COW iPath Series B Bloomberg Livestock Subindex TR ETN

Despite hopes for the U.S. economy, the outlook for many commodities is uncertain in 2012, thanks to worries over Chinese demand and a general slowdown in Europe. Yet, although these fears are present, there appears to be a few outliers so far this year with one of the biggest being in the livestock space, specifically in the case of cattle. According to recent reports from the Department of Agriculture, the recent drought across much of the key cattle producing states in the south and Midwest has had a devastating impact on the size of the total cattle herd, shrinking it to its lowest level in 60 years. In fact, the total herd, which was reported at just 90.8 million cattle and calves, was the lowest since 1952 when the U.S. herd was at 88.1 million (read Cocoa ETFs Surge On Supply Worries).

Thanks to this situation, as well as huge levels of population growth since the last time the herd was this small, these small herds could have a huge impact on the global price of beef in the near term. In fact, prices are testing multi-decade highs and are trending towards the $1.25/lb. level, a huge increase from just the beginning of 2010 when live cattle contracts were trading around the $0.80/lb. mark. "Prices are evidence that supplies are tight," said Len Steiner, an analyst at Steiner Consulting Group in Manchester, N.H. "Down the road, they're going to get even tighter."

Given that many emerging markets are continuing to demand better foods, as well as the lack of increased production from other markets such as Brazil, Argentina, or Australia, prices could remain high this year. This could be especially true if drought conditions continue to plague the plains states in the coming seasons and keep the total herd size depressed once again. While part of the trend towards smaller herds has been due to the cattle industry focusing on larger animals rather than more cattle, prices have not dipped below $1.14/lb. (for front month contracts) at all over the past 52 weeks, suggesting that a nice floor has been built under the current price point and that any moves below this level could be hard to do without a big change in the marketplace (see Inside The Forgotten Energy ETFs).

While buying futures in the livestock sector could be a way to play this trend, the risks can be high with these contracts as they tend to be purchased on margin and as a result, can push investors out very quickly. As a result, a closer look at some of the ETNs that are offered in the space could be the way to go instead. Currently, investors have three choices to target the sector and while they all have some commonalities, investors should be aware of a few of the key differences between the products as well:

iPath Dow Jones-UBS Livestock Total Return ETN (COW)

This iPath note tracks the Dow Jones-UBS Livestock Subindex Total Return which looks to reflect the returns that are potentially available through an investment in futures contracts on lean hogs and live cattle. The product focuses in on front month contracts but charges investors 75 basis points a year in fees. COW has a tilt towards cattle (64.4%) although it also holds a sizable chunk in hogs as well (35.6%) giving it broad exposure to both sides of the livestock market. In terms of assets, the product is pushing towards $100 million in AUM while doing volume of nearly 86,000 shares a day (read Inside The Managed Futures ETFs).

ETRACS CMCI Livestock Total Return ETN (UBC)

This ETN tracks the CMCI Livestock Index Total Return, a benchmark that consists of two futures contracts on the livestock sector with both cattle and hogs represented. The product consists of two maturity levels-- three months and six month contracts-- and charges investors 65 basis points a year in fees. Currently, the product is slightly tilted towards cattle, holding less in hogs; live cattle contracts comprise about 60% of the portfolio while hogs make up about 40% in comparison. Total assets under management are approaching just $ 5 million while volume is a quite low 2,300 shares a day suggesting that bid ask spreads may be rather wide for large investors (read Forget UNG: Try These Natural Gas ETFs Instead)

iPath Pure Beta Livestock ETN (LSTK)

The newest entrant in the space is LSTK from iPath, a product that also targets cattle and hogs in a roughly 2/1 split and charges 75 basis points a year in fees. However, unlike its counterparts in the space, LSTK implements a unique roll methodology which looks to cut down on contango. In this strategy, the fund will focus in on various contracts across the curve, selecting the ones that are closest to the front year average price over the past twelve months. Despite this unique methodology, the fund has failed to capture much interest from investors as it has less than $3.5 million in AUM and trades just under 3,500 shares a day (also read Can You Fight Inflation With This Real Return ETF?).

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