Time to Add Some Beef to Your Portfolio
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Very often in the investment world the best investments are found in the 'backwaters' where very few other are looking. It's similar to fishing in a way...the best spots are soon overcrowded and the fishing begins to deteriorate. The best known 'hot' stocks have already been found and analyzed to death.
For more adventuresome investors, one of the remote quiet spots in the investment world is commodities and more specifically beef or cattle. Not that the industry does not have wonderful long-term fundamentals...it does. It's just not a sexy investment like a tech stock that one can boast about at parties.
A look at the fundamentals shows that while beef consumption is static or declining in developed economies, demand is still increasing nicely in the emerging markets of Asia, Latin America and the Middle East. Global demand for beef is forecast to rise 24 percent by 2020 from the 64.5 million metric tons eaten last year according to Meat & Livestock Australia.
The supply side is positive for beef prices too thanks largely to the drought conditions in Texas, the biggest cattle producing state, last year which greatly reduced the herd and caused $7.62 billion in farm losses. The drought resulted in the smallest herd of cattle in the United States since 1952. The US Department of Agriculture forecasts that US beef output will fall to 11.5 million metric tons (25.3 billion pounds) this year, the lowest since 2005. And the USDA projects beef production to slide another 2.5 percent in 2013 to 24.66 billion pounds.
These fundamentals resulted in US cattle futures hitting record highs earlier this year which gave a boost to holders of an exchange traded note based on livestock, the Dow Jones-UBS Livestock Subindex Total Return ETN (NYSEMKT: COW). This ETN tracks an index which consists of two livestock commodities futures contracts, live cattle (60%) and lean hogs (40%) traded on US exchanges.
Cattle futures kept hitting records until the controversy over “pink slime” hit US beef consumption. This controversy hit the beef processing companies including Cargill, Tyson Foods (NYSE: TSN) and Smithfield Foods (NYSE: SFD) hard.
Cargill reported weak results in its meat division citing what it called a “cyclical downturn in North American beef.” Meanwhile Tyson Foods broke even on beef in its latest quarter despite what it called “extremely challenging market conditions.” Of course, beef consumption will pick up during the summer grilling season. The bottom line here for the meat packing companies though is that domestic demand did not match what they were paying for cattle prices earlier this year but things should improve as the pink slime fear dies down.
The real long-term solution, however, for the beef processing companies is the aforementioned emerging countries. Export volumes last year broke records, according to the US Meat Export Federation, at 1.287 million metric tons valued at $5.42 billion. Of course, US beef exporters face competition from companies such as Brazil's JBS S.A. ADR (NASDAQOTH: JBSAY.PK) which has the benefit of selling in its home market. In addition, it has also moved aggressively into the US market and controls 75 percent of Pilgrim's Corporation (NASDAQ: PPC).
All of the beef processing companies are still fairly close to their 52-week lows, thanks to the pink slime controversy, offering long-term investors a chance to participate in a bullish long-term macro trend from a low valuation starting point. It may be time to add some beef to your portfolio.
tdalmoe has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.