An ever widening gap in supply and demand continues to prevail in the US cattle markets, pushing up prices and providing positive support to the PowerShares DB Agricultural Fund (DBA), the iPath Dow Jones-UBS Livestock Subindex Total Return ETN (COW) and the UBS E-TRACS CMCI Livestock TR ETN (UBC).
According to the US Department of Agriculture, beef exports surged by 19 percent last year resulting in the smallest US cattle herd since 1958. On the demand side, worldwide demand for beef is near an all time highs as purchasing power and the middle class in emerging markets continues to grow. In fact, demand in Russia, South Korea, Hong Kong and Taiwan has grown at exponential levels, pushing US exports to their highest levels in over seven years.
As for supply, inclimate weather in the past year has lead to decreased production, while increased demand has lead to diminishing stockpiles. Furthermore, it takes two to three years for a cattle rancher to substantially increase herd, therefore indicating that weak supply is likely to prevail in the short-term.
In a nutshell, imbalances in supply and demand, coupled with surging corn prices, which have also lead to higher beef prices, are likely to continue to take center stage providing support for the following ETFs:
- PowerShares DB Agriculture Fund (DBA), which allocates nearly 18.6 % 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.
Disclosure: Author holds a long position in DBA