It seems that vegetarians may get the last laugh after all. Believe or not, we’re in the middle of bacon shortage. A series of factors have continued to push pressure on livestock prices, resulting in some of the biggest gains for the agricultural commodities sub-sector in decades.
Those gains could keep coming for the foreseeable future. Rising demand from abroad for American beef, chicken and pork means higher meat prices here at home. However, investors don’t need to sit idly by and take the price inflation. There are plenty of ways to beef up your portfolio.
Rising Beef and Pork Prices
Most broad commodity funds, such as the iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG), haven’t exactly been top performers over the last few years. It seems that all the natural resource attention has gone into the livestock sector. Prices for livestock continue to surge to new highs.
So far this quarter, lean hog prices have popped nearly 51%, while beef prices have surged to an average retail cost of $5.28 per pound. That's up nearly 25% since January and is the highest price since 1987. Even chicken wings - every sports fan’s favorite - have seen their prices surge by 8.9% during the first quarter. The reasons for the surge have been a combination of both short- and long-term factors.
On the short side, the drought that began in 2012 continues to wreak havoc on the agriculture sector. It sent more cows to slaughter earlier than expected. While the drop in beef prices in 2012 was welcome, the resulting smaller herds pushed up prices in 2013 and now 2104. Texas, which produces 80% of the country's beef, now has the smallest herd on record in the last 63 years.
The drought's effects have also pushed up prices for corn and soybeans. These grains are two of the major sources of animal feed. Corn is up nearly 16% this year. Those costs eventually make their way back into underlying livestock prices. Likewise, an outbreak of porcine epidemic diarrhea virus has reduced herd sizes.
Then there is the long-term factor of rising demand from Asia.
A wealthier emerging world is demanding a greater variety of protein in its diet, and that means meat. Despite its lower (but growing) income per capita, China's citizens eat six times more pork than Americans and are now the world’s largest consumer of hogs. Demand for beef in Japan continues to rise, as well, while India has seen its chicken consumption skyrocket over the last few years. These demand pressures only turn up the heat for prices.
Making Some Bacon
Overall, the livestock sector is facing a classic supply/demand problem, one that could persist for some time to come. For investors, that could mean loading up on plays in the commodity sub-sector. The Market Vectors Agribusiness ETF (NYSE ARCA:MOO) and PowerShares DB Agriculture (NYSE ARCA:DBA) are still the best overall agriculture plays. For investors looking at livestock-specific bets, there are plenty of individual picks.
A prime choice is the iPath DJ-UBS Livestock TR ETN (NYSE ARCA:COW). Clever ticker aside, COW tracks both live cattle and lean hog futures. The futures contracts are spread across two constant maturities of three months and six months. COW charges just 0.65% in expenses and is up about 14% for the year. The ETN also provides negative correlation with the S&P 500 making COW a good diversifier. The UBS E-TRACS CMCI Livestock TR ETN (NYSE ARCA:UBC) can be used as well.
Another option could be to bet on domestic meat producers such as Austin, Minn.-based Hormel Food Corp. (NYSE:HRL) and Springdale, Ark.-based Tyson Foods, Inc. (NYSE:TSN). Given their product lines and vast sizes, both HRL and TSN should be able to pass incremental price increases onto consumers with relative ease. Another potential winner could be Greeley, Colo.-based chicken producer Pilgrim's Corp. (NYSE:PPC). Higher prices have caused many U.S. consumers to trade down to chicken as their main animal-protein source.
A non-U.S. company to consider is Chinese hog producer Tianli Agritech, Inc. (Nasdaq:OINK).
Finally, the real reason for rising livestock prices is feedstock costs. The Teucrium Corn (NYSE ARCA:CORN) ETF and Teucrium Soybean (NYSE ARCA:SOYB) ETF allow investors to profit from rising feed costs that will trickle down to the livestock sector.
The Bottom Line
A combination of factors is pushing up beef and pork prices and should continue to do so for the foreseeable future. That means it’s time to bet on the livestock sector.