Short-term punts for the adventurous investor: Lean hogs
In the first of a new series, Platinum Financial Services’ Harpreet Sajjan highlights an ETF which he believes is set for a short-term spike in performance.
US hog futures fell to their lowest level in two years in Chicago recently, and I think the market is now at an attractive entry point.
The best way for retail investors to get involved in this commodity is through an ETF, where many options are available on the London Stock Exchange.
One should note that this type of investment is only for those willing to take on some volatility.
Performance of index over 3-yrs
Source: FE Analytics
The above is clearly a sign of how the severe drought in the US has battered the pig-farming industry. Hog prices have fallen as farmers aggressively thin their herds, as a result of increased soft commodity prices – such as corn and wheat – and effectively higher feed costs.
With more hog meat on the market to reduce these higher feed costs, a supply demand imbalance has been created, causing the price to fall. The drought has battered the nation's corn and soybean crops, triggering record prices for the corn and soybean meal that hog farmers feed their swine.
Although there is usually a seasonal rise in US hog supplies at this time of year, this has been accentuated by the drought and national statistics indicate an approximate 7 per cent rise in pork production this year as opposed to last.
Slaughter-ready hogs have been streaming into meatpacking plants since July, resulting in many farmers losing a lot of money on their hogs after a strong first half of the year.
It is worth noting that corn-futures have jumped more than 40 per cent over the summer and hog futures have slid close to 30 per cent.
In the past, corn and wheat prices have been as high as current levels but hogs were at higher levels than they are currently.
In my view, it is clear that prices may be artificially low and that farmers have over-reacted to increasing feed costs.
As soon as the slaughter frenzy dies down and supplies settle, I believe current prices are bound to revert up, making now a good time to get involved in this commodity. Indeed, the price has already risen by around 10 per cent in the last week or so, but I feel there is scope for more growth.
There are six lean hog ETFs managed by ETF Securities, including ETFS Lean Hogs and ETFS Lean Hogs Leveraged.
Harpreet Sajjan is head of portfolio management at Platinum Financial Services. The views expressed here are his own.