I know McDonald's (NYSE:MCD) is a topic that is covered ad nauseum here, but I wanted to try to present an additional unique perspective on why I am so bullish MCD and the beef production industry in general. Also, why they are so uniquely correlated.
For cattle prices, quite frankly, it comes down to supply and demand. There is a strengthening export market for beef and a dwindling domestic supply. Beef production around the globe has declined due to drought in major beef-producing countries. In 2011 it marked the first year in which the U.S. exported more tonnage of beef then we imported. It is being exported to the highest bidder abroad via free market capitalism therefore causing an abrupt rise in our prices here domestically. If you think about it this actually makes sense. The U.S. accounts for only 4% of the world's population. It's not the domestic demand of the 4% of the U.S. that is driving the price but the other 96% that is becoming accustomed to the luxury that is beef. We are the No. 1 source. We are by far best of breed in the area of producing grain fed product. In fact we are the largest beef producer on the planet.
Where does MCD fit into all of this?
It has global and domestic implications. I will focus on domestic first. Even if there is a consumer reaction to rising beef prices, I feel MCD will be less affected as much as, say, a high-end steak restaurant would. People see value in MCD as they have successfully branded themselves over the years. Buying choices are affected by discretionary income, but there is a longer term trend in the beef industry of eating more hamburgers as a percentage of beef consumption and less whole-muscle cuts, steaks, and roasts. Analysts also predict availability of pork and poultry to the domestic consumers to be flat to slightly down in 2012.
As for the global pull it is hard to find a place to start. I'm not going to focus on the latest report from Europe as that has been covered. I believe global demand will continue to increase because the economies in the developing countries are improving at a much faster rate than the economies of developed countries, like the U.S. or Europe. They are abandoning different types of traditional foods and adopting the bright light fast food of America. As income goes up, people go from a beans and rice diet to a diet that has more meat. There is also a correlation between amount of income and amount of meat eaten per week.
In closing, world beef supplies are declining but not world beef demand. This suggests a bullish standpoint for beef prices. I think MCD will be along for the ride.
Disclosure: I am long MCD.