- Divergence and price dislocations dominate trading over the past months.
- Live cattle futures have recovered.
- Feeder cattle futures have done a bit better.
- Lean hogs have also moved higher from the lows.
- The price action and fundamentals are telling us that 2021 could be a bullish year for the animal proteins - COW on dips.
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In March and April, while markets across all asset classes were falling during the risk-off selling caused by the spread of coronavirus, the animal protein futures were preparing for the peak season of demand. The grilling season starts on the Memorial Day weekend and runs through the Labor Day holiday. The summer months are a time of the year to enjoy the outdoors with family and friends. The barbecue is often the focal point for celebrations and get-togethers. Burgers, steaks, ribs, sausages spend more time sizzling on the grill from June through September than during the other months of the year.
In 2019, the price of live cattle futures peaked in mid-March at $1.3045 per pound, and lean hogs reached its peak at just over 93 cents in May. This year, the global pandemic sent the price of cattle futures to 81.45 cents in late April, the lowest level since 2009. Lean hogs fell to 37 cents per pound in March, a price not seen since 2002. The meat futures have recovered over the past weeks, but they are still below the levels last year in the futures market. Meanwhile, the prices that consumers are paying are much higher. I last wrote about the meat markets on Seeking Alpha on April 21. In that piece, I explained why I thought the low prices for beef and pork would lead to far higher levels in the coming months and years.
The iPath Series B Bloomberg Livestock Subindex Total Return ETN (NYSEARCA:COW) moves higher and lower with meat futures prices.
Divergence and price dislocations dominate trading over the past months
The spread of the COVID-19 caused risk-off conditions in many markets. In the cattle and hog futures markets, prices fell to the lowest levels in many years. Ranchers found themselves with a glut of cows and pigs as processing plants across the United States closed down or limited their activities. Workers came down with the virus creating a unique situation in the animal protein markets. At the same time, the demand from restaurants evaporated during the shutdown. While animal producers watched as prices sunk to the lowest level in years, consumers at supermarkets began to experience meat shortages, sending prices higher. March through May 2020 became a lose-lose period for producers and consumers alike in the meat markets.
As the peak season of demand was coming, the prices were trading at levels previously seen in October during the off-season. The low in cattle in 2009 occurred December and the 2002 bottom in the hog market in September. COVID-19 destroyed seasonality in the meat markets in 2020.
Live cattle futures have recovered
August live cattle futures reached a low of 80.50 cents per pound on April 6.
As the daily chart shows, the price was trading at the 97.825 cents per pound level on June 4, after reaching a high of $1.0190 on May 8, which stands as the technical resistance level. Support is around 92 cents, at the bottom end of a gap created in early May.
Price momentum and relative strength indicators were at just below neutral readings. Daily historical volatility at 22.71% on June 4 declined from over 48% in mid-May. Open interest has been flatlining at the 260,000 to 270,000 level since late March and stood at 271,748 contracts on June 3. At 97.825 cents, August live cattle futures were 21.5% higher than the early April low.
Feeder cattle futures have done a bit better
August feeder cattle futures reached a low of $1.10025 per pound on April 6.
At $1.34725 per pound on June 4, feeder cattle futures recovered by 22.4% since the low. Price momentum and relative strength metrics were over neutral readings, and daily historical price variance at 21.43% was down from almost 38% in mid-May. Just as in the live cattle futures market, open interest has been flatlining since late March and was at 31,357 contracts on June 3.
Lean hogs have also moved higher from the lows
The continuous lean hog contract fell to 37 cents per pound during the week of April 13, but the August contract only fell to 51.900 cents.
The chart shows that at 55.50 cents on June 4, the price of pork for August delivery was only 7% higher than the early April low. Price momentum and relative strength were below neutral territory, and daily historical variance at 43.6% remains at an elevated level. August hogs reached a peak of 67.575 cents per pound in late April and have been trending lower.
The price action and fundamentals are telling us that 2021 could be a bullish year for the animal proteins - COW on dips
The cure for low prices in commodities prices is low prices. While cattle and hog futures are not running away on the upside anytime soon, the long-term prospects are bullish. Animal protein producers were left holding cows and pigs that could not move into processing plants over the past months. Many have disposed of the animals instead of continuing to feed them after reaching full weight.
Hog and cattle prices may have recovered over the past weeks, but they remain appreciably lower than last year at this time. In early June 2019, nearby hog futures were trading around 80 cents. Live and feeder cattle were at $1.10 and $1.40 per pound last year at this time.
Producers will cut back on output after this year’s debacle. Meanwhile, demand remains robust as supermarkets are limiting consumer purchases at higher prices because of the bottleneck at processing plants. With lower production on the horizon, prices could be a lot higher next year at this time when markets return to normal.
The all-time high in live and feeder cattle was in 2014 at around $1.72 and $2.45 per pound. In hogs, the peak was during the same year at just below $1.34. We could see even higher levels in the coming years because of a change in producer behavior after losses in 2020. In a recent piece on Bloomberg Canada, the author explained that it has become “almost impossible” to hedge a hog in the current environment.
I am bullish on the meat markets for the coming years but would only buy during periods of price weakness. The most direct route for a risk position in the cattle or hog markets is via the futures arena, but the iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW) provides an alternative. The fund summary for COW states:
Source: Yahoo Finance
COW has net assets of $11.84 million, trades an average of 19,985 shares each day, and charges a 0.45% expense ratio.
COW fell to a low of $26.40 per share in early April and recovered to the $31.81 level as of June 4, a rise of 20.5%.
Put the COW ETN product on your radar, as the cure for low prices in the commodities market is low prices. We could see lower supplies lead to far higher prices in the futures market over the coming months and years.
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This article was written by
Andrew Hecht is a 35-year Wall Street veteran covering commodities and precious metals.He runs the investing group The Hecht Commodity Report, one of the most comprehensive commodities services available. It covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. Learn more.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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