2014 has so far been pretty sluggish for stock markets. Apart from occasionally hitting multi-year highs, the broader market indexes like the S&P 500, Dow Jones and Nasdaq were mostly flat or slipped into the red. High beta-pain and momentum meltdown essentially crashed some corners of the market leaving many worried about where exactly to invest their money for the near term.
Fortunately for those investors, some commodity ETFs, especially in the agricultural space, emerged as solid options. After being beaten down last year, many agro-based commodities held up well this year thanks mainly to demand-supply imbalances and the subsequent price rise. Among the pack, the iPath Dow Jones-UBS Livestock Subindex Total Return ETN (COW) might draw investors’ attention owing to the 27-year high for beef prices.
Inside the Soaring Prices of Livestock
Beef prices in the U.S. have shot up prior to the beginning of the grilling season in the U.S. Fewer cattle coupled with surging demand from nations like China and Japan were the reasons behind this jump in prices. Beef prices are presently hovering at the highest level since 1987.
Actually, a nationwide drought sent the cattle to market sooner than normal in 2012 resulting in a short-term supply imbalance that year. While this unprecedented supply relatively lowered beef prices in 2012, prices for the product skyrocketed the following year.
As per Bloomberg, more than 80% of Texas, the biggest producing state, is still unusually dry leaving the cattle herd to reduce to the 63-year low level. As per USDA, smaller amount of cattle will pull down the $85 billion beef industry to a 20-year low in 2014. As a result, USDA projects consumer price index for beef and veal to rise about 3% to 4% this year.
Beef is not the only livestock product witnessing a rally in prices, prices are climbing for pork as well. A virus called porcine epidemic diarrhea (PED) has become rampant in pig farms across the Midwest, killing young pigs and pushing up hog prices.
Hog futures soared to a record $1.33425 a pound on March 18 rising as much as 47% this year, as per Bloomberg. In fact, futures touched its all-time high in early March gaining about 25% from last-year’s low in May.
Market Impact
Based on these solid fundamentals (definitely from investors’ point of view not from common man’s perspective), investors could easily make some profits from surging livestock prices through a number of ETNs with medium risk.
Any of the three products could make for a good choice if the current trends continue. However, in absence of the current drivers, the products might fail to live up to investors’ expectations as both carry a Zacks ETF Rank #5 or Strong Sell rating for the longer term.
iPath Dow Jones-UBS Livestock Subindex Total Return ETN (COW)
This note tracks the Dow Jones-UBS Livestock Subindex Total Return, which delivers returns through futures contracts on livestock commodities. The benchmark provides 60% exposure to live cattle and the remainder to lean hogs.
The product charges 75 bps in fees per year and has amassed $53 million in its asset base. It trades in average volume of under 30,000 shares a day, suggesting additional cost in the form of a wide bid/ask spread. The ETN has added about 14.19% in the year-to-date frame.
UBS ETRACS CMCI Livestock Total Return ETN (UBC)
This product follows the UBS Bloomberg CMCI Livestock Total Return, which seeks to deliver returns from a basket of futures contracts representing the livestock sector. The commodity futures contracts are diversified across two constant maturities of three months and six months.
In terms of holdings, live cattle takes about 60% of the basket while lean hogs account for the remainder of the basket. The product has amassed about $5.8 million in AUM and trades at a very low volume of 26,000 shares a day. The ETN charges 65 bps in annual fees and has gained over 14.2% so far this year.
iPath Pure Beta Livestock ETN (LSTK)
This ETN seeks to match the performance of the Barclays Commodity Index Livestock Pure Beta Total Return. Unlike many commodity indexes, this benchmark can roll into one of a number of futures contracts with varying expiration dates, as selected, using the Barclays Pure Beta Series 2 Methodology.
In terms of holdings, live cattle takes 55% of the basket while lean hogs are tied to the remainder of the basket. The product has failed to garner investors’ money thus far having accumulated only $2.8 million in AUM. The ETN charges 75 bps in annual fees and has gained over 9.00% so far this year.
Bottom Line
In short, protein prices are expected to leap this year led by moves higher in beef, poultry and egg prices (per USDA data). Investors, who seek to beef up their wallet from cattle or lean log investing, can try out the aforementioned products.
However, one word of caution, investing in futures market needs a strong stomach for risk. Also, once the U.S. economy shifts into top gear, the dollar will likely gain strength and mar the appeal for broader commodity market investing.