Can Livestock ETFs Bring Home The Bacon?

by on October 2, 2012 | ETFs Mentioned:

Make room in your freezers, have your fill of Burger King’s new bacon sundaes, slurp down those bacon bloody marys, and bunker down for – yes, you guessed it – the Porkocalypse. The masses are already in disarray, with the head honchos of the world famous Major League Eating franchise already issuing an “indefinite” ban on all bacon-eating contests (with the exception of bacon-wrapped scallops, of course).  These folks are serious, and perhaps you should be too. And what will the world do without the succulent, lip-smacking, and meaty taste of good ol’ porky? Besides investing in an Oscar Mayer Wienermobile stocked with a lifelong supply of pork products, the future seems rather petrifying [see Free Report: How To Pick The Right ETF Every Time].

But despite the recent uproar and media hoopla, pork-eating members of society should not be concerned about a total elimination of this staple food, but instead should prepare to pay a higher price tag on pork and other carnivorous commodities in the coming year. And although this scare has brought out the most radical of pork fanatics, there does lie some truth behind their claims and predictions.

What’s The Beef?

With the sweltering summer heat quickly turning into cool fall breezes, many have already forgotten the devastation this summer’s record-high temperatures brought to the agricultural industry. The U.S. Department of Agriculture continues to cut its forecasts on corn and soybean crop, citing that the drought had significantly cut yields. And although corn and soybean prices have cooled off from their record highs recently, analysts believe that the market will still feel the impact of shortages for quite some time [see also 3 ETFs In Focus As Election Nears].

A general consensus among analysts reveals that 2013 will be a particularly trying year for livestock producers, with higher feed prices expected to pressure producer returns. Already U.S. farmers are rushing to reduce their herds in an attempt to offset the imminent losses from sky-high feed costs. And as the industry continues to consolidate, the effects of the country’s worst drought since the 1950′s will quickly work their way onto supermarket shelves as livestock producers hike up their prices.

Makin’ The Bacon

Recently, the chief executive officer of Smithfield Food, Inc warned the masses: “If you got sticker shock on pork, you’ll have a heart attack when you look at beef.” And although everyone is preparing to empty their pockets at the grocery store next year, there is, of course, an opportunity to make a profit on Wall Street. Investors should keep a close eye on these ETFs in 2013, as the imminent increase in livestock prices may provide some lucrative returns:

  • DJ-UBS Livestock Total Return Sub-Index ETN (COW): This fund is composed of two livestock contracts: lean hogs and live cattle. COW currently has over $55 million in total assets and has an average daily trading volume of 40,469, making it the largest and most liquid ETP in its category.
  • E-TRACS UBS Bloomberg CMCI Livestock ETN (UBC): This ETN tracks an index that is designed to measure the collateralized returns from a basket of futures contracts representing the livestock sector. Contracts are diversified across two constant maturities of three months and six months.
  • Pure Beta Livestock ETN (LSTK): Unlike other products on this list, this fund applies a unique roll methodology to its livestock exposure, which is designed to reduce the impact of contango or backwardation on returns.

Because these three ETNs are futures-based products, investors should keep a close eye on their positions. Currently, lean hog futures contracts are contagoed up until June of 2013. Live cattle futures are sitting in contango through April of 2013, and a spike in price is also seen in October of 2013. Feeder cattle is also exhibiting contango through August of 2013, as far as contracts are currently offered [see also What Is Contango?].

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Disclosure: No positions at time of writing.