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Hedge Funds Move Into Cattle As Demand Grows And Supplies Shrink

Joe Ocrant, a 40-year veteran of the U.S. cattle trade, started his livestock-centred investment fund years ahead of the new wave of managed money that has flooded into livestock futures this year.

With U.S. pork exports to China surging, most of the new money is going into hog futures, but Ocrant is going long on cattle at a time when U.S. herds are smaller than they have been since the Eisenhower administration.

Ocrant told Reuters he expects to earn his clients a big payday this winter and next spring.

We re going into a situation where we re going to have, by the beginning of next year, 10 to 15 per cent less cattle and beef than we had the year before, Ocrant said.

He declined to disclose the specific size of his investment, but said his Oak Investment Group, a Chicago-based commodity trading adviser, has placed about 80 per cent of its multimillion-dollar cattle-based assets on a long position.

There has been even more investment interest of late in hog futures at the Chicago Mercantile Exchange, where bullish stakes are at a record high. But some analysts warn that hog futures prices at current levels already reflect all the potential good news about hog sales especially U.S. pork exports to China.

Ocrant said he is sticking with cattle.

For investors to benefit from long positions, demand for U.S. cattle and hogs must stay strong. A U.S. recession or a slowdown in Chinese demand for pork could result in losses for a portfolio long on livestock.

It is a calculated risk, Ocrant said, explaining that he has hedged his positions in the options market.

Managed money, including hedge funds, have embraced

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livestock investments years after they began investing in grains and other commodities as alternatives to the low-yielding stock market.

Data showed hedge funds have been building bullish positions in cattle over the past month.

Money managers increased their net-long positions by almost 80 per cent to 101,532 contracts from 56,714 net longs on Sept. 6, according to the Commodity Futures Trading Commission s disaggregated commitment of traders data as of Oct. 11.

Livestock futures still trade in the shadow of the more prominent Chicago Board of Trade s grains markets, the largest in the world, but are far less anonymous than they used to be even when Chicago was dubbed butcher to the world.

Livestock futures at the CME, the parent company of the CBOT, are traded nearly round the clock longer than grains are with the large crowd of floor traders making way for faceless transactions executed on the electronic platform.

Among top performers

The flood of investment money has made CME hog futures nearly on par with gold as one of the best performers in the Reuters-Jefferies CRB index, a global commodities benchmark weighted with 19 products from livestock to crude oil to grains and precious metals.

Hog futures have gained 13.7 per cent this year to date while cattle futures are up 12.5 per cent, putting the commodities third and fourth among top earners in the index.

Ocrant s excitement about the cattle market stems from the fact that the U.S. cattle herd has the smallest total population since about 60 years ago. Ranchers cut herds as profits eroded, and rebuilding them will take a year or more, he said.

The cattle industry was blind-sided in 2003 when the first case of mad cow disease in the United States sharply cut global demand for U.S. beef. Also, the economic meltdown of 2008 sparked a shift in consumer demand from high-end beef cuts to less-expensive meat such as chicken.

Ocrant said he raised his long exposure to the futures market from 50 per cent to about 80 per cent over the past two months.

Ocrant reflects back over his 40-plus years in the business when $80 per cwt for cattle in the cash market was considered the high watermark, until prices of $100 a cwt surfaced a couple of years ago because of scarce supplies.

We are in a new paradigm for at least the next year, you re not going to see cattle below $100 again. The supply side will continue to go down, but the only downside would be a complete collapse in demand which would mean another recession, said Ocrant.

Guessing Not Good Enough

chicago /reuters / A

world facing tight food supplies CME cattle futures climbed to a high of 123.175 cents per lb. on Oct. 3 from a recent low of 116.00 on Sept. 23 as cattle prices rallied.

Hogs on a hot streak

In the past few weeks, the open interest in CME hog futures was on a tear as funds raised their net-long positions while China stocked up on U.S. pork, helping to rally prices.

CFTC data as of October 11 showed net-long positions held by managed money in CME hogs futures and options more than doubled to 70,635 from 34,429 in early September.

The purchases by China lit a fire beneath cash hog prices when they typically go down because of ample fall supplies and the end of summer grilling.

The problem with buying hog futures at these levels is that they have baked into the cake the Chinese buying of U.S. pork and as a result are trading at very lofty levels, especially for this time of the year, said independent CME hog trader Dan Norcini.

He said funds are interested in livestock futures due to strong fundamentals that were overpowering the risk aversion trade caused by global economic concerns.

Allendale Inc. director of research Rich Nelson said if the funds bail out, along with lower cash and the possibility that China has its pork needs met for now, it could exacerbate any type of decline that should have already taken place seasonally.

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Graphic of U.S. yearly pork exports to China:


We are in a new paradigm for at least the next year, you re not going to see cattle below $100 again. The supply side will continue to go down, but the only downside would be a complete collapse in demand which would mean another recession.

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