As alternatives to hedging and speculating in futures on various commodities, securities similar to stocks have been developed that seek to mimic the price changes of the underlying futures contracts. One of these is the iPath exchange-traded note (ETN) issued by Barclays — the Dow Jones UBS Livestock TR Sub-Index ETN (ticker symbol is COW, of course). The note reflects price changes on two livestock futures contracts — live cattle and lean hogs. The proportional representation in the COW price is approximately 61% cattle and 39% hogs.
Other ETNs linked to livestock include ETRACS Bloomberg CMCI Livestock ETN and Elements MLCX Total Return Index. ETNs have the backing of the issuing institutions, but are not secured debt — thus, there is a certain amount of risk attached to these instruments in addition to the potential lack of liquidity in the ETN market. However, we would be remiss not to consider these markets, particularly when they offer some unique speculative opportunities.
“COW, cattle and hogs” (below) shows cumulative percentage changes in the prices of the ETN and December livestock futures contracts from April 2 to Aug. 17, 2012. It is obvious that neither the futures combination nor exchange traded note has provided spectacular returns over this time period. Cattle and hogs have been negatively affected by the increase in the price of corn because of the extreme drought conditions during the summer months. In the face of rising corn prices, livestock has been sold in large numbers, resulting in a temporary reduction in the prices of meat futures. Because futures contracts provide the base of ETN pricing, the COW has struggled through this period.
Throughout the months shown on “COW, cattle and hogs,” the cumulative percentage price changes for the ETN remain close to cattle price cumulative changes, and only depart from the lean hog cumulative percentage changes beginning in the first week of July. At that time, Barclays pricing formula keeps COW close to cattle futures while hogs show a sharp price decline.