Investment money into livestock futures is growing. During 2007, it gained by 24,913 contracts in live cattle futures. In the first three and a half months of 2008, we have picked up 22,889 contracts. In other words, we have already equaled the entire 2007 investment. The same situation is laid out for lean hog futures. As you can tell, we have in fact already beat the entire 2007 investment.
We all know the effect east coast money has had on the grain markets. Sharp distortions have been seen in wheat futures versus cash markets. Corn is trading at almost $1.50 premium per bushel strictly from this money. Though index funds are active in livestock, they have not caused price distortions yet. Given supply and demand factors futures prices have generally been correctly priced in the past two years of index fund buying. The index fund group is composed of long-only buyers. At the start of the boom, large investors believing the prices of commodities in general would deposit money with large financial institutions such as Goldman Sachs and ask that the money models a particular commodity index. Most of these broad based commodity indices had a small portion (0-6%) of the index being made of livestock futures. Goldman Sachs would put the money into the appropriate futures for these investment firms. That sort of indirect commodity investing has grown, and will continue to grow, in the coming months.
Recently there have been two ways to directly invest into livestock futures without opening a futures account. You have heard of ETF's or Exchange Traded Funds before. This has traditionally been a way to invest in a sector of stocks using a vehicle (the ETF), which trades like a stock. Recently Exchange Traded Notes (ETN) has opened up direct investment into livestock. UBS, a large financial firm, has released an ETN, which tracks the Bloomberg CMCI Livestock Total Return index. It is invested 58% in lives cattle futures and 42% in lean hog futures. This is listed in the E-TRACS family of ETN's. The second way is through the Barclays iPath family of ETN's. They have one, which tracks the Dow Jones AIG Livestock Total Return Sub-Index. It is invested 59% into cattle futures and 41% into lean hogs futures. These ETN's are traded just like a stock and listed on a stock exchange. Unlike the original index investment, through large financial firms, they are tradable to both large and small investors. We have told you in the past that we do consulting with hedge funds that invest in the stocks of meat companies. Those same firms are now shifting their interest from the meat companies into direct investment into the commodity (livestock futures) itself through these ETN's. So far livestock futures are for the most part not showing significant price distortions. Allendale will let you know if that changes.
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