The U.S. Department of Agriculture (USDA) began tracking the size of the nation's herd of cattle back in 1973. Since then, it has never noted such a severe plunge in the number of cows -- until now. Ranchers are expected to raise only about 99.4 million head of cattle this year, the lowest level on record. Blame it on corn and record drought. Prices for this basic feedstock have risen so sharply and the ongoing drought across the South has been so severe, that many ranchers are bringing their cows to auction, causing supply to dwindle.
As ranchers cull their herds, an interesting dynamic is setting up that should have investors taking notice. In coming weeks and months, consumers will get a dose of sticker shock as they shop for beef products. Restaurants will feel a similar strain. Pork and chicken -- and the companies that produce them, will most likely move back into vogue as demand shifts.
Wholesale ($1.92 per pound) and retail ($4.44 a pound) beef prices are at levels not seen since 2004 and look headed even higher in coming months as fewer cows are slaughtered and supply shrinks. Prices are also surging because beef exports are up nearly 30% this year, thanks to the weak dollar. But what should really interest investors is that the price spike is likely to boost the relative appeal of pork and chicken. Simply put, it may soon become too expensive to serve up steaks and burgers to the family, so pork and chicken dinners could be the alternative.
This is great news for pork and chicken breeders. The rising price of beef means they can sell more of their products, or even raise prices and still remain well below beef prices. For an industry that has had a hard time sustaining profits, 2012 could shape up to be a banner year, so this should a good time for investors to take action. Analysts that track pork and chicken producers are only beginning to raise their profit forecasts, but get ready for a steadier stream of upward revisions as the supply, demand and pricing dynamics for 2012 come into sharper focus.
Forget the chicken titan
You would think that Tyson Foods (NYSE: TSN), the world's largest supplier of chicken, would make for an ideal pick. Trouble is, Tyson has steadily expanded into beef in recent years and isn't the chicken "pure-play" that many might suspect. Beef now accounts for 34% of Tyson's sales.
Three other livestock processors, however, should more likely benefit from the rising appeal of pork and chicken.