As the global appetite for cattle widens and supplies in the US begin diminishing, a supply and demand imbalance could potentially push cattle prices through the roof enabling exchange traded funds like the PowerShares DB Agricultural Fund (NYSEARCA:DBA), the iPath Dow Jones-UBS Livestock Subindex Total Return ETN (NYSEARCA:COW) and the UBS E-TRACS CMCI Livestock TR ETN (NYSEARCA:UBC) to reap the benefits.
Demand from around the world for cattle is increasing as wealth, purchasing power and widening of a middle class in developing nations increases and desires for a Western way of life prevail. According to data from the US Department of Agriculture (USDA), export volume of US beef rose by 26 percent year-over-year through May of this year, with an overwhelming spike in demand coming from Asia. The report indicates that exports to Hong Kong rose by 126 percent, to South Korea by 74 percent and to Taiwan by 54 percent. Additionally, demand from other emerging and frontier markets is strong, illustrated by a 3,628 percent increase in exports to Russia and a 234 percent increase to Egypt. As a result of this improved demand, the US, which is the largest beef producer in the world, is expected to ship more than 2 billion pounds of beef and veal overseas this year for the first time in nearly 7 years.
On the supply side, the USDA indicates that there are approximately 100 million cattle and calves in the United States, the lowest number since this agency began keeping track in 1973. Severe weather conditions that led to past droughts and the financial crisis, which led to tight credit markets, are two reasons that supply has been unable to keep up with demand. As for the near-term future, this supply imbalance is likely to remain as that it takes nearly two to three years for a rancher to substantially increase herd.
In a nutshell, the fundamentals of increased global demand and a shortage in cattle are likely to provide positive price support to the agriculturally based commodity.
As noted earlier, some ways to capitalize on this supply shortage in cattle include:
- PowerShares DB Agriculture Fund (DBA), which allocates nearly 20.3% of its holdings to cattle futures.
- iPath Dow Jones-UBS Livestock Subindex Total Return ETN (COW), seeking to replicate the performance of the Dow Jones-UBS Livestock Subindex Total Return Index, which allocates 59.27% of its assets to cattle and 40.73% to lean hogs.
- UBS E-TRACS CMCI Livestock TR ETN (UBC), designed to track the performance of the UBS Bloomberg CMCI Livestock Index Total Return, which allocates 55.61% of its assets to cattle and 44.39% to lean hogs.
Although microeconomics dictates that an opportunity in the cattle markets exists, it is equally important to be mindful of the inherent risks involved with investing in commodity-based equities.
Disclosure: Long DBA