CHICAGO (Dow Jones)--U.S. consumers looking to satisfy their carnivorous cravings after the economy eventually heals will be greeted by less red meat, which bullish Chicago Mercantile Exchange livestock traders are betting will be a boon for futures and related cash cattle and hog prices.
"Supply is a lot easier to sink our teeth into because we have numbers to back it up and guys are building that into the deferred hog contracts right now," a brokerage firm's hog trader said. "But, the economy is really clouding the demand side of the equation moving forward."
The U.S. Department of Agriculture's monthly cattle-on-feed report that was released in January implies a 7% year-over-year reduction in cattle numbers in the coming months. USDA's December quarterly hog survey suggested a 3% decline in hog slaughter for 2009 versus last year.
In both cases, high feed costs were largely seen to blame for eroding producer profits and resulting in herd liquidation.
Unfortunately, meat demand has been caught in the crosshairs as consumers target ways to get more bang for their buck. Shoppers are hunting for cheaper protein alternatives, a move that has lured some of them away from high-end beef and pork cuts.
Nonetheless, bullish traders are already re-building lean hog and live cattle's once-shaky foundation, using the prospect of resurgent consumer spending as mortar. A sign of a possible bullish livestock-supply scenario is being played out between spot-month cattle and hogs and their more distant trading contract cousins.
Spot-February live cattle on Wednesday settled at 84.52 cents per pound, compared with its February 2010 counterpart at 92.20 cents. And, 2009 February hog futures on Wednesday posted a 57.60-cent settlement versus the 70.80-cent close a year away.
Harry Balzer, vice president of consumer marketing research firm NPD Group Inc., said that, through good times and bad, consumers typically are driven by products that make their lives easier or cost less, which allows them to disperse their incomes over a wide variety of items.
The country's financial dilemma, said Balzer, forced customers to temporarily put on hold those things to which they had become accustomed. Once the economy gets back on track and consumer cash flow is restored, however, shoppers will revert back to their original buying habits, he said.
"This is just a short-term blip in a long-term trend," said Balzer.
Balzer points out that long-standing brand companies such as Kraft Foods Inc. (KFT) or ConAgra Foods Inc. (CAG) wouldn't be in existence today if consumers permanently changed as much as some people believe they have. Otherwise, he said, you would wind up with a different set of companies.
Joe Ocrant, president of Oak Investment Group, said cattle futures continue to build in a supply-side bull market because of shrinking cattle-breeding stock compared with last year. Had the economy been thriving, he said, cattle futures and cash prices would be significantly higher because of reduced live supplies.
Ocrant and others agree that some consumers may permanently adopt a "different" lifestyle as a consequence of economic belt-tightening measures. But, he said, avid meat-eaters who resorted to eating something else other than meat because of budgetary constraints tend to go back to buying meat protein when they are able to again afford it.
"The supply-side bull market will be intact and, when the economy turns around, whether that will be six months or two years from now, we're not going to find the number of animals that we normally have," said Ocrant. "And, thus we'll get a sustained prolonged bull market because the supply is not going to be there to satisfy demand."
Source: Theopolis Waters, Dow Jones Newswires; 312-341-5778; theopolis.waters@dowjones.com