Meat: A Tasty Investment Opportunity

Two years have gone by since the first signs of this crisis started to appear, with no clues about what the world was going to face. But, as many of us optimistic people like to highlight, every crisis is an opportunity, and this one especially is a big one. With almost every newspaper, TV channel and blog talking about what’s happening, plenty of topics are being discussed and new investment ideas are beginning to appear. One of the most repetitive topics deals with the US’s future once the crisis is over and how the world is going to manage if this country is not able to keep the leadership.

Many people imagine a long term scenario in which currently emerging markets (especially China, India and Brazil) overthrow the US and Europe’s supremacy. For example, as concerns on dollar strength begin to appear, some specialists argue that China needs to take the leadership roll and prepare its currency for replacing the international currency. I’m not so confident about the currency change since I believe it would be a devastating moral impact to investors, although I have no doubt that in the near future China will become the most important economy. In this entry, I’m going to emphasize China and meat exports to that country, revealing how investing in any place of the production chain could be a valuable investment for the future.

To start with, it is important to imagine and have a clear picture of the dimensions of China’s growth and vastness in every economic and social aspect. To avoid making this too long to read, I will elaborate on three indicators that I consider the most significant. On the one hand, I want to focus on China’s projected economic and population growth:

click to enlarge images

As we can see in the projections, China will continue to grow at a high and sustained pace (year GDP growth of 10%) and its population will start growing at a higher rate than it did in this decade. What is important about this data is that as its population continues growing, the country will continue to need a huge supply of food from other countries. If its population reaches 2025 estimates (260 million more), the country will need to increase its food demand by 21%. The economic growth shown in the graph will help China’s wealth for obtaining the food they need by producing more efficiently and increasing imports from other countries.

To make this information relevant and related to the meat market, is important to emphasize that the Chinese way of living is starting to change. First of all, because they have higher incomes (a new middle class is starting to appear), which allows them to afford more expensive things, such as meat. Second, they are aware that meat is one of the best foods for making their children grow stronger and healthier. Third, many of them are starting to like eating meat.

With this data, it stands to reason that in the near future, there will be an important expansion in the meat market, lead mainly by China, which will benefit the smartest countries. Related to this, one of the countries which is trying to increase its market share is United States. Forecasts from the U.S Meat Export Federation shows that in 2010 there will be a jump in beef exports to China, reaching 60,000 metric tons per year.

I believe it is clear why I am optimistic in investing somewhere in the meat market. I am not sure whether it is the right time to make the decision or not, because it depends where are you planning to invest. Since the possibilities vary from investing in a farm with the purpose of breeding the cattle to buying some shares from an ETF that tracks livestock (AIGL, COW), it all depends on the risks the investor is willing to take. Taking the first option requires living in a country where you can breed good quality cattle, having a year without any climate effect (flood or drought) among other external factors that increase business risk.

The second option will give smaller returns but, at least, allows everyone to take a share in this growing market. As I mentioned before, the opportunity exists in every part of the supply chain: the producers, who breed the cattle until they sell it; the firms responsible of carrying the cattle to another country (China could ask for livestock instead of processed meat), buying shares from big cattle producers (Tyson Foods - TSN, Sanderson Farms - SAFM) or from ETFs related to the business. It all depends on the investor.

Disclosure: No positions

Comments

[Roy Manning:]

HOGS (Zongpin) is an excellent meat investment. They are expecting revenues to grow 50% and net income over 30% this year. HOGS is a chinese company that specializes in processing pigs and selling prok through supermarkets and its own Chain of stores. It is listed on the Nasdaq exchange.

Apr 13 08:51 AM

[Gonzalo:]

Thank you very much for your data. I only knew about US meat exporters which could benefit, but this is an excellent recommendation. I will take it into account.
Thanks again.

Apr 13 10:31 AM

[Joseph Sherman:]

Great article. Meat producers should consider how to move from a commodity based product to having a tribe around their meat. What makes you stand out?

Apr 13 11:29 AM

[Jordan Rizzuto:]

Feed costs will increasingly influence livestock companies' profitability in the coming years. The spike in grain prices last year crushed margins and forced many producers to liquidate inventories. You can track daily and seasonal influences on grain prices at stormx.com/agriculture.

Apr 13 12:01 PM

[optionsgirl:]

Check out Chinese stocks SEED and FEED. Check out the etf MOO.

Tyson is building a plant to render meat fats and by products into bio fuel. The company they have partnered with is SYNM- check them out, too.

Apr 13 02:43 PM

[optionsgirl:]

Also, check out Brazilian company SDA. They had a lousy quarter. Got caught up in derivatives.


On Apr 13 02:43 PM optionsgirl wrote:

> Check out Chinese stocks SEED and FEED. Check out the etf MOO.<br/>
>
> Tyson is building a plant to render meat fats and by products into
> bio fuel. The company they have partnered with is SYNM- check them
> out, too.
>
>

Apr 13 02:45 PM

[Gonzalo:]

Hi Joseph, thanks for reading. I totally agree with you, meat producers will need to re think this new market and how can they get most profit of it.
Sorry for my ignorance but I didn't understand the question about what makes me stand out, regards what? Why I wrote this article?
Thanks again



On Apr 13 11:29 AM Joseph Sherman wrote:

> Great article. Meat producers should consider how to move from a
> commodity based product to having a tribe around their meat. What
> makes you stand out?

Apr 14 09:55 AM

[Gonzalo:]

Jordan Rizzuto:
I agree with you last year grain prices were extremely high, and it could harm meat companies profit but as we can see in the every commodity, the adjustment has been made and today's prices are reasonable. Although it is important to take into account that another important food for China is soy, and if grain prices spike, people will be forced to shift from grains to meat. I'm not sure in what proportions grain prices harm meat consumption. I think it will depend on which grains rise.


On Apr 13 12:01 PM Jordan Rizzuto wrote:

> Feed costs will increasingly influence livestock companies' profitability
> in the coming years. The spike in grain prices last year crushed
> margins and forced many producers to liquidate inventories. You
> can track daily and seasonal influences on grain prices at stormx.com/agriculture.
>
>

Apr 14 10:00 AM

[icy:]

In the 1960s plane loads of cattle for breeding flew from Texas to South American countries, such as Brazil and Argentina. Some of the best beef (on my plate) has been served in Brazil and Argentina lately. These countries import almost no beef from USA today.

Plane loads of breeding stock, more swine than bovine, have been flown from the USA to Pudong in the last three years. Chinese farmers might make more profit raising beef and pork than rice. You might find that in 10 years almost no beef and pork is exported to China. Actually, you might find the US importing beef from China, as their production costs might be remarkably lower than USA's, and grains here have gotten too expensive to feedlot finish beef and pork here, in the manner that was prevalent only 5 years ago; perhaps biofuels?

Apr 15 06:01 AM

[icy:]

If grain prices rise, people do not eat more meat; just the opposite, you need many pounds of grain to grow one pound of meat, if you cannot afford grain to eat, you certainly cannot afford meat (if steel costs too much to market Volkswagens, do people buy more HumVees?)

Cows and hogs can get fat on sorghum (milo) , corn, oat, wheat, rice, ground up cotton seeds, even watermelon if you split the rind, as cows are too stupid to open a watermelon; pigs can open anything if there is food inside. So it does not matter which grains are in short supply; usually the cheapest grains work well. Cows and pigs can eat almost anything and turn it into meat, but great taste comes from interstitial fat, and fat production takes a litttle more protein and a lot more carbs than hay or grass; hence feedlots. And feedlots = grain consumption. So things in the meat business have radically changed in the last 2 or 3 years; the price of tasty meat has gone up because the cost of grain has gone up. You might want to ask which countries can grow cheap grain to figure out which country will export tasty meat. The flavor is in the fat, fat takes grain, lean meat does not pay to export. The cheapest grain producer = the most profitable meat exporter.


On Apr 14 10:00 AM Gonzalo wrote:

> and if grain prices spike, people will be
> forced to shift from grains to meat. I'm not sure in what proportions
> grain prices harm meat consumption. I think it will depend on which
> grains rise.

Apr 15 06:39 AM

[Gonzalo:]

I live in Argentina, so I completely disagree that the best from Texas beef was served in my country. Mainly because we are grain and meat exporters. Ask anyone you know what they eat when they come here: beef.
China has been importing soy since a long time, and I don't see an increasing production of soy because there is something called competitive advantage. For China is cheaper and gets best quality by importing soy from, for example, Argentina. There are some characteristics that allow this to happen, China doesn't have the ideal climate for cultivating soy.
The article was not only for US investors, if grains are too expensive there, firms must be smart enough to diversify their production (Monsanto, with agriculture commodities, has a lot of farms in Argentina because in this country, labour and input material - fertilizers - are way too cheap compared to other countries)


On Apr 15 06:01 AM icy wrote:

> In the 1960s plane loads of cattle for breeding flew from Texas to
> South American countries, such as Brazil and Argentina. Some of
> the best beef (on my plate) has been served in Brazil and Argentina
> lately. These countries import almost no beef from USA today.<br/>
>
> Plane loads of breeding stock, more swine than bovine, have been
> flown from the USA to Pudong in the last three years. Chinese farmers
> might make more profit raising beef and pork than rice. You might
> find that in 10 years almost no beef and pork is exported to China.
> Actually, you might find the US importing beef from China, as their
> production costs might be remarkably lower than USA's, and grains
> here have gotten too expensive to feedlot finish beef and pork here,
> in the manner that was prevalent only 5 years ago; perhaps biofuels?

Apr 15 06:39 AM

[Gonzalo:]

I live in Argentina, so I completely disagree that the best from Texas beef was served in my country. Mainly because we are grain and meat exporters. Ask anyone you know what they eat when they come here: beef.
China has been importing soy since a long time, and I don't see an increasing production of soy because there is something called competitive advantage. For China is cheaper and gets best quality by importing soy from, for example, Argentina. There are some characteristics that allow this to happen, China doesn't have the ideal climate for cultivating soy.
The article was not only for US investors, if grains are too expensive there, firms must be smart enough to diversify their production (Monsanto, with agriculture commodities, has a lot of farms in Argentina because in this country, labour and input material - fertilizers - are way too cheap compared to other countries)


On Apr 15 06:01 AM icy wrote:

> In the 1960s plane loads of cattle for breeding flew from Texas to
> South American countries, such as Brazil and Argentina. Some of
> the best beef (on my plate) has been served in Brazil and Argentina
> lately. These countries import almost no beef from USA today.<br/>
>
> Plane loads of breeding stock, more swine than bovine, have been
> flown from the USA to Pudong in the last three years. Chinese farmers
> might make more profit raising beef and pork than rice. You might
> find that in 10 years almost no beef and pork is exported to China.
> Actually, you might find the US importing beef from China, as their
> production costs might be remarkably lower than USA's, and grains
> here have gotten too expensive to feedlot finish beef and pork here,
> in the manner that was prevalent only 5 years ago; perhaps biofuels?

Apr 15 06:41 AM

[Gonzalo:]

I live in Argentina, so I completely disagree that the best from Texas beef was served in my country. Mainly because we are grain and meat exporters. Ask anyone you know what they eat when they come here: beef.
China has been importing soy since a long time, and I don't see an increasing production of soy because there is something called competitive advantage. For China is cheaper and gets best quality by importing soy from, for example, Argentina. There are some characteristics that allow this to happen, China doesn't have the ideal climate for cultivating soy.
The article was not only for US investors, if grains are too expensive there, firms must be smart enough to diversify their production (Monsanto, with agriculture commodities, has a lot of farms in Argentina because in this country, labour and input material - fertilizers - are way too cheap compared to other countries)


On Apr 15 06:01 AM icy wrote:

> In the 1960s plane loads of cattle for breeding flew from Texas to
> South American countries, such as Brazil and Argentina. Some of
> the best beef (on my plate) has been served in Brazil and Argentina
> lately. These countries import almost no beef from USA today.<br/>
>
> Plane loads of breeding stock, more swine than bovine, have been
> flown from the USA to Pudong in the last three years. Chinese farmers
> might make more profit raising beef and pork than rice. You might
> find that in 10 years almost no beef and pork is exported to China.
> Actually, you might find the US importing beef from China, as their
> production costs might be remarkably lower than USA's, and grains
> here have gotten too expensive to feedlot finish beef and pork here,
> in the manner that was prevalent only 5 years ago; perhaps biofuels?

Apr 15 06:39 AM

[Daigo:]

Hello Gonzalo,

I was very delighted to find your article because I had the same idea, and collected the following resources in March, and I bought COW at the end of March which I thought it's going to be close to the bottom. My focus is long term investment and the current slump in the ETF is just like being given another opportunity to buy in cheap. Of course, the volume for the COW ETF is very low and investors must use precaution. I also think it's very important to understand how the future trading works before buying commodity ETF.

Enough said, please enjoy these links.

Regards,
Daigo Tanaka


Basic idea:
online.wsj.com/article...
www.cattlenetwork.com/...

What is the cost for farmers? (a bit old but good article)
ag.arizona.edu/arec/we...

No bubble in meat, yet the current price is multi-year low:
www.cattlenetwork.com/...
www.fao.org/worldfoods.../
www.cattlenetwork.com/...

Lessons from mad cow disease. 20000 cows slaughtered from 1985 to 1990, and 10~20% decrease in the beef price.
https://msu.edu/~corcora5/food/vegan/...

BUT the beef bounced back and went way higher in 90's! No body permanently stopped eating beef. Nobody stopped eating chicken after bird flu. I won't stop eating pork either!

Apr 30 08:12 PM

[Gonzalo:]

Hello Daigo, thank you very much for making a comment in the post. I'm glad you have the same idea and thank you very much for the links, very interesting. About the ways to invest, I just numbered some to have options in going long in this idea. I agree
it's very important to understand how the future trading works before buying commodity ETF but for those who are not willing to get into firm risk, it's an available way to invest.
Thanks again for your comment



On Apr 30 08:12 PM Daigo wrote:

> Hello Gonzalo,
>
> I was very delighted to find your article because I had the same
> idea, and collected the following resources in March, and I bought
> COW at the end of March which I thought it's going to be close to
> the bottom. My focus is long term investment and the current slump
> in the ETF is just like being given another opportunity to buy in
> cheap. Of course, the volume for the COW ETF is very low and investors
> must use precaution. I also think it's very important to understand
> how the future trading works before buying commodity ETF.
>
> Enough said, please enjoy these links.
>
> Regards,
> Daigo Tanaka
>
>
> Basic idea:
> online.wsj.com/article...
> www.cattlenetwork.com/...
>
> What is the cost for farmers? (a bit old but good article)
> ag.arizona.edu/arec/we...
>
> No bubble in meat, yet the current price is multi-year low:
> www.cattlenetwork.com/...
>
> www.fao.org/worldfoods.../
> www.cattlenetwork.com/...
>
>
> Lessons from mad cow disease. 20000 cows slaughtered from 1985 to
> 1990, and 10~20% decrease in the beef price.
> https://msu.edu/~corcora5/food/vegan/...
>
> BUT the beef bounced back and went way higher in 90's! No body permanently
> stopped eating beef. Nobody stopped eating chicken after bird flu.
> I won't stop eating pork either!
>

May 22 03:20 PM