COW’s Upside Ahead of Summer Grilling Season

Meat-focused food stocks are only weeks away from the beginning of peak grilling season, when barbecues across the U.S. roll out of storage, and the demand for beef and pork heats up.  

Cattle and hog futures have already been trending higher, with beef futures in a sustained bullish path of least resistance since the April 2020 pandemic-inspired multiyear lows. Hog futures have also appreciated over the past two years.  

While live and feeder cattle and lean hog futures on the Chicago Mercantile Exchange are the most direct route for a risk position in meats, the iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW) provides an alternative for market participants seeking exposure to the animal proteins without venturing into the leveraged and margined cattle and hog futures arena.  

Sustained Rally 

Cattle futures reached pandemic-inspired lows in April 2020. Live cattle have attained a desirable weight (1,150-1,375 pounds for heifers and 1,200-1,500 pounds for steers) for sale to meat packers.  

Source: Barchart 

The weekly chart highlights the rise from 81.45 cents per pound in April 2020 to the most recent $1.7770 high in mid-April 2023. After more than doubling, the price was closer to the high at near $1.62 per pound on May 5.  

Feeder cattle are weaned calves from six to 10 months old and recently sent to feedlots. The feeders are highly sensitive to feed prices. 

Source: Barchart 

The weekly chart illustrates the rise from $1.0395 in April 2020 to $2.1220 in late April 2023. The feeder futures remain near the peak at over $2.025 per pound on May 5. 

Corn is one of the primary feed inputs for cattle. Therefore, rising corn prices often increase production costs, translating to rising feeder cattle prices.  

Choppy Bullish Trend 

While cattle futures have progressively increased over the past three years, hogs have experienced more choppy price action.  

Source: Barchart 

The weekly chart of nearby lean hog futures shows a rise from 37 cents in April 2020 to $1.22750 in June 2021. In August 2022, lean hog futures made a marginally lower high at $1.22525 per pound. Meanwhile, at 83.775 cents per pound on May 5, lean hogs were around 4.0 cents above the midpoint between the high and low going into the 2023 peak grilling season.  

Higher Meat Prices 

The following issues support higher beef and pork prices going into the peak demand season: 

• The trend is always your best friend in markets. Cattle and hog trends have been bullish, no pun intended, since the 2020 lows. 
• Seasonality favors higher beef and pork prices over the coming months as meats tend to peak in the late spring and summer and decline in the fall.  
• The USDA increased its projected beef prices in 2Q 2023 and beyond in the April World Agricultural Supply and Demand Report, with beef export demand rising in Asian markets. 
• Inflation remains at the highest level in decades, despite rising interest rates. Higher energy, labor, financing and other input prices put upside pressure on animal protein wholesale and retail prices.  
• Based on lower March-May farrowing intentions, the April WASDE report lowered its pork production forecast for the second half of 2023.  

While cattle and hog futures are below the highs, beef and pork demand will rise over the coming weeks.  

The COW ETN Follows the Meats 

Cattle and hog futures markets are less liquid than many other agricultural futures. Low market participation at each price level tends to lead to higher volatility as bids to buy can disappear when prices fall and offers to sell evaporate on rallies.  

Since the cattle and hog markets can become illiquid, the ETN product that tracks the sector can suffer from the same dynamics. At $37.82 on May 5, COW had $27.37 million in assets under management. The ETN trades an average of 5,604 shares daily and charges a 0.45% expense ratio.  

Cattle and hog futures experienced significant price appreciation since the April 2020 lows.  

Source: etf.com 

The chart highlights the more than 43% rise from $26.40 in April 2020 to $37.82 on May 5, 2023. Over the past three years, COW has done an excellent job tracking the live cattle and lean hog futures prices.  

The Trend Is Your Friend 

The long-term trend in the cattle and hog futures arenas over the past three years remains bullish. Seasonality could drive prices to peak over the coming weeks as the 2023 grilling season begins, increasing the demand for beef and pork products.  

However, since the season ends in early September, the futures market will likely begin to reflect the offseason during the late summer. COW could be a short-term investment as prices tend to reach seasonal lows in the fall.