Animal Protein ETF May Mooove on Inflation

The iPath Series B Bloomberg Livestock Subindex Total Return (COW) exchange-traded note is the only exchange-traded product that tracks the price of cattle and hog futures.  

The most direct route for exposure to the meat sector is via the Chicago Mercantile Exchange’s live cattle, feeder cattle and lean hog futures contracts. COW provides an alternative for those looking to participate in the animal protein arena.  

The grilling season begins on Memorial Day weekend when barbecues are rolled out and slabs of meat begin sizzling. Peak demand for grilling meats typically ends after Labor Day weekend.  

Cattle Prices Steer Higher 

Live cattle includes heifers, which weigh from 1,150 to 1,375 pounds, and steers, which range from 1,200 to 1,500 pounds. Their futures are more liquid than those for feeder cattle, which are six- to 10-month-old calves sent for fattening before slaughter. 

As of Oct. 10, the feeders had open interest—the total number of open long and short positions—of 50,991 contracts.  

Source: CQG 

The above chart highlights that live cattle’s open interest stood at 263,951 contracts on Oct. 10, over five times the level in the feeder cattle futures market. The live cattle futures reflect the current meat prices, while feeders are still growing. Feeders are typically sensitive to corn and soybean meal prices.  

Meanwhile, the weekly trend in live cattle futures has been bullish since the April 2020 pandemic-inspired low. The trend in cattle remained higher on Oct. 11, 2012, despite the offseason. Rising input costs underpin cattle prices.  

Lean Hogs: Seasonal Slump 

While seasonality has not caused cattle to fall, lean hog futures are another story.  

Source: CQG 

The above chart shows lean hog futures rose to a seasonal high in early August. The roll from peak to offseason futures caused the price to gap lower in mid-August as the forward-looking futures market prepared for the offseason pork demand slump.  

At around 93 cents per pound, lean hogs were substantially lower than the August high but around the same level as in October 2021, which are higher prices than in the past years.  

Three Factors Underpin Prices 

COW is the only game in town for tracking meat futures. The ETN is not a highly liquid product. At around $38 per share, it had $26.88 million in assets under management. COW trades an average of 4,740 shares daily and charges a 0.45% management fee. The low liquidity can make the bid/offer spread wide, increasing execution risks. However, COW does an excellent job tracking the meat futures over time.  

Live cattle futures reached a low of 81.45 cents per pound in April 2020, with the feeders falling to $1.03 during the same month. Lean hogs fell to 37.0 cents per pound in April 2020.  

Source: Barchart 

The above chart illustrates COW’s rise from $26.40 in April 2020 to $38 per share on Oct. 11, a 43.9% increase. As we move forward in the 2022/2023 offseason, three factors support meat prices: 

• Feed and energy prices are surging, putting upward pressure on animal protein production costs.  
• The war in Ukraine has pushed soybean, corn and fertilizer prices higher, turbocharging inflation’s impact on meat prices.  

• The trend in cattle and hog prices remains mostly bullish despite the offseason. The trend in all markets is always a trader’s or investor’s best friend, as it reflects the path of least resistance for prices.  

While seasonal corrections in the meat sector are possible, the current environment will likely continue to underpin prices.  

Further Declines for the 2023 Peak Season 

The offseason is an excellent time to put meats and COW on your trading/investing radar. Higher interest rates and a rising dollar have weighed on commodity prices. However, food and energy have been supply-side issues, transcending the U.S. central bank’s monetary policy efforts. With the potential escalation of the war in Ukraine, energy and food prices and supplies may be volatile.  

I favor long positions in COW product, leaving room to add price weakness over the coming weeks and months. The futures markets will begin to reflect rising demand pressures for the 2023 peak grilling season early next year. Now is the perfect time to watch those meat futures and COW.  

Since COW can suffer from limited liquidity, establish price levels and a risk/reward plan before dipping a toe in the meats. I favor a scale-down buying approach with lots of room to add on downside spikes in the ETN caused by bearish volatility in the cattle and hog futures arena.  

Supply-side inflation in food and energy markets is beyond the Fed’s reach, and the odds favor higher meat prices in 2023 when those grills roll out of storage during the peak demand season.