How To Trade Rising Beef Prices

By Casey Murphy | September 02, 2014 AAA

After a summer of rising meat prices due to extremely dry conditions in the U.S. Midwest, pricing pressure started to wane in early August. However, based on the chart of the Dow Jones-UBS Live Cattle Subindex, it appears that a reversal is underway and that higher prices could be on deck.  

Based on the chart below, you’ll see that beef prices are trading within a defined uptrend. From a trading perspective, the ascending trendline (marked by the blue dotted line) and the 200-day moving average have both acted as strong levels of support. These levels are used by bullish traders looking for strategic entry positions. In most cases, these traders would likely protect their long positions by placing a stop-loss order below one of the two areas mentioned depending on risk tolerance. (For more, see: Learn To Corral The Meat Markets.)

Last week’s bounce off the support levels triggered another technical buy signal when the MACD indicator crossed above its signal line (shown by the blue circle). Combing with the MACD buy signal with a rising Relative Strength Index it suggests that there is room for prices to move to the upside and we could very well see another move toward July’s record highs. (For more, see: Commodities: Live Cattle.)

Increasing Exposure to Beef Through ETNs

For retail traders who do not have a futures account, the most popular tool for gaining exposure to beef prices is to trade the iPath Dow Jones-UBS Livestock Subindex Total Return ETN (COW). For those who aren’t familiar with this ETN, it is designed to track the performance available through an unleveraged investment in futures contracts on livestock commodities. The index is not technically a pure play as it relates to beef prices since it consists of both lean hogs and live cattle. However, based on the chart below and given the state of the underlying fundamentals of the meat market, it appears this fund could be worth a closer look. (For related reading, see: How To Trade Rising Pork Prices.)

Taking a look at the weekly chart, you’ll see that the price is currently testing the support of an ascending trendline and its 200-week moving average. Based on the analysis of live cattle prices above, current levels could be an ideal entry point for long-term position traders. Analyzing the risk/reward of this trade, traders would likely set their stop-loss orders below the moving average, which is current trading at $29.03. (For more, see: ETF or ETN? What's The Difference?.)

Tyson Foods

When it comes to the meat market, one needs to look no further than Tyson Foods Inc. (TSN). The company was founded in 1935 and is one of the world’s largest processors and marketers of meat products such as pork, chicken and beef. According to its 2013 fact book, beef sales consist of 41% of the company’s overall revenue, and during fiscal 2013 the average weekly production of beef was 135,000 head of cattle. The size of Tyson's operations lend it economies of scale that other food companies can only dream of, and based on the five-year weekly chart below, you can see that this translated to a rising share price. (For more, see: How To Invest In Commodities.)

The Bottom Line

Consumers got a rest from rising beef prices in early August, but recent price action suggests that a reversal may be underway. Buy signs from the MACD indicator and support from long-term moving averages are suggesting that now is an ideal time for bullish traders to consider increasing their exposure to cattle. (For related reading, see: Trading The MACD Divergence.)

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