In a January 2, 2023, Barchart article,
Inflation continues to cause production costs to increase, but Q1 2023 was the heart of the offseason for metal demand during the winter. As we move into Q2 2023, the peak grilling season is on the horizon that runs from the end of May through early September.
Feeder cattle lead the way on the upside in Q1
Feeder cattle futures rose 10.08% in 2022 and moved another 9.32% higher in Q1 2023.
The five-year chart shows a bullish trend of higher lows and higher highs since the feeder cattle futures found a bottom at $1.0395 per pound in April 2020. The nearby feeder cattle futures settled at $2.00825 on March 31. The May contract closed Q1 at $2.0525 and was marginally lower over the first days of Q3.
Live cattle prices move higher over the three months
Live cattle futures rose 13.03% in 2022 and gained another 6.62% in Q1 2023.
The five-year live cattle chart shows the same bullish pattern as the feeders since the April 2020 81.45 cents per pound low. Nearby futures settled at $1.6835 on March 31, 2023, with the June futures at $1.62125. At the $1.63325 level on April 9, the fat cattle were not far above the Q2 closing level.
Lean hogs fall in Q1
Cattle prices posted gains in Q1, but the lean hog futures that rose 7.64% in 2022 fell 14.20% over the three months ending on March 31, 2023.
The five-year chart shows the rise from the pandemic-inspired 37.0 cents per pound level. While hogs have displayed a bullish long-term pattern over the past three years, the price action tends to be highly seasonal. The nearby lean hog futures contract settled at 75.25 cents on March 31, with the June contract at 91.625 cents per pound at the end of Q1 2023. The hogs have continued lower in Q2’s early days.
The COW ETF moved lower in Q1 and continued to underperform the animal protein sector
The most direct route for exposure to the animal proteins is via the CME’s cattle and hog futures contracts and the related options. The iPath Series B Livestock Subindex TR ETN product (COW) provides an alternative to the futures arena. At the $38.38 level on April 9, COW had $27.370 million in assets under management. COW trades an average of 2,095 shares daily and charges a 0.45% management fee.
The chart shows COW’s decline from $40.36 on December 30, 2022, to $38.55 per share on March 31, 2023, a 4.48% loss in Q1. While the animal protein sector edged 0.58% higher in Q1, the COW ETF underperformed the sector. In 2022, animal proteins posted a 10.25% gain, and COW moved 7.14% higher.
Looking forward to Q2 and the beginning of the 2023 peak grilling season
The 2023 peak grilling season begins towards the end of Q2 in late May. The Memorial Day weekend holiday is when barbeques roll out of storage, and family and friends gather to enjoy the weather and grilled delicacies. The cattle and hog futures markets will reflect the increased meat demand weeks and months before the season begins as animals travel to processing plants.
Ranchers, animal protein producers, and processors face higher output costs as inflation remains at the highest level in decades. Moreover, as I pointed out on March 4 and February 6 on Barchart, climate change initiatives to reduce methane emissions weigh on cattle production, increasing prices.
Cattle and hogs are heading into the 2023 peak demand season, with bullish trends dating back to April 2020. The trend is always your best friend in markets; higher prices could be on the horizon over the coming weeks and months. However, bull markets rarely move in straight lines, and over the past three years, buying on price weakness has been the optimal approach, which looks likely to continue.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
