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Executive summary:

  • Cattle broke out to a new 52-week high at a level not reached since March of 2012.

  • Global demand grinds higher while U.S. supply quickly depletes.

  • Traders are net long live cattle and have quadrupled long positions since August of 2013.

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New Highs

On the daily chart above from stockcharts.com, the breakout from an ascending triangle can be seen. In terms of momentum, the MACD (below price) and parabolic SAR (green dots) both printed bullish signals around February 10th and have continued to show strength. The Chaikin Money Flow (bottom), has done quite well recently which shows that a large influx of capital has come into livestock. One concerning indicator to watch is the RSI (top). The Relative Strength Index has recently made a move into overbought territory. While this move reveals strength in livestock, it should still be a cause of concern.

Increasing Demand

In a November 2013 USDA report on global meat consumption the agency noted that;

"Beef and broiler meat are expected to reach new records."

The agency cites the increase in global demand to strength in foreign markets such as China, Sub-Saharan Africa, and the Middle East. Currently, the US is the world's largest exporter of cattle with 37.7% of global production. Below, I have created two charts using USDA data that show the origin and main sources of global demand.

While global consumption is expected to be, "slightly above," last year's consumption, imports from the U.S. are declining. While the decline in demand for U.S. cattle is a minor cause of concern, this year's consumption will set a new record for global cattle consumption.

Declining Supply

While global demand remains strong, supply from the U.S. remains under pressure. The image below, from the same USDA report mentioned above, shows how U.S. supply will shrink 6% from 2013 into 2014 after several years under pressure.

The USDA report cites, "lower calf crops in recent years, and fewer live cattle imports," as the factors driving supply lower. The reason behind lower calf crops is the heifer retention system that composes the natural cycle that cattle prices tend to follow. Almost every ten years, a new bull market reaches the cattle market. The current bull market in cattle can be traced to 2010, when a move to the upside triggered our current bull market.

Given that the average cattle cycle consists of five years of declining cattle followed by five years of an increase in cattle herds, a five year bull market will be followed by a five year bear market. As we are currently in the fourth straight year of increasing cattle prices and declining cattle herds, another year can be expected to complete the five year cycle.

Positions of Traders

The graph I created below, using data from the CFTC, shows the current positions of traders in the live cattle market.

Cattle traders have not mimicked the bull market in cattle prices and net long positions decreased from 2011-2013. Now, traders are quickly hopping back onto the cattle trade. As traders add to their longs to catch back up, expect prices to rally further.

Conclusion

While the breakout in cattle may temporarily pull back to support levels, expect the cattle rally to continue on the back of record global demand and depleting supplies. Once this five year bull market concludes, prepare to short cattle the next five years. For investors seeking exposure to the cattle market, the The iPath Dow Jones-UBS Livestock Subindex Total Return ETN (NYSEARCA:COW) offers the maximum exposure of any livestock ETF to the cattle market with a 63.86% weighting. The other 36.14% is weighted toward lean hogs, a commodity I will cover in the coming weeks.

Source: 1 Year Left In The Cattle Bull Market