Commodity investing has been pretty rocky so far this year as agricultural commodities have seen a significant rough patch in 2012. Trading has been especially volatile in the livestock market as new worries by the general public have thrown a wrench into the traditional supply/demand balance (read Three Commodity ETFs That Have Not Surged).
This has largely been due to spiking consumer rage over a ground-beef filler product that has popularly been referred to as ‘pink slime’. The additive generally consists of scraps from butchered cattle that have the fat removed and are then treated with ammonium hydroxide.
The unpleasant looking substance—while deemed safe by the Department of Agriculture—has been a popular product that has been mixed in with ground beef in order to make the end result leaner. However, while the element has been in beef for quite some time, the displeasure with this technique has begun to build, thanks to social media and TV highlights of the practice.
This has forced many major supermarket chains to announce that they would get rid of the additive in their products in the near future in order to avoid further backlash from consumers. This also appears to be a more permanent issue as a major producer of the substance, Beef Products Inc., announced that it would suspend production of the product at three plants across the Midwest and Texas.
While beef demand could be hurt in the short-term as people shy away from beef that still contains the substance, it could have longer term implications for the market as well. This is because after the issue fades from public memory there will still be a problem over how to make up the extra supply that the ‘pink slime’ took in the market. In fact, according to Cargill, close to 850 million pounds of the additive are used each year which is roughly the equivalent of nearly 1.5 million head of cattle (see Is USCI The Best Commodity ETF?).
While this might not sound like much given that the U.S. herd is about 90 million head strong, investors should remember that the U.S. exports roughly 7 million heads of cattle a year and that the overall herd size has been slowly shrinking over the years. Given this, it isn’t unreasonable to expect that supplies will continue to be tight and that beef prices could rise off of their ‘pink slime’ lows.
Thanks to this, it could be the time to invest in livestock ETFs as they bounce higher following this issue. Beef prices could rise as supplies become tighter while pork prices could also rise as hogs become a more popular substitute for beef consumption in the near term. For investors who are intrigued by this trend, there are three livestock ETFs which could offer decent exposure to the market:
Currently, all three are ETNs while two are iPath products; the Dow Jones-UBS Livestock Total Return ETN (COW) and the Pure Beta Livestock ETN (LSTK). Both products charge investors 75 basis points a year in fees and have a roughly two to one favoring for cattle contracts over lean hogs.
Beyond these choices, investors also have a similar product from ETRACS, the CMCI Livestock Total Return ETN (UBC). This note has slightly less in cattle (roughly 60%) giving more to lean hogs in the process. Additionally, investors should note that the product charges just 65 basis points in fees although its volume is quite low, coming in below 2,500 shares a day in many cases (also read Is It Time To Buy The Livestock ETFs?).
In terms of performance, all three have lost marginally so far this year with UBC falling about 3.3%, while COW and LSTK have declined by 1.2% and 1.9%, respectively. Over the last month, as more worries over beef demand have surfaced, losses have been more pronounced with all three losing at least 3.2% in the time period (read USCF Launches Agricultural Commodity ETF).
Over the past few days, however, it appears as though prices may have bottomed out for these notes, as many have started to trend higher in the past few sessions. Given this, and the already tight beef market, investors could consider buying these ETNs as a way to benefit from the pink slime controversy, assuming that this issue curtails beef supply without hurting demand too much in the longer term.
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