Beef Prices: What Cliff?

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Last we visited on Agri-Foods J. Wellington Wimpy, of whom we were a great fan, was mentioned. If still around, poor old Wimpy would certainly be dismayed by price to be paid for his favorite food, hamburgers. U.S. beef prices do not seem to be aware of Obama Fiscal Cliff. As the chart below portrays, USDA beef index, a composite of boxed and hanging beef prices, eked out a new 90-week high. Given the fundamentals, beef prices seem destined to head higher. No Obama Fiscal Cliff here.

Beef prices are moving higher for a variety of reasons. The falling prices of this Summer set up conditions that would lead to higher prices. That decline in beef prices during the Summer was due to continued liquidation of the cattle herd as a result of dry conditions and herd reductions at feed lots as feed grain costs rose to unprofitable levels. Several forces have pushed prices higher from the Summer low. First, demand for beef globally remains strong. Most people would rather eat a steak than a dry, tasteless, boneless hard-to-chew chicken breast.

The other two forces also relate to the dry weather in much of the West and Midwestern U.S. over the past two years. Due to that dry weather reducing available pasture, ranchers have been essentially liquidating cattle herds for two years. Sell the cow, and no calf in the Spring. Steaks are not made in a factory. Feed lot operators continue to be extremely reluctant to take on feeder cattle due to the high cost of grain for feed. This situation may persist for some time as years are required to rebuild pasture after the rains return. Further, dry conditions continue in the Midwestern U.S. which may reduce crop plantings this coming Spring. Should that happen, feed grain prices would remain high.

usda beef index

Important to remember also is that global Agri-Food consumption is influenced little, or none at all, by any resolution of the Obama’s Fiscal Cliff. China will still be feeding 1.3 billion people. Middle East will still need to import half or more of their grain needs to feed their populations. Agri-Food consumption is simply extremely resistance to many of the current economic woes. U.S. consumers will give up buying silly new smart phones before they give up eating. Question all this leads to is how can one hope to be able to afford those delicious steaks, and not be forced to eat one of those repulsive, pale white chicken breasts?

tier one agri-equities vs sp500

One of the answers to that question might be in the chart above. In that chart is plotted our index of Tier One Agri-Equity prices. As can be readily observed in that chart, it achieved a new high at the end of November. We will only note that these results seem somewhat better than the equity market. By the way, how is your favorite social networking stock or gold miner doing?

Companies comprising this index are largely international companies involved in global Agri-Food production or trade. Some niche companies operating in the U.S. are included. Investors might better service their food budget by researching Agri-Equities in the coming cold months of Winter. Sleep in, rather than listening to the latest pump-and-dump scheme on the morning business shows. Then, while rested, and with your brain uncluttered with Street nonsense, do your research later in the day.

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About Ned W Schmidt CFA