Etfs For Pork: Investing In The Meat Industry

Pork is the most commonly consumed meat worldwide, with China being the largest market for it, consuming more than half of the world's supply. In recent years, pork prices and shares in producers and feedstock suppliers have soared, and an exchange-traded fund now covers this market. China already has a hog futures market, but retail investors desiring exposure through futures must settle in physical hogs, which can be impractical. An ETF tracking the local pork sector was launched on the Shenzhen Stock Exchange, with Penghua's fund being the first of several similar vehicles. These ETFs cover a range of pork-related companies, including animal vaccine and feed makers, as well as hog producers. There are also US-traded ETFs that invest in livestock more generally, such as the iPath Bloomberg Livestock Total Return and the iPath Pure Beta Livestock ETN.

Pork ETFs in China

China is the world's largest market for pork, consuming more than half of the world's supply. In recent years, the price of pork in China has soared due to the impact of African swine fever, which has decimated herds and curtailed supply. In 2019, the price of pork jumped 47% in August, causing concern in the country about the impact on economic growth.

In response to the surge in prices, China has looked to increase its purchases of pork from overseas suppliers, including the United States and European Union. This move has resulted in a rally in the U.S. lean hog futures market.

China's First Pork ETFs

In March 2021, China launched its first hog breeding exchange-traded funds (ETFs) on the Shenzhen Stock Exchange. The CSI Livestock Breeding ETF, managed by Penghua Fund Management Co, was the first of three funds tied to the country's booming pork sector. The other two similar funds are managed by Guotai Fund Management Co and Ping An Fund Management Co. These funds track the CSI Livestock Breeding Index, which consists of listed hog breeders, pig feed suppliers, and vaccine makers.

The launch of these ETFs aimed to capitalise on the pork industry boom and provide investors with easy and low-cost access to profits from the sector. The ETFs cover a range of pork-related companies, including animal vaccine and feed makers, as well as hog producers such as Muyuan Foods.

Investor Benefits

Investors can benefit from these ETFs in several ways. They allow for a long-term investment perspective in the agricultural sector, particularly for those seeking exposure to the pork industry. The ETFs also offer better trading liquidity and low management fees, making them attractive to speculators looking to take advantage of short-term price swings in the local pork market.

Additionally, the ETFs can serve as a hedge against inflation, as pork price volatility has had a significant influence on inflation rates in China.

Despite the near-term bullish outlook, analysts caution that there are investment risks due to the cyclical nature of the hog sector's supply and price movements. The resurgence of African swine fever is also a concern, as large farms with high pig densities are more vulnerable to infection, which could result in significant losses.

Pork belly futures

The CME's pork belly futures contract was designed to help processors and warehouse operators manage price risks. It performed two primary functions: guiding inventories and establishing forward pricing. Over the years, it grew in volume and liquidity to become one of the premier meat futures contracts traded.

However, the popularity of pork bellies on trading platforms declined, and the CME halted trading in 2011. This was due to changes in the bacon market, with consumers eating more pork year-round, reducing the need for cold storage and, consequently, the hedging of frozen meat for summertime sales.

Today, pork producers and consumers can hedge some pork costs with CME's lean hogs futures contract. Additionally, there is an ETN (not an ETF) traded on the NYSE, backed by live cattle and pork belly futures, with the symbol "COW".

Lean hog futures

The CME Group offers a range of futures contracts, including lean hog futures, to help manage the risks inherent in the US pork industry. These contracts enable price discovery for individual markets and provide access to arbitrage and spread opportunities with other commodities. Additionally, the CME Group's Pork Cutout futures and options complement lean hog futures by offering risk management tools to the US pork industry and export markets. These contracts are also cash-settled, based on the CME Pork Cutout Index.

Pork prices and shares in producers and feedstock suppliers have soared in recent years, creating a unique asset class. The volatility of pork prices has had a significant impact on inflation, with pork price increases outpacing rises in the cost of other goods. Lean hog futures allow investors to take a long-term view of this agricultural sector and benefit from improved trading liquidity and low management fees.

US ETFs investing in livestock

There are currently no livestock ETFs open in the market. However, there are a few ETNs (exchange-traded notes) that offer exposure to the livestock sector, particularly in the US. Here is a closer look at some of these ETNs:

IPath Dow Jones-UBS Livestock Subindex Total Return ETN (COW)

This ETN tracks the Dow Jones-UBS Livestock Subindex Total Return Index, which provides exposure to futures contracts on livestock commodities. The index allocates 60% of its weight to live cattle and the remaining 40% to lean hogs. COW has an annual fee of 0.75% and has seen year-to-date gains of over 14%.

UBS ETRACS CMCI Livestock Total Return ETN (UBC)

UBC follows the UBS Bloomberg CMCI Livestock Total Return Index, which offers diversified exposure to a basket of livestock futures contracts across two constant maturities: three months and six months. Similar to COW, UBC also allocates 60% of its holdings to live cattle and the remaining 40% to lean hogs. UBC has lower assets under management (AUM) and trades at a lower volume compared to COW, with an annual fee of 0.65%.

IPath Pure Beta Livestock ETN (LSTK)

LSTK seeks to replicate the performance of the Barclays Commodity Index Livestock Pure Beta Total Return Index, which can roll into a number of futures contracts with varying expiration dates. LSTK's holdings include 55% live cattle and 45% lean hogs. This ETN has lower AUM compared to the others, with an annual fee of 0.75% and year-to-date gains of over 9%.

PowerShares DB Agriculture Fund (DBA)

While not a pure-play livestock ETF, DBA offers exposure to the broader agricultural space, including holdings in feeder cattle and lean hogs. DBA allocates nearly 14.8% of its assets to cattle futures and 8.1% to lean hog futures.

It is important to note that investing in the futures market and commodities comes with higher risks. Investors should carefully consider their risk tolerance and conduct thorough research before investing in these ETNs.

Pork stocks

While there are currently no livestock ETFs open in the market, there are several pork stocks and ETFs that investors can consider.

Pork is the most commonly consumed meat worldwide, and its consumption is expected to double by 2050, providing several investment opportunities. Here are some of the top pork stocks:

• Tyson Foods (NYSE:TSN) is one of the world's largest food companies, with an extensive portfolio of products and brands, including chicken, beef, pork, and prepared foods. The company has been sued for greenwashing and faced "meatpacker" claims.
• Hormel Foods (NYSE:HRL) is a leading global branded food company with three operating segments: Retail, Foodservice, and International. It has iconic retail brands like Planters, SPAM, and Skippy, and has been slowly shifting from being a meat-centric company to a global branded food company.
• BRF S.A. (NYSE:BRFS) is a Brazilian producer of fresh and frozen protein products, including meat, margarine, pasta, and desserts. It has several top-selling brands and is the dominant exporter to China, providing 33% of the chicken sent to Japan.
• Pilgrim's Pride (NASDAQ:PPC) is one of the world's largest poultry producers, with protein processing plants and prepared food facilities worldwide. Its revenue rose 5% in the first half of 2024, and its operating profit surged 425% to $691 million.
• Steakholder Foods Ltd is an international deep-tech food company that provides production technology and supplies for the commercial production of structured alternatives.
• Seaboard Corporation
• China Xiangtai Food Co., Ltd.
• Muyuan Foods

Pork ETFs

In China, the world's largest market for pork, an ETF tracking the local pork sector was launched on the Shenzhen Stock Exchange. Penghua's fund will be followed by several similar vehicles, giving investors easy and low-cost access to profits from the whole sector. The new hog ETF covers a range of pork-related companies, including animal vaccine and feed makers, as well as hog producers.

There is also an ETN (not ETF) traded on the NYSE under the symbol COW, which is backed by live cattle and pork belly futures.

Frequently asked questions