Where’s The Beef? This COW Is The Way To Trade The Real Bull (COW, EWY, EWJ, CORN, NLR)
Richard Rittorno: U.S live cattle futures have been on a steady climb since hitting a 52-week low back on May 24, 2010 at $101.625. Cattle futures have been sizzling for nine months now with price putting in a 52-week high of $126.375 last Wednesday.
Cattle prices have some serious catalysts going for them. High costs and tightening U.S. herds have sent the price per pound on a nice steady climb.
Even if the U.S. consumer were to back off and take a pass at that steak dinner, however, analysts say the Asian consumer is chomping at the bit for U.S. beef. Growing appetites for beef in Japan (NYSEArca:EWJ) and South Korea (NYSEArca:EWY) in particular should help continue the climb in price for cattle.
According to the U.S. Department of Agriculture, Japan and South Korea are the third- and fourth-largest markets for U.S. beef. The U.S. Department of Agriculture also reports the volume of orders is increasing with a growth rate of 33% in the first 11 months of 2011 year over year.
The exchange rate has helped offset the high price due to the import tariffs of almost 3 to 1 price increase for the same cut of beef here in the States. However, Asian appetite for high-quality beef from the U.S. has not slowed consumption and appears to be growing.
The supply for live cattle has tightened in part because South Korea’s domestic livestock fell victim to foot -and-mouth disease in 2010. At that time Korean consumers turned to U.S. for beef and since have continued their appetite for high-quality U.S. meat.
Japan’s consumers have brought the quality of food to the forefront after the Fukushima nuclear power (NYSEArca:NLR) plant meltdown resulting in tainted domestic products from milk and meat to fruits and vegetables.
If cattle prices already didn’t have enough catalysis sending prices higher, ranchers are seeing their input costs climbing as well. Corn (NYSEArca:CORN) has been in tight supply as the global crop has been hit with drought in Argentina and lower yields.
Analysts point out that even though cattle prices might be at record highs, they are not done running as long as strong U.S. beef exports continue.
Looking the daily chart for Lean Cattle, traders will find price has been waving upward along the trendline since the end of May. As each wave top has moved its way back to the trendline, only to bounce and continue onward to the next wave up. The current wave top is now at the 52-week high and price is making its way back to the trendline, where history suggests a bounce and continued move higher.
Traders can gain access to the cattle market via the iPath DJ UBS Livestock (NYSEArca:COW), is ETN that seeks to track the lean cattle and lean hog indexes.
COW is not a pure play, so traders will need to keep an eye on the hog market as well to assure its not putting pressure on the ETN from the negative side.
Currently lean hog prices have been flat during the same period of cattle’s run upward.
As of December 31, COW was made up 64.4% of lean cattle and 35.60% of lean hog. Since COW is not a pure play traders, can consider using options to leverage up the small moves COW makes compared to the futures market.
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