Beef: Why there’s a Five Guys in your Town by Attain Capital

It’s been a little over 10 months since we’ve looked at the Meat markets (Live and Feeder Cattle) hitting all time highs, and if you think that’s because the ascent has slowed down… think again.  It’s almost become S&P-like boring to talk about…. Ho hum, another all time high in Cattle today as the market has marched on and on this year. . Feeder Cattle is up 42%, while Live cattle is up 22% YTD. But it’s not just this year. The cattle markets have been in a consistent uptrend the past 4-5 years, more than doubling in price since 2010 {past performance is not necessarily indicative of future results}.

Beef Feeder cattle

Beef Live Cattle

 

(Disclaimer: Past performance is not necessarily indicative of future results)

Here’s where we’ll throw you a curve ball – because unlike the stock market, which is discounting what is excepted to be going on over the next 12-18 months, the cattle markets are factoring in conditions from 2 to 3 years ago. Puzzle me that one, futures markets affected by the past.  For further explanation, we turn to the Texas Department of Agriculture explaining that it was the drought all the way back in 2010 that’s pushing prices higher today, via the Texas Tribune.

At this point, the biggest impact of the drought has been on beef prices,” said Bryan Black, spokesman for the Texas Department of Agriculture. “The drought that began in the fall of 2010 forced cattle raisers in Texas, Oklahoma and elsewhere to reduce the size of their herds. As a result, beef production has declined, and that has pushed prices higher…. Donnell Brown, the owner of R.A. Brown Ranch, said he has had to reduce his 1,000-cow herd by 50 percent over the last three years.”

Beef Shrinking Market

(Disclaimer: past performance is not necessarily indicative of future results)

Chart Courtesy: Wall Street Journal

What’s that reduction look like in numbers, the Wall Street Journal has a graphic, showing production (not sure that’s the word the cattle getting slaughtered would use) to hit its lowest year to year change since at least 2006, down 5.3%, to 24.4 Billion pounds.

And now there’s a new factor – the high beef prices themselves… which can lead to more ranchers slaughtering the cattle they do have, to take advantage of the high prices, leading to less cattle and even higher prices. Although the flipside to that is also likely to happen. Just like money flew into the Dakotas to take advantage of high energy prices, money will fly into ranching in order to ‘produce’ more cattle and take advantage of the higher prices. Which will eventually lead to more supply… in turn pushing prices back down. It’s why commodity markets are cyclical – with those looking to profit from higher prices by growing more, drilling more, or birthing more cattle, ultimately causing the end of those high prices.

For now, we’ll just hope prices at our local hamburger joint don’t go up too high… Which come to think of it, might be another reason for high beef prices. The number of fast-casual burger spots in Chicago has increased a lot since the financial crisis, when restaurateurs decided on cheaper burger options over more expensive concepts (according to an article we read back in 2009/2010ish… that we just spent way too long trying to find… anybody got it out there?). There’s the national guys… Five Guys, SmashBurger, Epic Burger (our favorite), M Burger, and dozens of local entrants.  Now we’re getting hungry for a (more expensive) burger!

“The Managed Futures Blog is a compilation of thoughts, research, attempts at humor, and more from the team at Attain Capital Management (“Attain”). Attain pairs high net worth individuals, RIA’s, and institutional investors with alternative investments in commodities, managed futures, and global macro strategies through privately offered funds and managed accounts. Click here to sign up for their insight and analysis.”