Paladin Money

I’ve talked about the iPath Dow Jones-UBS Livestock Subindex Total Return ETN, (Ticker: COW) in two previous posts:

1. Food and Commodities. February 8th, 2011
2. On CORN and COW. February 12th, 2011

I purchased COW on February 2nd, after hearing a discussion on CNBC about ranchers slaughtering their cows rather than continuing to feed them expensive grain-based feed.  The conclusion was that this would lead to a shortage in supply. That argument made a lot of sense to me, and, coupled with my expectation that increasing wealth in the emerging markets will increase the demand for meat in people’s diets caused me to conclude that COW (it actually splits beef and pork) would be good investment with roughly a one-year window.

Since I made that investment, COW has tested my faith somewhat and it has only narrowly avoided getting dumped in the recent correction:

After I purchased it COW continued upwards for a while then plunged out of its channel and through its 50-day moving average, although it has recovered somewhat since then.  I still believe in the logic that caused me to buy COW in the first place, which is why I still own it, but such things are a tad challenging so soon after acquiring an investment.

I felt somewhat validated therefore by Kopin Tan’s comments in his “The Trader” column in today’s Barron’s magazine. Kopin wrote:

“The bull run may be faltering, but cows are enjoying quite a moment: Cattle futures surged to new records last week, with some of the excitement spilling over into the hog pits and setting off a scramble for exchange-traded funds that track livestock prices. Questions abound: Will food-sellers foist pricier beef onto consumers? Can salmon burgers produce the same sizzle on the grill this summer?

Rising meat prices ought to benefit protein producers like Smithfield Foods (ticker: SFD) and Tyson Foods (TSN), but the celebration in these stocks is muted for a reason. Sure, more of the planet’s growing middle class are becoming carnivores, but meat is also getting pricier because it costs more to feed livestock. Cattle futures were up 25% over the past year, but the iPath Dow Jones-UBS Grains Subindex Total Return exchange-traded note (JJG) has rallied by nearly twice as much. Since it takes seven or eight pounds of grain to produce a pound of beef, runaway feed costs are a big drag.

More expensive meat is no flash in the wok. Take beef: With China’s meat consumption per capita expected to grow roughly 37% in the next decade, Robbert van Batenburg of Louis Capital Markets thinks “the stars are aligning for a powerful rally in livestock.”

While consumers often cut back as prices surge, the supply could stay tight for years. Farmers have trimmed herds as grain costs soared and are slaughtering the younger cattle usually held back for breeding. The U.S. herd has shriveled to 1950s levels, even though our beef-eating population has since nearly doubled. Drought in Argentina and a foot-and-mouth disease outbreak in South Korea herds haven’t helped. The conservative U.S. Department of Agriculture sees cattle prices up 11% this year and pork, 8%.”

I will be retaining my holding in COW unless something really ugly happens to the ETN.  COW, by the way, is futures-based.  This is its current allocation between pork and beef:

Interesting that Kopin should mention JJG in his article.  I did dump that this past week.  JJG has been straining my patience a bit as the upside in its corn holding was outweighed by the drop-off in its wheat and soybean components.  I have decided to replace it with CORN, but am waiting for a good entry on that.  CORN is sitting on both a red daily and a red weekly trade triangle as I write, and I’m needing to see some green there before I part with mine.  My personal opinion is that corn has the greater upside among the grains.

Tags: CORN. JJG, COW