Livestock ETFs Delivering Outsized Gains

October 31, 2014

Here’s one part of the commodity space where supply is not overabundant.

No one has been particularly fond of commodity ETFs this year. Oil prices are plummeting, gold is in the negative for the year now and agriculture markets have fallen to multiyear lows due to abundant supplies.

But amid the general malaise impacting investor sentiment toward commodities these days is the stellar performance of livestock ETFs—a performance few noticed.

Year-to-date, funds that tap into the livestock market through cattle and hog futures have delivered double-digit returns—some as high as 27 percent—on the back of strong demand for pork and beef at a time when U.S. supplies are still hindered by the impact of drought on feed two years ago.

Beefy Returns

Funds like the iPath Pure Beta Livestock ETN (LSTK | C) and the UBS Etracs CMCI Livestock Total Return ETN (UBC | C) have now seen total returns of 27 percent and 25 percent, respectively, since the beginning of the year. Similarly, the iPath Dow Jones-UBS Livestock Subindex Total Return ETN (COW | B) is now up 16 percent.

COW only invests in front-month futures contracts, making it very sensitive to the here and now. UBC, meanwhile, is a laddered portfolio of varying futures, while LSTK picks its contracts arbitrarily in an effort to mitigate contango.

Livestock_ETFs_YTD_Perf

Chart courtesy of StockCharts.com

The Livestock Marketing Information Center said in a recent report assessing the space that prices for livestock have been “very good this year, most setting record highs.”

“For hogs, broilers, turkeys, and steers and heifers, this summer has seen the best feed price ratios since 2006,” according to a report on HardAssetsInvestor.com. “Sector wide for the livestock industry, the margins are the best they have been in at least six years. With expectations of even lower feed costs in the fourth quarter, feed price ratios are expected to continue to improve, and in some sectors could break records.”

Prospects For Livestock Going Forward

The U.S. cattle futures market is on track for having its sixth-straight annual gain in 2014, which, according to Bloomberg, “would be the best streak in the last five decades.”

Providing support for this extended rise in prices has been, not least, a domestic cattle herd in the U.S. that has continued to decline because of, among other things, drought and high feed costs since the ’70s, HAI reported.

Ag Equities Not So Much

It’s worth pointing out that while futures-based livestock ETPs are doing well, investors tapping into the segment through agribusiness ETFs instead aren’t seeing such outsized performance.

That’s because agriculture has had a tough year, with corn and wheat markets at multiyear lows in the face of a very benign growing season in the U.S.

The PowerShares DB Agriculture Fund (DBA | C-7) is up only 6.1 percent year-to-date, and the Market Vectors Agribusiness ETF (MOO | C-67) is actually down 2.6 percent in the same period.

 

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