After a dismal performance in 2013, several commodities have
been flying higher this year. While coffee, natural gas and sugar
continued their ascent, reaching fresh highs, lean hog is not far
behind the broad commodity rally.
In fact, lean hog futures turned out to be the best performing
commodity after coffee in the Standard & Poor's GSCI Spot
Index, gaining 31% in the year-to-date time frame (read:
Coffee ETFs Soar on Brazil Drought Concerns
). The biggest reason for this surge is the porcine epidemic
diarrhea (PED) virus that has spread to farms in 25 U.S. states and
killed millions of young pigs, curtailing supply of pork.
The largest U.S. meat processor - Tyson Foods (
) - expects pork supplies to drop 2-4% this year. The U.S.
Department of Agriculture last month reduced the pork production
outlook by 0.7% and domestic pork supply by 0.6% for 2014. Further,
most market experts estimate that the piglet virus will weigh more
on pork supplies in the second and third quarters, in turn pushing
up hog prices in the short-to-intermediate term.
Though direct hog play in the ETF form is not currently available
in the market, investors seeking to ride out this bullish trend
might look at the three livestock ETNs. Any of these could be an
excellent choice given their decent Zacks ETF Rank of 3 or 'Hold'
all the Agricultural ETFs here
iPath Dow Jones-UBS Livestock Subindex Total Return ETN (
This note tracks the Dow Jones-UBS Livestock Subindex Total Return,
which delivers returns through futures contracts on livestock
commodities. The benchmark provides 62% exposure to live cattle and
the reminder 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
19,000 shares a day, suggesting additional cost in the form of a
wide bid/ask spread. The ETN has added nearly 14% year-to-date.
UBS ETRACS CMCI Livestock Total Return ETN (
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
In terms of holdings, a big chunk of the assets is tied to live
cattle at 59% while lean hog takes the remainder in the basket. The
product is less popular and illiquid with AUM of just $5 million
and average daily volume of less than 15,000 shares. The ETN
charges 65 bps in annual fees and has gained over 11.5% so far this
iPath Pure Beta Livestock ETN (
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 (read:
3 Commodity ETFs Still Looking Strong
Live cattle accounts for 60% of the assets while lean hog makes up
for the rest. LSTK has attracted a small asset base of $2.7 million
so far and trades in a paltry volume of less than 1,000 shares a
day. As such, investors have to pay extra in the form of a wide
bid/ask spread beyond the expense ratio of 0.75%. The ETN is up
nearly 9% in the year-to-date time frame.
State of Backwardation
Apart from the supply constraints, the three products are poised to
benefit from the positive roll yield in the coming months, as
traders need to roll from one future contract to another in order
to avoid physical delivery.
The roll yield is positive when the futures market is in
backwardation (the price of the near month contract is higher than
the next month futures contract) and negative when the futures
market is in contango (read:
Commodity ETF Investors Are Riding a Sugar High
Though the lean hog futures market is currently in contango, it
will soon shift to backwardation. This would be bullish for the
commodity and the lean hog ETNs and the fund would probably roll
over the next month futures contracts at a lower price, thereby
making profits. A market in backwardation signifies that demand
exceeds supply, shooting hog prices higher.
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IPATH-DJ-A LVST (COW): ETF Research Reports
IPATH-PB LIVSTK (LSTK): ETF Research Reports
TYSON FOODS A (TSN): Free Stock Analysis Report
E-TRC UBC LVSTK (UBC): ETF Research Reports
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