Park Your Money in Beef

 | Nov 30, 2011 | 11:02 AM EST  | Comments
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It's a risk-on, risk-off investment world to the extreme. Correlations among all kinds of asset classes -- stocks, commodities and currencies -- have rarely been higher. Livestock is one of the exceptions and remains one of the few asset classes that still sings to its own investment tune.

Just look at how the iPath ETN DJ-UBS Lvstk A (COW), an exchange-traded note (ETN) that tracks the price movements of cattle and hogs through the performance of the Dow Jones-UBS Livestock Total Return Sub-Index, has outperformed the S&P 500 over the last six months.

And when you think about it, it makes sense. It'd be hard to find a connection between, say, the price of Apple (AAPL) and farm animals designated for slaughter.

Over the last 12 months, the price of cattle has been going straight up. Prices for steers of market weight reached $127.50 last week. The November price for cattle leaving Nebraska feedlots a year ago was $99.80. Put another way, the value of a semi full of cattle -- about 38 or 39 head -- today stands at about $65,000. That's up about $15,000, or about 30% higher compared to a year ago.

You may have noticed the impact of these increases in your own shopping basket. Retail beef prices have risen more than any other major food group. The national average price of a pound of 80-89% lean ground beef is $3.22, up from $2.42 last year.

Beef supplies are shrinking as ranchers reduce the size of their herds. The cattle herd in the United States totaled 100-million head on July 1, the lowest for that date since at least 1973. Texas cattle ranchers are culling the most breeding cows ever this year, as the worst drought in Texas history has forced them to shrink livestock herds rather than incur higher costs to buy feed grain.

Meanwhile, demand for beef from Asia is exploding. Beef exports this year through August were already up 27% and the recent approval of three U.S. free-trade agreements with South Korea, Colombia and Panama will only boost sales further. The U.S. Meat Export Federation expects beef shipments to climb by about $517 million, or 13%, over the next 15 years as duties on U.S. shipments are phased out.

Throw in the fact that livestock has also been resilient during previous recessions and livestock seems as good a place as any to park your money.

Until relatively recently, you'd have to set up a futures account profit from these movements. Today, you can bet on livestock through COW. As of Oct. 31, 2011, the performance of COW is linked 62.99% to the price of live cattle and 37.01% to lean hogs.

A word of warning. Although it's been a terrific relative performer, the performance of COW has lagged the sharp price rises in cattle I cited above by a wide margin. If you really want to get the biggest bang for your investment buck, you'll need to set up that futures account to trade the live cattle and lean hog contracts directly.

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