As your trips to your local supermarket confirm, the price of agricultural commodities is exploding. Most recently, corn is hitting record highs — having more than doubled in the past two years. This is a result of exploding demand from the world’s consumers, combined with U.S. government mandates and subsidies promoting the use of grain-based ethanol.
Even as corn has soared to levels not seen since the Civil War, the futures price of the cattle it feeds has risen only a more modest 31% during the same period. In relative terms, this has actually made cattle cheap. Today, a 1,250-pound steer in the United States is worth about 4.2 times the cost of the corn he consumes over five months to reach slaughter weight, down from almost 12 times in December 2005. Not since 1996, when corn reached what was then a record $5 a bushel, have cattle been this cheap relative to their primary source of feed.
This relative imbalance means that today U.S. feedlots are losing money on every animal they sell. Not surprisingly, hog farmers in South Dakota are already starting to liquidate their herds and get out of the business. As of May 1, feedlots in the United States held 11.1 million head, down 1.4% from a year earlier. Ranchers last year cut the number of young females they held by 3.5% to 5.67 million on Jan. 1, the second straight annual decline.
Meanwhile, even as soaring corn prices mean that fewer cattle are coming to market, demand for beef across the globe is exploding. U.S. beef exports in the first quarter soared 29%, thanks to a declining dollar and as rising global incomes increase meat consumption. Remember, the first thing global consumers buy as their incomes rise is not a flat-screen television or a computer but more and better food. And global demand for beef, pork and chicken may grow as much as 50% by 2020 as the population increases and incomes improve.
Stagnating production in the United States and exploding demand across the globe can lead to only one thing: soaring prices. Wholesale choice-grade beef in the United States, the world’s biggest producer and consumer, are already expected to rise by 16% next year. That’s the biggest gain since 2003 and the second-largest since 1979. There already have been big increases in beef prices in China, Russia, India and throughout Southeast Asia this year.
So buy the iPath Dow Jones AIG Livestock TR Sub-Index ETN (COW) at market today and place your stop at $41.50.
Fertilizer giant Potash (POT) continued its relentless trajectory upward, closing at a new record high of $239.50 on Tuesday, before correcting slightly. With the December $210 calls up 77.40% during just the past three weeks, sell half of your options to take some quick profits. Tighten your stop to $205.00.
But in terms of price performance, Sociedad Quimica y Minera de Chile S.A. (SQM) has outdone even Potash, hitting almost $60 last week. Even after correcting, it ended the week 9.65% higher, and now is up an option-like 46.39% in the last three weeks. Tighten your stop to $45, but expect to be stopped out in the next couple of days if this stock continues to correct.
The Market Vectors Coal ETF (KOL) also had a solid week as it resumed its solid uptrend. With the options up 62.50% since May 19, sell half of your options to lock in your profits here. Hold on to the ETF and the rest of your options. Move your stop to $49.25.
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