Last year I met with Jim Rogers in his Singapore home, during our conversation he gave me great investment advice on farming & ranching among other things and a year later he is proving that his long term market outlook is right on target.
Cattle Beat Gold as Safest Commodity Return in ’11 as Price Swings Widened
By Whitney McFerron - Jan 5, 2012 1:00 PM GMT+0800Thu Jan 05 05:00:00 GMT 2012
Feeder-cattle futures provided the safest returns of all commodities including gold in the second half of 2011, when adjusted for volatility, as high feed costs and drought led to smaller herds and record prices.
The Standard & Poor’s GSCI Feeder Cattle Total Return Index rose 2.45 percent in the six months ended Dec. 31 with volatility of 13.6, for a risk-adjusted return of 0.18 percent, the highest per unit of price swings among 24 commodities tracked by S&P, data compiled by Bloomberg show. While gold gained more, touching a record $1,923.70 an ounce on Sept. 6, the higher volatility of the metal’s total-return index left its adjusted gain at 0.147 percent.
Commodities rose to a 29-month high in April before Europe’s widening debt crisis sent the GSCI Total Return Index down 24 percent by October, fueled by price swings that left only seven raw materials with positive risk-adjusted returns. As gold futures fell 3.4 percent in the fourth quarter, its first drop since 2008, feeder cattle reached a record last month as the U.S. herd shrank and beef exports surged.
Cattle were “one of the best-performing out of any commodity last year, and the reason for that, of course, was the herd liquidation,” Patricia Mohr, an economist and commodity specialist at ScotiaBank Group in Toronto, said in a telephone interview. “At the end of last year, gold lost some ground because of the renewed strength in the U.S. dollar,” and volatility increased as economic concern mounted, she said.
Beef Supply
Feeder cattle are about a year-old and weigh 500 pounds (227 kilograms) to 800 pounds when they are sold to feedlots, where they eat mostly corn for several months until they reach about 1,200 pounds and are shipped to beef processors.
The S&P GSCI Live Cattle Total Return Index (SPGCLCTR), which tracks the price of slaughter-ready animals, advanced 2.39 percent in the second half of 2011, with volatility of 15.4 that gave it a risk-adjusted return of 0.155 percent, data compiled by Bloomberg show. That was ahead of the ratio of price to volatility for gold, which ranked third among GSCI commodities.
Cattle prices may continue to “hold up quite well” during 2012 as beef demand is improving globally, while supplies will be slow to rebound, because it takes the animals about two years from birth to reach slaughter-ready weight, Mohr said.
The worst drought ever in Texas, the biggest U.S. producer, destroyed pastures last year and forced ranchers to cull their herds. The U.S. cattle population was 92.582 million head at the start of 2011, the smallest for that date since 1958, government data show. The U.S. Department of Agriculture will release its 2012 herd estimate on Jan. 27.
Feeder-Cattle Rally
Feeder-cattle futures on the Chicago Mercantile Exchange reached a record $1.508 a pound on Dec. 28, with the most-actively traded contract surging 20 percent in 2011. Slaughter-ready cattle futures, also traded in Chicago, climbed to a record $1.25675 a pound on Nov. 10, finishing up 12 percent for the year.
“You’ve got the whole issue of the expanding middle class around the world and increasing protein in diets, so that’s going to translate into more grain consumption, and ultimately that has put support under beef,” said Sal Gilbertie, the president of Teucrium Trading LLC, which sponsors exchange-traded funds for commodities ranging from natural gas to corn. “Food trumps jewelry. The last thing people will ever do is let themselves be hungry.”
The price gains for both cattle contracts outpaced the 10 percent advance last year for gold, which posted an 11th straight annual gain.
Negative Return
The S&P’s Total Return Index of 24 commodities had a risk-adjusted return in the second half of minus 0.159 percent, after the gauge dropped 3.78 percent during the period with volatility of 23.772. The S&P GSCI Silver Total Return Index, which calculates the return to investors of holding a position in the commodity, was the most-volatile during the second half of 2011 at 55.59, followed by nickel and lead.
Commodity investments may become more volatile in 2012 as central banks grapple with how to support economies globally, while demand for raw materials including industrial metals and energy may weaken if Europe enters a recession, said Michael Pento, the president of Pento Portfolio Strategies in Holmdel, New.
Some members of the U.S. Federal Open Market Committee are leaning toward additional quantitative easing to support the economy, minutes from the group’s November meeting showed. Euro-region economic confidence probably dropped to the lowest in more than two years in December, according to a Bloomberg survey.
“Volatility is going to be off the charts in 2012 for precious metals and commodities in general,” Pento said. “We’ll have very, very slow growth worldwide, and we’ll see stagflation persisting in the U.S. and Europe and in other countries.”
