As an investor you’re a detective by default – you may prowl for signs on a chart, dig into a balance sheet for hidden clues, or maybe you stumble across anecdotal evidence that triggers an investment idea. Perhaps occasionally it’s a combination of things you’ve patched together. Searching for these clues as the second half of 2013 develops, I’ve found myself asking – how far does the market have to drop in order for “margin debt” to become an issue? If the economy were to stumble, what would Apple’s success mean? You start wondering – why is the supermarket selling 12oz packages of choice steaks when they used to sell 16oz ones for the same price? This leads me to my 3rd theme to watch – Beef. And beef prices.
These longer-term themes may not play out in the day-to-day of high frequency trading, and may test an investor’s resolve, but occasionally trends can be real drivers of gains over time if they are “caught right”. As Warren Buffett is fond of saying, “In the short run, the market is a voting machine. In the long run, it’s a weighing machine.”
Why watch beef? Watch beef as a gauge of US consumer strength. Watch beef prices as an indicator of commodity pricing power. Keep an eye on the cattle industry as it may be a harbinger for issues soon to be felt in other semi-related areas, and obviously to gather awareness of implications that arise for companies whose businesses may experience shocks due to price or supply changes.
Beef prices spiked in early 2013, perhaps due to a strengthening economy, but chiefly due to continued drought in bellwether cattle states like Kansas, Nebraska and Texas (Australia is experiencing their own crisis, but we’ll focus on the domestic). This year’s feed supply and cost problems are coming on top of previously frustrating years due also to drought as well as ethanol’s expansion. The smallest U.S. cattle herd in 60 years is the end result, which comes despite beef exports recently setting new records. Source: USDA National Agricultural Statistics Service.
Investing ramifications due to changing cattle industry trends could range from the obvious to the not-so-obvious. First, let’s address the single largest buyer of beef in the United States – McDonalds (MCD). They’ve recently started to phase out their premium Angus burgers and their preoccupation with beverages, salads, and apples smells more like margin-compression avoidance than it does the public’s clamoring for “healthy options.” Other companies with high beef inputs could also see effects, especially ones using choice cuts like Texas Roadhouse (TXRH), in addition to leading cattle processors like Tyson Foods (TSN).
As beef prices have risen, and domestic cattle supplies have become more constrained, cousins to beef have also been affected. Immediately, consumers have turned to substitutes such as pork, which was a standout performer during 2013’s first half. Perhaps these supply issues have prompted China’s Shuanghui International in their attempt to takeover the United States’ leading US pork producer – Smithfield Foods (SFD). Next in the protein line is chicken, which has experienced a doubling of some prices over just the past couple years.
Less obvious implications (and perhaps longer-term) even exist for companies like Coach (COH), auto-manufacturers and other users of cowhide. Do premium beef prices push more fence-sitters into becoming vegetarian, or at a minimum, continue to reduce their propensity to consume red-meat? That could prove a recipe for companies like Whole Foods or even a restaurant chain like Noodles & Co. If the Millennials are shunning home and car ownership because they can’t afford it, isn’t beef the logical food to shun?
That the cattle herd has not increased in light of higher prices and surging exports is disturbing and a signal that the traditional economics of the cattle industry may no longer be applicable. Things do change. In 1976, per capita beef consumption in the United States peaked at 94.3 lbs. per person. In 2011, it was only 57.4 lbs. per person and still falling (source: USDA). First of all, if a reduction is red meat is better for you, shouldn’t the U.S. be looking a bit more svelte? Secondly, and more seriously, is beef slowly becoming the new lobster?
This is a very important commodity for many different reasons and 700 words won’t do justice to the upheaval much of the cattle industry is going through. Beef is technically not a necessity, but it does weave its way into our lives within many products, and can serve as an important gauge of consumer strength, behaviors, and tastes. Beef is a product that can quickly affect a number of other substitutable products, and in addition, it’s also experiencing massive change due to a changing climate. For all of these reasons, I would highly encourage you to keep this industry on your radar screen and watch those beef price.
Heart Capital does not offer investment advice via this medium. Under no circumstance whatsoever do these postings, opinions, charts, or any other information represent a recommendation or personalized investment, tax, or financial planning advice.
Twitter: @heartcapital and @seeitmarket
No position in any of the mentioned securities at the time of publication.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
