The bubble Shawn Hackett sees in the livestock complex started with the multiple-year U.S. drought that peaked in 2012.

The Boynton Beach, Fla. market analyst is hyper bearish on the meat complex. "The highs we make will not be exceeded for at least a decade," he says.

The drought and unattractive beef prices forced massive cattle herd liquidation that created a serious US supply beef shortage in 2013. It reached an apex in 2014.

Perfect storm of global meat shortages, diseases and drought have driven prices to classic market-topping highs.

"US beef supplies tumbled just as China's cattle herd suffered a major disease problem. Plus China encountered a shortage of high-quality feed, which is why US alfalfa exports to China skyrocketed. China's beef herd contracted just as demand for beef there was advancing. China turned to massive beef imports to fill the gap, which exacerbated the cattle price surge.

Pricy beef pushed consumers to seek lower-priced meat. But as consumers turned to pork, porcine epidemic diarrhea virus struck. PEDV catapulted hog prices into the stratosphere, while at the same time chicken prices were making new all-time highs," Hackett says.

"All meats were scarce and pricy. Still, consumers can eat cheap dairy products right?" poses Hackett.

As luck would have it, China decided to deploy a national dairy rationalization strategy to move from small operators to big operators to improve milk-per-cow efficiency and hence long-term milk production growth.

This triggered a temporary serious contraction in China's dairy herd leading to a milk shortage in China and a need to massively import milk powder derivatives.

Bullish events create bubble
"I am of the opinion that these bubbles will peak in 2014 and pop," says Hackett. "The current parabolas that we have been seeing on lean hogs, feeder cattle, live cattle and various milk derivatives are signs that the end is near, at least time wise. Bubble tops are always made when the maximum bullish outlook has been traded that ultimately proves to overshoot reality.

"Picking bubble tops is dangerous. One must tread very carefully as a speculator. Put options over futures is clearly the way to go in my opinion," says Hackett.

"As a producer the decision is much simpler," he states. "Sell aggressively at these very high, very profitable prices and then cover some of these sales with some call options in case the bubbles have further to go. If you do this, then you will have locked in a bird in the hand and can still participate in the birds in the bush with your call options should another upward spike trade occur."

U.S. consumers face competition
April US beef exports were up 15% from a year earlier giving US consumers more tougher conditions for buying protein at the grocery store.

Strong beef exports are significant because US beef production has been down almost 6% for the year and beef prices are at record high levels, notes Tim Petry, North Dakota State University extension livestock economist.

A weaker dollar in April this year versus last year contributed. Still, US consumers face competition from international buyers for US beef.

More export volume helps buoy prices. But less volume available to consume here pushes consumers to seek meat protein value in pork and chicken.

Otte is the farm management editor for Farm Futures magazine.