Cattle and natural gas

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Jan 20, 2014

Cattle Prices Explode

Cattle prices bolted to an all-time high again this week, driven by ongoing fears of a nationwide cattle shortage created by recent droughts that cut off the animals’ feed supplies. This week's rally was partially attributed to meatpackers and retailers who had been holding off on purchasing beef in hopes of lower prices. As prices rose, panicked buyers flocked to the market, pushing prices higher yet, gaining over four cents per pound during the week, reaching as high as $1.41.

As prices rise, consumers may shift to less expensive meats like pork and poultry, hurting beef demand, which could drive prices lower. On the other hand, a strengthening US economy could put more money in consumers' pockets, allowing them to continue paying up for burgers and steaks.

Natural Gas Heats Up

During the recent onslaught of wintry weather, traders’ attention focused on natural gas demand. The US Department of Energy released a report Thursday showing that our nation used up a record amount of natural gas last week during the storm, consuming an unprecedented 287 billion cubic feet of the fuel. As a result of the report and expectations for continued strong heating demand, natural gas futures lifted to a three-week high at $4.49 per million British thermal units.

The rally may be tempered longer term as vast reserves of gas are tapped utilizing hydraulic fracturing or “fracking” in the Marcellus region of Northeast United States. The process extracts gas from deep layers of underground rock using sand, chemicals, and large amounts of water. Though controversial, the rapid expansion of fracking has quickly created a surplus of natural gas.

Law of Supply and Demand

Natural gas prices are being tempered by abundant supplies despite increasing demand. In contrast, we can’t make enough beef to meet demand right now, so meat prices are skyrocketing. High prices inevitably cause two things to happen: demand is killed, and producers (ranchers) are stimulated to produce more to capture the profitable high prices. The relatively low price of natural gas and burdensome supplies coming on stream would typically be expected to reverse as demand is stimulated for the cheaper energy source and the producers (drillers) slow down production.

Longer term, these market forces should make cheap commodities go up and expensive commodities fall in price. Hence the proverb we all learn as commodity brokers and traders: “the solution to low prices is low prices, the solution to high prices is high prices.”

 

Opinions are solely the writer's. Walt Breitinger is a commodity futures broker in Valparaiso, Ind.  He can be reached at (800) 411-3888 or www.indianafutures.com. This is not a solicitation of any order to buy or sell any market.

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Alex Breitinger

 

Breitinger & Sons, a division of Paragon Investments

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