Cattle Strength But Weak Hogs Despite Currencies And Disease

About: iPath DJ-UBS Livestock Total Return Sub-Index ETN (COW)


Andrew Hecht, Seeking Alpha

Dec. 2, 2019




·         Live cattle are near the highs.


·         The beef market ignores the South American currencies.


·         Hogs are sinking.


·         Pork shortages in China do not help US prices.


·         COW moves with livestock futures.


The peak season for animal protein demand runs from the Memorial Day weekend at the end of May through the Labor Day weekend at the beginning of September each year. The grilling season is the time of the year when the aroma of steaks, burgers, hot dogs, ribs, and other meats fill the warm air. In the fall and winter seasons, many grills go into storage for the cold months of the year, and the demand for cattle and hog products declines.


As we are now at the start of the winter season, beef and pork futures markets face lower seasonal demand factors. However, the price of cattle futures has been strong, despite weak currency levels in South America. Brazil and Argentina are significant beef-producing countries. When the real and peso fall in value vs. the US dollar, it lowers the cost of meat production, which can weigh on global prices. Therefore, the trends in the South American currencies do not support the strength in live and feeder cattle futures prices.


When it comes to pork, the trade war between the US and China is creating price distortions in the global pork market. African swine fever has killed millions of pigs in China, creating a shortage of pork. In the US, a glut of pigs has weighed on lean hog prices.


The iPath Series B Bloomberg Livestock Subindex Total Return ETN product (COW) reflects the price action in the meat futures markets.


Live cattle are near the highs


The cattle market has enjoyed a strong offseason since reaching a low in early September. Cattle have followed the same trading pattern as in 2018.


As the weekly chart of the live cattle futures contract highlights, the price reached a seasonal low at $1.0570 per pound during the final week of August 2018. The futures then proceeded to rally to a high of $1.1785 in the last week of October. After a correction to $1.1535, the futures rose to a peak of $1.30450 per pound in late February.


This year, the low was at 93.40 cents per pound during the week of September 9. Last week, live cattle reached a high at $1.22075 and settled not far below the peak.


Meanwhile, the cash-settled feeder cattle futures contract has risen from a low of $1.2765 per pound in mid-August to a high at $1.4940 during the final week of October and were trading at just over the $1.42 level at the end of November.


The beef market ignores the South American currencies


The US is a significant producer of cattle, as are Brazil and Argentina. The price of beef has been strong despite the weakness in the Brazilian and Argentine currencies against the dollar.


The US dollar is the world’s reserve currency and the benchmark pricing mechanism for most commodities. Cattle futures are dollar based, but local costs of production in Brazil and Argentina are in their respective currencies. Weakness in the Brazilian real and Argentine peso makes their exports more competitive in global markets as it lowers the cost of raising cattle.


The monthly chart of the Brazilian real vs. the US dollar currency pair shows that the Brazilian currency fell from a high at $0.65095 in 2011 to a low at $0.23040 in late 2015. As of the end of November, the exchange rate was trading at $0.23690, not far above the multi-year low. The low level of the currency pair makes Brazilian production more competitive and is not supportive of the price of cattle futures.


Meanwhile, the price action in the Argentina peso vs. the US dollar currency pair has been even more bearish for the South American foreign exchange instrument.


The chart shows that the value of the peso has tanked from $0.26622 in January 2010 to $0.01669 as of the end of last week. The price action in cattle markets in the face of the declines in both the real and peso is a sign of underlying strength in the beef market. Cattle could be on a path for even higher highs over the coming weeks.


Hogs are sinking


While beef prices have been getting stronger, pork has been disappointing.


The weekly chart of lean hog futures illustrates that in 2018 the price of pork rallied from a low of 48.925 cents per pound in late August to around the 55-cent level at the end of November. In 2019, lean hog futures started the offseason at a high level at 59.30 cents in late August. After a sharp rally that took the price of the nearby futures contract to 72.125 cents in mid October, the price was back at just over 60 cents per pound at the end of November. Hog prices have been under pressure in the US. The trade war has created a surplus in the US and deficit on the other side of the world.


Pork shortages in China do not help US prices


The outbreak of African Swine Fever in China has killed millions of pigs. China is the world’s leading pork consuming nation, and the disease has caused a shortage of hogs in the most populous country on the earth. At the same time, the carnage in the pig population spread beyond China’s borders preventing imports from other Asian nations. The Chinese have dipped into strategic reserves of frozen pork, but they have not accessed supplies from the US market where a glut exists because of the trade war. Ironically, in 2014, the Chinese purchased the largest pork producer in the United States, Smithfield Foods, for $4.7 billion. The acquisition took a publicly-traded company private. The pork shortage in China has caused frozen hog carcasses to fly from the US to China despite the tariffs of 62% imposed because of the trade war. Even though hogs are heading from the US to the Asian nation, China continues to need more pork to fulfill requirements while the US market is in a state of oversupply that's pressuring prices lower.


A trade deal between the US and China could cause a significant recovery in the price of US pork and lean hog futures over the coming weeks and months. One of the reasons for the sharp decline in the futures market from the May high at over 93 cents aside from seasonality could be that speculative buying on hopes of a trade agreement turned to pessimism as the trade war escalated in August. During the week of August 12, the price of nearby lean hog futures dropped from over 79 cents to 62 cents per pound.


Until there is a deal on trade, Chinese pork shortages are doing little help to reduce the level of oversupply in the US market.


COW moves with the livestock futures ...


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