Commodity fundamentals are the fundamentals of supply and demand in a market which provide clues to the path of least price resistance. We are currently in the midst of a deflationary storm where the prices of many assets have dropped significantly. Unprecedented monetary and fiscal stimulus is working overtime to stabilize markets until scientists find an effective treatment and vaccine to end the coronavirus nightmare.
Meanwhile, the vast majority of the United States remains at home to slow the spread of the disease, which continues to infect people and kill the most vulnerable. This week my wife and I went shopping. Social distancing guidelines have created lines outside of supermarkets that remind me of my trips to Russia in the late 1980s. At the same time, some of the aisles are still bare with shortages of items like toilet paper, paper towels, disinfectant wipes and others. In the past month, there have been shortages of beef, pork and chicken, as consumers have stocked freezers in the United States. Based on cattle and hog futures prices, there should be more than enough to meet demand, as animal protein markets have plummeted to multi-year lows. ETN (COW) iPath Series B Bloomberg Livestock Subindex Total Return (COW) rose and fell with meat prices. The last time I wrote about meats and the COW product on Seeking Alpha was February 11 when I wrote wet markets in China that could have triggered the global pandemic. Since then, prices for beef and pork futures have fallen.
Cattle fall at the lowest price in a decade
Prior to March 2020, long-term critical support for the forward price of live cattle was the 2016 low of 94.30 per pound. The lowest occurred in October 2016, at the end of the peak demand season during the summer months.
As the monthly chart highlights, the impact of Coronavirus on the markets pushed the price of live cattle on the continuous chart to a low of 83.825 cents per pound, a level not seen since December 2009, when they were traded at a low of 78.70 cents. Cattle futures rebounded from the most recent low and were trading at just over 92 cents per pound on April 9.
Price momentum and relative strength indicators on the long-term chart continued to show a downward price trend. Open interest, the total number of open and short positions open on a futures market, went from 378,966 contracts at the end of 2019, when the price was at the level of $ 1.2470 per pound, to 266 587 contracts at April 8. The fall of 112,379 contracts or 29.7% when the price drops is not typically a technical validation of a sustained downward trend in prices. However, 2020 is anything but an ordinary year.
The daily live cattle futures price chart for June shows that the price fell to a low of 76.60 on April 6 before climbing back just below the level of 84 cents on April 8. The June low was the lowest price since 2006.
Pigs fall to eighteen-year low
In 2016, lean pork futures fell to a multi-year low of 40.70 cents per pound amid a glut in the pork market. The lowest occurred in October, a month after the end of the 2016 grilling season, the peak period of the year for demand.
The monthly chart shows that in April 2020, the price of the continuous contract fell to 37.50 cents per pound, the lowest level since 2002. As in the cattle futures market, price dynamics and relative strength continued to fall, with prices slightly above The rate of 42 cents per pound on April 9. Open interest fell from 282,358 contracts at the end of December 2019 to 230,049 contracts on April 8, a decrease of 52,309 contracts, or 18.5%. In both the cattle and pork markets, the deflationary spiral has prompted many market players to stay away, lowering the measure of open interest.
As the daily chart shows, nearby June lean pork futures recovered just over 49 cents per pound on April 9.
Demand destruction with abundant supplies
Price action in the animal protein markets is no different from that in the markets for all asset classes. The price of crude oil fell from $ 65.65 per barrel in early January 2020 to its most recent low level at less than $ 20 per barrel in late March. The prices of grains and many other agricultural products have also dropped significantly in recent weeks. In the case of cereals, lower prices lower the cost of animal feed, which leads to increased carcass weights in processing plants and a larger overall supply.
Meanwhile, the global landscape of declining demand for all products, while residents of the United States and around the world stay safe to slow the spread of the virus, has weighed on prices for live cattle and lean pork futures.
Grilling season is less than two months away
The peak demand season in the animal protein sector is now less than two months. Memorial Day Weekend in the United States marks the unofficial start of the summer season, which is when many people take their barbecues out of storage. From Memorial Day weekend to Labor Day holidays in early September, the aroma of steaks, burgers, hot dogs, ribs and other protein fills the air as they sizzle on the grill. Uncertainty about the spread of the coronavirus in the summer months and the possibility of further social distancing will likely mean fewer summer barbecues and less demand for beef and pork. As a result, prices currently reflect the weak demand outlook and high levels of supply during the peak season of recent years.
Cow is the ETN product of meat – Low prices are an opportunity for recovery
I have had more than a few Coronas at summer barbecues over the years. Ironically, it will be another type of Corona that will keep those who gather together over the next few months.
Futures prices for cattle and hogs have already fallen to the lowest level in more than a decade for beef and almost two decades for pork. Expect many sales in the weeks and months to come as these shortages in the butcher section of supermarkets in recent weeks are turning into an overabundance of inexpensive meat offerings.
Meat prices fell to levels that were either long-term lows or close to those levels. If prices fell further, the live cattle and lean pork markets could become too cheap to ignore. In addition, the potential for export problems from South America could create shortages in the weeks and months to come. While low grain prices are expected to increase supply to the United States as carcass weight increases, livestock and prices are high at levels where they have rebounded strongly in the past. At the same time, the current glut conditions do not guarantee an oversupply in the future, as the shelf life of beef and pork is not the same as in many other products like copper and crude oil .
The most direct route to a risky position in meat is through the futures and options markets. Meat futures can be very volatile and sometimes illiquid, which can cause price spreads up and down. For those looking for exposure to livestock prices without venturing into the futures arena, the ETN iPath Series B Bloomberg Livestock Subindex Total Return (COW) product offers an alternative. The fund summary for COW states:
Source: Yahoo Finance
COW has net assets of just $ 7.01 million, trades an average of 21,455 shares each day and charges an expense ratio of 0.45%. COW’s low level of net assets means that the gaps between offers and offers are wide. For positions in meats using COW, I would leave standing orders at the desired levels and I would pay attention to stops because illiquidity can lead to stop hunting by algorithms. Prices of around 40 cents per pound for pigs and 80 cents for live cattle likely limit the downside potential, making these meat assets to put on your investment radar.
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Disclosure: I have / we have no positions in the stocks mentioned, and we do not intend to take any positions in the next 72 hours. I wrote this article myself and it expresses my own opinions. I do not receive any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose actions are mentioned in this article.
Additional disclosure: The author still has positions in the commodity markets in futures, options, ETF / ETN products and commodity stocks. These long and short positions tend to change on an intraday basis.