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After two years of having a complete ban on beef imports, Japan recently lifted their trade embargo with the United States and allowed the importation of beef into the country. Within just a few weeks however, the Japanese government reversed their decision after detecting spinal material in beef that was sent from the US. Despite previously being America's largest foreign customer, the Japanese, who are trying to shed their protectionist image, have reverted back to international trade embargos in fear of Creutzfeldt-Jakob syndrome, which can cause death if consumed from diseased cattle. In 2002, when the embargo was first started, cattle futures dropped very quickly, with live cattle prices reaching around $.65/lb, from over $.80/lb. Today, however, the futures market has treated the Japanese ban with little more than a yawn, sending live cattle prices down only about 4-5% in the weeks since the embargo. While it is true that many ranchers did not increase the size of their herd in anticipation of Japan lifting their import ban, the supply of cattle is nevertheless, very likely on the rise. With generally higher prices for cattle over the last few years, rancher's profits have been soaring. This has incentivized many of them to increase the number of cattle, and combined with the re-emergent lack of Japanese demand, the supply/demand equation for cattle may soon send prices downwards. In addition to the risk being imposed by the introduction of new supply, as well as losing a large customer, live cattle futures are posed to economic cycle risk. High quality steak tends to be the most cyclical of all food consumption, with a marked increase in demand when times are prosperous. During times of recession or slower economic growth, many potential steak consumers opt for lower priced meat items such as pork. In fact, a recent study by two Ivy league professors show pork bellies to be the best performing of all commodities during the latest parts of a recession. With the US consumer seemingly on its last legs, cattle futures are for those with high risk tolerance only, at this point. Nevertheless, over the course of this commodity bull market, live cattle and feeder cattle prices will undoubtedly go much higher, and the astute investor may see very high returns. Until the next recession has run its course however, The Commodity Investors advises readers to place their money in potentially more profitable investments such as Cocoa or Soybeans.
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