Commodity ETF Alert September 2011 Issue

| September 13, 2011 | 0 Comments


One of my favorite summer pastimes is throwing a few steaks on the grill…

The tantalizing smell of choice rib-eyes sizzling over an open fire makes my stomach growl with anticipation.  For me, that first juicy bite of steak is one of the best tastes in the world.

Of course, those tender rib-eyes have to come from somewhere.  And it’s US cattle ranchers who work hard to supply most of the beef you find in the local supermarket.

But ranchers have had a tough go the last few years…

The financial crisis of 2008 and the recession that followed sent cattle prices into the gutter.

In fact, live cattle prices dropped a staggering 23% from 2008 highs- to $0.80 a pound in mid 2009.

Those low prices made it hard for cattle producers to make ends meet… input costs were high, while cattle prices were low.

What’s more, the recession put a damper on beef demand…

A slab of meat is one of the more expensive products on the grocery aisle.  And the weak economy had many consumers looking for cheaper alternatives.

The double whammy of cheap prices and weak consumer demand gave cattle ranchers a very tough go in 2009.

As a result, many ranchers went into survival mode…

They whittled down their cattle herds to cut costs.  But herd reduction led to excess supply running through mid-western US sale rings.  And that kept live cattle prices under $0.90 a pound for nearly all of 2009.

However, 2009’s dire conditions set up a 2011 turnaround…

The January 2011 US Department of Agriculture (USDA) cattle inventory report revealed total US cattle numbers were at their lowest level since 1958.

And according to a more recent USDA July inventory report, the total US cattle herd is now sitting at a record low 99.9 million cows and calves.  That’s down 1.4% from last year and it’s the lowest mid-year cattle inventory report since 1973- when the USDA first started tracking the data.  These low inventory numbers have cattle prices picking up steam.

And prices are set to rise even further…

A record-breaking drought is literally torching the Southwestern US.  In fact, Texas is experiencing its hottest summer on record.  The record heat has ranchers’ water tanks drying up and vegetation turning into dust.

Obviously, that’s very bad news for the Texas cattle industry…

With little feed and water for their cattle, many ranchers are now forced to liquidate their herds.  And that’s setting up an even bigger cattle supply crunch for 2012.

You see, Texas is one of the largest cattle producing states in the nation.  And when 2012 rolls around, the Texas calf crop will be substantially lower… which means future cattle supplies will be hindered even further.

What’s more, all these supply worries come at a time when beef exports are at record highs.

In fact, March 2011’s beef exports came in at $475 million… the highest beef export value ever. 

Where’s all this beef going?

Mexico and Canada are the biggest buyers of US beef, as they have been for years. But Asia’s accounting for most of the US export demand increase.

In fact, Japan imported 38 million pounds of US beef in June 2011… the highest level since 2003.  And beef import volumes in South Korea and Hong Kong’s are up 73% and 82% respectively over last year.

Clearly, US beef exports are surging!

Here’s the upshot…

US cattle inventories are at record lows while US beef exports are at record highs.
And with the severe southern drought leading to even more herd reductions… cattle prices are set to move even higher.

What’s more, cattle prices are likely to remain higher for some time.

They’re not likely to level off and start dropping until US cattle producers can strengthen their herds (which requires withholding even more cattle from the supply chain).

And industry experts don’t see that happening until the end of 2012… at the earliest. Until then, cattle prices should remain in a strong uptrend.

Let’s jump on this bullish cattle trend now before prices really take off.  Here’s how we’ll do it…


By far, the easiest way to invest in cattle is the iPath Dow Jones-UBS Livestock Subindex (COW).  COW is an exchange traded note (ETN) which reflects returns potentially available through investments in live cattle futures.  COW is currently made up of 62% exposure to live cattle futures and 37% lean hog futures.


Take a look at the chart…


COW is currently trading at $29.66.  As you can see, COW dropped quickly in April as the live cattle market pulled back from all-time highs.  But now, prices are rebounding as supply concerns overtake the market.


iPath Dow Jones-UBS Livestock Subindex (COW) is trading at $29.66.
Buy COW up to $30.50 per share.
Our profit target is $36.00 or more.
Don’t forget your position sizing.

Commodity Review

Energy JJE $20.75 $18.56    11.8%
Grains JJG $52.98 $48.88      8.4%
Industrial Metals JJM $41.46 $40.59      2.1%
Precious Metals JJP $103.89 $98.78      5.2%
Softs JJS $84.37 $74.28    13.6%
Livestock COW $29.74 $29.97    -0.8%
All Commodities DJP $48.28 $45.65     5.8%


There’s still plenty of uncertainty about the strength of the US economy, not to mention a ton of fear over Europe’s debt crisis.  All these worries translate into incredible volatility in the oil market.

But our trade in oil is working nicely…

Remember, we purchased USL when West Texas Intermediate was trading just over $80 a barrel.  As of yesterday’s close, oil was trading just under $89… and our position in USL is up 5.5%.

So where does oil go from here?

It all comes down to economic headlines.  If we get more news of weakening economic conditions in the US, then oil may retest the $80 level.  But if there’s any sign of the US avoiding another recession, you can bet your bottom dollar oil is going higher.

As for natural gas, it can’t get much worse than it is right now.  Prices have been hovering just under $4 MMBtu for nearly a month now.

But consider this…

From mid October 2010 to late January 2011, natural gas prices rallied 45%.  There’s a good chance of another rally this fall as higher winter usage expectations are built into the market.

Consider buying UNL up to $31 if you haven’t already…


The United Nations in concerned about world corn supplies…

In fact, the UN slashed its 2011-2012 corn forecast by 13.7 million tons due to a now weaker than expected US corn crop.  That has corn prices trading near all time highs once again.

Watch corn closely in coming weeks… we may see a breakout above the $8.00/bushel level.


Not surprisingly, industrial metals remain weak…

The uncertain global economic picture has investors unwilling to bid up these hard commodities.  Our copper position (JJC) is sitting at multi-month lows while palladium (PALL) remains stuck in neutral due to fears of a slowing auto sector.

In my opinion, these two commodities are pricing in a worst-case scenario for the world economy.

But remember, there’s still no hard evidence of the US economy entering another recession.  What’s more, emerging markets are still growing like crazy.

If the European fears can be put to rest, we should see a big rally in both of these commodities.  Continue holding JJC and PALL for a bounce to higher prices…


Gold recently surpassed $1,900 an ounce before pulling back.  Remember, we sold half our IAU position in our last trade update for a sweet 37% profit.  We’re holding the remaining half for further upside, which I think will come in due time.

However, given the uncertainty in Europe, gold will likely be extremely volatile in coming weeks.  Don’t be surprised to see gold fall if investors keep pushing the US dollar higher as they’ve done in recent weeks.

Whatever you do, don’t let wild market gyrations shake you out of our remaining position in IAU.  I still believe global fundamentals support much higher gold prices in the long run.

Meanwhile, silver is slowly establishing a new uptrend…

Prices are once again peaking over the $42 an ounce level.  And that’s a great sign confidence in this market is returning after the brutal sell-off earlier this year.

Keep holding SLV for further upside…


Soft commodities are showing strength recently…

Maybe you remember, I said to look for buying opportunities in lumber, cotton, and coffee in our last monthly trade alert.

Cotton hasn’t done much, but lumber and coffee have risen nicely.  In fact, lumber is up a nifty 8% over the past few weeks.  And coffee, not to be outdone, is up nearly 12% since its mid-August lows.

I’d be surprised to see lumber rise much more due to the ongoing US housing fiasco. But coffee should hold onto recent gains thanks to strong global demand.

Portfolio Changes

  • This month we’re adding cattle (COW) to the portfolio.  See above for all the details.

Category: Commodity Trading

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.