A Small Speculation - Lean Hogs

My only investments in commodities to date have been paper silver and the Lyxor commodites ETF. The silver investment has been very successful although it represents a small part of our overall asset allocation. I made a decision last year to increase the exposure to commodities. In January, I made a small investment in the Lyxor commodities ETF (currently down about 1.2% on cost). I am not sure what percentage of our assets should be allocated to commodities, but have provisionally given myself a limit of 3% or total assets.

Today I took on another position, investing in lean hogs. The price of lean hogs declined steadily in the second half of 2007 and flattened towards the end of last year and the early part of January. The reason for the decline was generally accepted as being overbreeding by (primarily) US producers. Given rising feed costs (soyabeans and corn), there may have been some pressure to reduce stock numbers as well, but I have not found much to support that theory. At the same time, pork prices in China and Hong Kong have risen significantly. Pork prices rose 56% in China in the 12 months to November 2007. Some provincial governments have been handing out coupons to citizens to help defray the rising costs. China imports pigs from the US to meet the shortage. I have no idea whether the extreme weather conditions in China will affect the supply, but the possibility exists.

My expectation is that rising demand in China (and a few other places) will exert greater influence on the prices set in western markets. At the same time, the combination of lower revenues and rising costs should result in reduced breeding by farmers. In short, I can see a credible case for improving fundamentals.

From a technical perspective, the recent price movements could be taken as a breakout signal. I am not a huge fan of technical chart analysis, but am not totally hostile either. While it looks like a breakout to my inexperienced eyes, it is too soon to trigger interest from momentum investors.

As I do not have time to constantly watch the futures markets and do not wish to have several hundred live pigs delivered to my front door, I purchased the HOGS ETC traded on the London Stock Exchange. Exchange Traded Commodities are essentially the same as ETFs, only they track a single commoditiy or a basket of commodities. Unlike futures and options there is no leverage (although you can trade on margin if you wish) and no expiry date (so no roll over costs). There are embeded management and other expenses (as with ETFs).