Animal Proteins in Q3 and Beyond

The 2022 peak season for meat consumption ended in early September as the summer months is the barbecue season in the US. Cattle and hog prices typically display seasonal weakness at the end of the grilling season, but 2022 is anything but an ordinary year. In 2022, the highest inflation in four decades increased production costs for all commodities, and animal proteins are no exception. Corn and soybean prices soared to the highest levels since 2012, and they are critical inputs in animal feed. Simultaneously, the highest energy prices since 2008 have caused production costs to soar. Live and feeder cattle prices increased in Q3, while lean hog futures prices declined. However, all three meat futures contracts posted gains over the first nine months of 2022. 

Live cattle futures rise in Q3

Live cattle futures on the CME moved 8.07% higher in Q3 and were 2.56% above the closing price at the end of 2021. Last year, live cattle futures moved 21.45% higher. The nearby live cattle futures contract settled at $1.43275 per pound on September 30. 

The chart highlights the bullish pattern of higher lows and higher highs since April 2020, when the live cattle reached a low of 76.6 cents per pound as the global pandemic gripped markets across all asset classes. The all-time high was in 2014 at $1.7275 per pound. At over the $1.47 level on October 5, the live cattle futures were closer to the record peak than the April 2020 low. The trend in live cattle futures remains bullish in early Q4 2022.

Feeder cattle futures edge marginally higher in the third quarter

Feeder cattle futures edged only 0.33% higher in Q3 and were 4.37% above the 2021 closing price on September 30. In 2021, feeder cattle futures posted a 20.10% gain. The nearby feeder futures settled at the $1.74175 per pound level at the end of Q3. 

The chart illustrates that after reaching a low of $1.03625 in April 2020, nearby feeder cattle futures have trended steadily higher, reaching a peak of $1.9020 per pound in August 2022. The record peak was at $2.45750 in October 2014. 

Feeder cattle tend to be highly sensitive to corn prices, and higher feed prices often weigh on the feeders. Corn was over 14% higher than the 2021 closing price at the end of Q3.

Lean hogs decline but are still higher for the year

Lean hog futures dropped 18.24% in Q3 due to seasonal weakness after the 2022 grilling season. However, the lean hogs were still 9.51% higher over the first nine months of 2022, leading the meats on the upside since the end of 2021. Last year, the volatile lean hog futures gained 15.94%. Nearby lean hog futures settled at 89.225 cents per pound on September 30, 2022. 

As the chart shows, pork futures tend to be highly seasonal, rallying as the grilling season approaches and during the peak demand period each year. Prices often decline late in the year. The all-time high for nearby pork futures was in 2014 at $1.32425. Hogs have followed a primarily bullish pattern since the April 2020 41.50 cents per pound low. 

The outlook for Q4 and beyond

In early October, cattle futures remain strong and in bullish trends, while the lean hogs have declined, reflecting seasonal selling pressures. However, as inflationary pressures continue, high grain and energy prices should continue to underpin the meats over the coming months.

While the Fed has aggressively increased interest rates to combat inflation, food and energy have become supply-side economic challenges beyond the Fed’s reach. The war in Ukraine has put upward pressure on grain and energy prices as the fertile European breadbasket remains a battlefield and the Black Sea ports, a crucial logistical region for grain exports, are a war zone. Moreover, Russia is a leading energy producer, and sanctions and retaliation against countries supporting Ukraine have pushed oil and gas prices to the highest levels in years. As critical input prices remain elevated, the cost of producing beef and pork remains high, putting upward pressure on meat prices. Therefore, if the war continues, any selloffs in the animal protein sector are likely to be buying opportunities over the coming weeks and months. At the beginning of 2023, the cattle and hog futures arena will begin to focus on the 2023 grilling season, which starts in late May. 

COW is an ETN that tracks meat prices

The most direct route for a risk position in the meats is via the futures arena. The iPath Series B Livestock Subindex TR ETN product (COW) provides an alternative for those looking for animal protein exposure without venturing into the futures markets. 

At the $37 level on October 5, COW had $26.307 million in assets under management. The ETN trades an average of 4,260 shares daily and charges a 0.45% management fee. 

The chart shows that COW closed 2021 at $37.67 per share and was trading slightly below that level on October 5. Rising production costs that support cattle and hog futures could make buying the COW ETN on a scale-down basis the optimal approach for next year when the grilling season provides seasonal support for the meat futures. 

The war in Ukraine and rising input costs should keep a bid under animal proteins. Any seasonal weakness over the coming weeks and months could be an opportunity to load up on the cattle and hog futures for 2023. 

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