The Big Cattle Bust

On Friday, January 27, the USDA reported that the size of the cattle herd in the U.S. is the smallest in 60 years, or 91 million. One the recent reasons for the declining herd count is the droughts last summer in Texas and Oklahoma, which caused a shortage of grass and water and thus ranchers sent more head to slaughter. Another major structural driver for the declining herd count has been the soaring price of corn over the past few years, driven by the demand for ethanol in gasoline. It has become increasingly costly to raise cattle in the U.S. due to the government decisions to increase mix of ethanol in gasoline. Additionally, the higher prices for corn and other crops has resulted in more land switching to crops and away from cattle. These factors have helped drive supplies to such low historic levels.

On the demand side, export growth of beef increased 22% last year, driven largely by the falling dollar that made US exports less expensive. Given the recent announcements by the Federal Reserve to keep interest rates at current levels into 2014 and the willingness to provide more stimulus, it would appear a weaker dollar remains likely.

I considered buying an ETF/ETN focused specifically on cattle future prices. I am not allowed to trade futures and derivatives in my IRA. The ETN iPath Dow Jones UBS Livestock Subindex Total Return (Ticker COW) appeared to fit the exposure until I looked at its performance. In 2011 retail beef prices increased over 10% but the price of COW actually declined. 

I have a ~2% position in my IRA in Tyson Foods (Ticker TSN), one of the largest beef producers in the world as well as chicken and pork. The stock has performed reasonably well since I purchased it in October 2011, trades below 10x the consensus 2012 EPS estimate, and has a consensus recommendation of Overweight. Originally I had established the position to play falling corn prices, enabling the company to expand margins. This thesis may continue to play out as corn prices remain off their 2011 peak, in my view. Management gave a presentation in December outlining a close relationship between beef revenue and cattle prices. The company also has a strong presence as an exporter. One of the main risks, in my view, is that Tyson cannot pass along higher prices to the consumer as retail grocers like Albertsons push back against price increases. I expect price increases in the U.S. to eventually go through and export growth to provide extra juice for the company.


I decided to expand my position in TSN to ~4%.


Tyson Foods reports earning this Friday before the market open.