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Wrangle Livestock ETNs as Hogs Oink Higher


Hog futures rose to an all-time high Wednesday as traders pushed up prices on fears of a spreading swine virus. While there are no direct hog exchange traded funds available, investors can still gain exposure to the market through livestock exchange traded notes.

Lean hog futures have been rallying as the porcine epidemic diarrhea virus spread to 25 U.S. states, killing over 4 million pigs, reports Elizabeth Campbell for Bloomberg.

Consequently, pork output in the U.S., the world’s largest exporter of hogs, is expected to drop 0.7% in 2014.

CME lean hog futures for April delivery reached a high of about $114.7 per pound but dipped down to $111.1 in afternoon trading Wednesday.

Lean hog futures have surged 31% year-to-date, the best performing commodity after coffee in the Standard & Poor’s GSCI Spot Index. Hedge funds and large speculators have raised net-long bets on hogs to 65,506 contracts as of Feb. 26, the highest since November.

“Everyone is expecting lower and lower supplies,” Chad Henderson, a market analyst at Prime Agricultural Consultants Inc., said in the article, calling the activity in the hogs market the “rally of the ages.”

Looking ahead, Don Roose, president of risk-management firm U.S. Commodities Inc., believes that many traders are anticipating U.S. pork production to decline in the second and third quarters as well reports Kelsey Gee for the Dow Jones Newswire.

According to the CME Group, lean hog futures are trading in backwardation where later dated contracts cost more than near-term contracts – April contracts are hovering around $111 per pound, whereas June contracts are up to $118 per pound. Exchange traded products that roll front month futures contracts will benefit in a backwardated market. [Backwardation and Contango]

Commodity traders interested in gaining exposure to the lean hogs market can take a look at three ETNs: iPath Dow Jones-UBS Livestock Subindex Total Return ETN (COW) , UBS E-TRACS CMCI Livestock TR ETN (UBC)  and iPath Pure Beta Livestock ETN (LSTK) .

COW tracks the performance of the Dow Jones-UBS Livestock Subindex Total Return, which is comprised of futures contracts on livestock commodities, including 61.9% in live cattle and 38.2% in lean hogs. The ETN has a 0.75% expense ratio and is up 15.3% year-to-date. [Unheralded Commodities ETN is Mooooving Higher]

UBC follows the performance of the UBS Bloomberg CMCI Livestock TR Index, which includes about 58.3% live cattle and 41.7% lean hogs. The ETN has a 0.65% expense ratio and is up 12.4% year-to-date.

LSTK has a 39.6% exposure to lean hogs and 60.4% to live cattle. The note tracks the Barclays Commodity Index Livestock Pure Beta Total Return Index, which selects holdings based on a so-called Pure Beta Series 2 Methodology. The methodology tries to limit the effects of contango and backwardation in the futures market by holding futures contracts with varying maturities, instead of relying on front month contracts. The ETN has a 0.75% expense ratio and is up 5.1% year-to-date.

While limiting the effects of backwardation and contango helps mitigate volatility, the iPath Pure Beta Livestock ETN may not fully benefit from a backwardated market.

For more information on the agricultural commodities, visit our agriculture category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.