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Since mid-April, the share price in the iPath DJ-UBS Livestock Total Return Sub-Index ETN (COW) has traded in a continual downward trend, taking the ETN from a high of $54.65 (April 15th) to a low of $44.51 (June 24th). In the past couple of days, the ETN has traded higher, underpinned by a stronger-than-average volume. Yesterday (June 26th), the ETN traded 12,830 shares compared to a 90-day average of 4,460 shares/day.
Source: Finviz.com
COW is a livestock ETN that tracks an index comprised of lean hogs and live cattle futures contracts. The significant downswing through April, May and June may be entering at least some temporary respite, as seasonal buying and warmer weather around the country fuel hopes that beef demand for outdoor grilling will rise.
As the ETN is based partially on the underlying cattle futures, it is worth noting the Chicago Mercantile Exchange August live cattle ended up 2.125 cents at 105.375 cents per pound. Spot June futures, which expire on Friday, were up 1.250 cents at 109.000 cents per pound, reflecting market expectations for present demand-induced cash cattle prices this week.
My analysis is the ETN will probably recover slightly, as the season gets into play, but the longer-term trend remains challenging to determine objectively, at least until the US/China trade talks take a more confirmatory turn. The market repels uncertainty.
A Look Back at Seasonal Trends
Firstly, seasonality is something futures traders tend to keep an eye on, especially the agriculture, softs, energy, and meat markets, as consumer behavior generally underpins the demand/supply of a commodity.
The markets tend to factor seasonal expectations ahead (demand/supply, weather, employment, etc.), and then price fluctuates depending on how the reality meets that expectation.
Looking at a weekly chart for live cattle, going back from 2014 to the present day, I have placed markers with some proximity on price moves from late June for each year. In most cases, note that the market has been bearish for cattle.
Source: Finviz.com (Identifiers by Author)
Recall that the COW ETN also comprises of live hogs. The weekly chart below represents the futures market for this commodity. Note the late June through July trend is generally negative. In fact, the market headed south every year around late June onwards except 2018.
Source: Finviz.com (Identifiers by Author)
A look back at the same seasons over the past few years does not bode well for the COW ETN, as these trends seem to point to further discounting.
On the plus side, live cattle is entering a triple-bottom (often deemed to be a strong support by technical analysts) around 98.000. That may provide some cushioning for the ETN. However, a drop below this level would trigger further weakness to new lows.
Chinese Demand and African Swine Fever
Chinese imports of live hogs remain a key consideration. As the largest importer and consumer of both U.S. beef and hogs, China plays an instrumental role in U.S. output. Recently, the dependency on U.S. to meet China’s demand for pork spiked substantially as a result of significant herd losses brought on by the African swine fever (ASF).
To provide perspective, in May, Chinese imports surged 63% compared to the same period in the previous year.
Despite this, hog futures continue to decline. This is to do with “expectations” I mentioned earlier and the reality of not meeting the expectation. Imports were high, but not as high as expected. It’s a tricky prospect for even the most ardent analyst to get China data projections spot on.
In fact, according to Reuters, shipments of U.S. pork to China have so far “fallen short of market expectations and supplies in U.S. cold storage warehouses have swelled” (Source: Reuters).
At the same time, U.S. slaughter rates are going up as hogs held back from the market by farmers anticipating a China-led bump in prices are now being forced to send those animals to slaughter, thus massively increasing supply. This is the root cause of the price collapse.
No matter how negative the prospect for the current oversupply in lean hogs, and the historical seasonal trends, there will come a point when prices will bottom. We could be near there now. As in any market, traders need to watch these events unfold before making a reasoned decision.
Is The Negativity Priced In?
In my view, the price for COW may be nearing a bottom, as the volume has picked up both in the ETN and the cattle futures, while lean hogs remain reserved until the China swine epidemic and the U.S. trade-talks fully play out.
Things to look for closely for any reader wanting to trade COW (or for that matter live cattle futures or lean hog futures) include an observation of either strong support or weakness in live cattle futures around 98.000 – any drop below this indicates bearishness and, in line with historical trends around this time of the year, lower prices. This may continue at least into mid-July/early-August before prices pick up.
There is an opportunity here once a bottom is established.
However, and most critically, the current trade-war rhetoric playing out will trigger either a strong surge in prices of both cattle and live hogs (and hence the ETN) or remain sideways to slightly bearish. I say “slightly” bearish as much of the negativity has likely been priced in.
Trade Wars and Trump’s Art of Negotiation
Back in March, President Trump stated the U.S. will impose tariffs on approximately $50 billion worth of Chinese imports. Immediately, China took retaliatory action with a list of over a hundred items to which it intended to “propose” tariffs.
The tariff on American-produced beef is suggested at 25%. This would be a significant spike and – if it pans out – affect demand/supply dynamics and prices for the commodity.
Despite the African swine epidemic, U.S. pork shipments have been curtailed by steep Chinese import tariffs. These have been imposed as part of a trade war between the two countries.
It is important however to realize that those tariffs from China have not yet been fully implemented and remain contingent on U.S. tariffs on Chinese goods going into effect.
It is worth noting that U.S. Treasury Secretary Steven Mnuchin said yesterday the trade deal between the United States and China is “about 90 percent” complete. He added: “We were about 90 per cent of the way there (with a deal) and I think there’s a path to complete this”. Both cattle and lean hogs could offer upside opportunity post a positive upcoming G20 summit in Japan.
Prior to Trump’s trade threats, hog futures had been trading mostly higher, lifted by expectations for accelerated U.S. pork imports by China as an effect of ASF.
So, while prices have been trending lower for some time, there appears to be a temporary respite, as the G20 meeting (where Xi Jinping and President Trump will rub shoulders), combined with the pre-emptive announcement by the White House of a 90 percent completion of the trade deal, looks to be positive for the market.
To Summarize
Seasonal trends tend to point to a lower price in both live cattle and lean hogs (which make up the COW ETN) around this time of the year. However, we are not living in “normal” times, as the developing (and hopefully concluding – we can hope) trade-war rhetoric has suppressed prices for an already long period of time and by a higher-than-average margin – the price has dropped significantly since April, by over 18.5%.
This usually means there is a strong probability of a recovery rally, at least temporarily.
What will take prices into a confirmed bull market for the ETN, in my opinion, is conclusion to the trade deal between the U.S. and China, with some (hopefully) positive light at the end of this prolonged tunnel, especially during the G20 meet.
The demand for beef and pork remain strong, and American producers want resolve; as ultimately does the President. At the current price, COW offers a reasonable entry point at $45.63, with a strict stop-loss placed at the recent low ($44.51). If the stop is triggered, I would wait for the next pullback to complete, with any positive resolve to the trade talks the trigger to re-enter.
Disclosure: I am/we are long COW. 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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