You look after someone else's hogs and collect rent from the hogs' owner. Farmers run contract facilities when they can't afford their own hog operations... or they don't want exposure to hog prices. You won't make as much money this way, but it's much less risky.

Two years ago, the farmer and his wife paid off the debt on their hog hotel... and decided to enter the hog business for themselves. The plan was to build a farrowing operation. A farrowing operation is like a piglet factory. You buy a herd of female pigs and inseminate them every six months. You make money selling the piglets to a finishing farm. The finishers stuff the piglets with corn until they're heavy enough for the slaughterhouse.

So the farmer mortgaged his land again, bought 1,200 sows, and entered a contract to sell the piglets to a finishing farm at $50 per head.

Last week, the finishing farm told the farmer not to ship any more piglets. It had run out of money. Corn is the problem. The June floods in Iowa wiped out 2% of the U.S. corn crop, and corn prices spiked to more than $8 a bushel – four times the average corn price of the last 30 years. With corn at $8, it costs $150 to fatten a hog. But the meatpackers only pay $100 per hog. So the finishing farms lose $50 on every pig they raise.

Right now, finishing farms are liquidating their herds and going out of business.

So our farmer is stuck with the piglets. When I went to Iowa a few weeks ago, I heard of farmers throwing piglets in the trash... or using them as compost. For the first time in his life, the farmer doesn't have enough money to make his interest payments.

So the farmer contacted his lender and explained the situation. The loan officer advised him to sell all his land, liquidate the sows, and look for a job.

"My youngest son doesn't want to attend the fair next week because he is afraid the lender will repo his puppy," says the farmer.

When corn goes to record highs, pork must also go to record highs. That's because pork is corn refined. You could say a pig is just a sack of corn with four legs.

But there's a lag. Right now, everyone's selling hogs. The finishing operations are selling their herds, and the farrowing operations are dumping their sows. It is pushing down live hog prices.

But in nine months – when the market has worked through the excess – hogs will be in short supply. And that's when hog prices will start setting records. This shortage will last for two years, because that's how long it takes to bring a commercial hog operation from scratch to production.

In 1998, the last time the hog business washed out like this, live hog futures jumped from 10¢ to 70¢ in two years. I expect we'll see something similar this time around...

The hog ETF is the easiest way to invest in hogs. It trades in London. The symbol in Yahoo Finance is HOGS.L. Experienced traders should look at the futures market. A lean hog contract trades in Chicago on the CME.

[la papillion]

Thks guys, for highlighting this interesting article on the relationship between hog/cattles/corn.

I invested in china milk, but never knew that the feed is so important to their cost. Fortunately, china milk grew around 75% of their own feed, hence isn't subjected to buying corn to feed their 'corn products', haha

[kennynah]

Thks guys, for highlighting this interesting article on the relationship between hog/cattles/corn.

I invested in china milk, but never knew that the feed is so important to their cost. Fortunately, china milk grew around 75% of their own feed, hence isn't subjected to buying corn to feed their 'corn products', haha

then, they are subject to some fertilizer costs.... there's so much self generated dunk...so, surely, they must buy some from somewhere...and as far as i know, that aint cheap...

[kennynah]

ah....now i understand.....why it's called corn beef.... beef eat corn grow up then get sliced up...

to be brand agnostic