Cattle Market: Will Drought Keep Prices Up?

| July 2, 2015 | 0 Comments

cowsCattle Market Gives A Firsthand Lesson In Supply/Demand Balance…

As I mentioned earlier this week, I’m writing to you from the outskirts of a small rural community in Western Montana.

It’s a beautiful location.  Tall green grass as far as the eye can see, tree lined hills on either side of the valley, and majestic snow capped mountains 15 miles to the south.

Words really can’t adequately describe the natural splendor.

Of course, I’m biased since this little slice of heaven is my childhood home.

But there’s trouble brewing in my neck of the woods this summer…

The past few months have been remarkably dry in Western Montana.  Essential precipitation skipped over our region during the pivotal spring growing season.

And now a record-breaking heat wave is parked over the entire Northwestern US.  Temperatures soared to nearly 100 degrees the past few days.  It’s very rare to see that kind of heat in Western Montana- much less in late June.

Here’s the deal…

The extended dryness and high temperatures have stunted the growth of essential mountain grasses needed to feed our cows this summer.

You see, ranchers in our area move their cattle herds to high mountain pastures in the summer months to graze the usually abundant grass.  In the meantime, grass in the irrigated pastures on the valley floor are cut, baled, and stacked in preparation for the long winter ahead.

It’s a cycle that repeats itself every year.

But this season’s scarce mountain vegetation is going to cause big problems for ranchers this year.

With insufficient feed to last the summer months, cows will likely have to come out of the mountains early.  What’s more, the calves scheduled to be sold this Fall will likely be underweight due to inadequate grazing conditions.

Of course, Western Montana ranchers aren’t the only ones having water issues…

Cattle producers across the entire Western US have faced drought related problems the past few years.  In many cases, ranchers have been forced to cull their herds due to lack of feed.

Unfavorable weather conditions have contributed to a phenomenal surge in cattle prices.  Since early 2013, feeder cattle have exploded from a $1.30 a pound to record highs just over $2.20.

But the ongoing Western US drought is just part of the story…

The main underlying trend sending prices higher in recent years is the remarkable weakness in US cattle numbers.  Recent USDA supply numbers reveal the total US cattle herd is still hovering near 60-year lows, as it has been for the past few years.

That’s right, the last time the US cattle herd was this small was back in the early 1950s!

Of course, consumers are feeling the pinch in the grocery isle because of it.  The price of retail beef has soared the past few years right along with the price of wholesale cattle.

Is there any relief in sight?

It’s debatable.

On one hand you have industry experts predicting US ranchers will start rebuilding their herds in response to higher cattle prices.  Once numbers start trending higher, prices should start easing in response.

While this is certainly true of the commodity price cycle, Mother Nature isn’t making it easy.

The most recent US Drought monitor says it all…

7215drought

In my neck of the woods, there’s no way we could take on more cattle- we’ll barely have enough feed as it is.  And I bet a lot of ranchers in drought stricken Western US states are in a similar situation.

From my perspective, the expected rebound in the US cattle herd will likely take a bit longer than experts predict. 

Why am I telling you all this?

As a commodity investor, it’s important to realize just how delicate the balance is between supply and demand in the commodity space.

It doesn’t matter if it’s cattle, cocoa, or corn- lack of supply, or the expectation of it, will send prices higher.

Of course, it works just the opposite as well.  Excess supply, or conditions that lead to excess supply, will also be priced into the market.  The dramatic downturn in oil prices the past year proves that point.

But what amazes me time and again, and I’ve been in this business a long time, is how something as simple as a lack of rain in one region can have such a remarkable influence on the price the entire world pays for a specific commodity.

Without question, understanding the delicacy of the global supply/demand balance is key to being a successful commodity investor. 

So stay tuned to Commodity Trading Research, where we’re constantly monitoring the supply/demand balance of many commodities, and the profit opportunities that go with them!

Until Next Time,

Justin Bennett

BIO:  Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com.  With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them.  Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.

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Category: Commodity Trading, Livestock

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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