I’ve learned that the beef processing facilities have been backlogged for weeks due to the fact that ranchers can’t keep their cattle fed, so they’re having them slaughtered instead. This has the short-term effect of thrusting beef prices into alarmingly low territory, and it’s also decimating the cattle population across Texas. If this drought continues, many Texas cattle herds could be down to just twenty percent of their normal size. And even those remaining cattle aren’t looking well fed these days. Most ranchers can’t even afford to bring in the hay, either, because fuel prices make hay transportation extremely expensive. You can’t spend $100 a week feeding a cow that, right now, fetches less than $1,000 at the auction.

Although cattle prices are extremely low right now, this is all going to drive the price of Texas cattle into the stratosphere over the next 1-2 years. One rancher even told me he thought a head of cattle might reach $3,000 in the medium term. Ultimately, this means huge increases in beef prices over the next several years, at least if that beef comes from Texas cows.

I’ve currently shorted a few contracts of live cattle at the 121.000 level with a very tight stop at 123.000. To currently hold one contract of live cattle you will need $1620 which is very reasonable. I do not often speculate in the futures market but sometimes one needs to capitalize on extreme supply/demand inefficiencies.

About these ads