Can You Bring Home the Bacon by Investing In Pork?
It’s safe to say that a lot of people like bacon. Whether on a BLT sandwich, a pizza, or in a pasta, bacon is popular around the world. And that’s just bacon. There are pork ribs, pork chops, and good old ham.
If pork is so popular, is it worth investing in?
The Our World in Data website has a fascinating report on global meat consumption. It shows how global pork consumption has grown from 25 million tons in 1961, to 121 million tons in 2018. That’s nearly fivefold, while the world’s population has grown less than threefold. In other words, the average person is eating twice as much pork.
With growing pork consumption, it must be a great investment, right?
Well, not really…The chart below shows the performance of stock prices (S&P500 index) and pork prices (lean hog futures). We will come back to why we are using lean hog futures contracts in a bit.
Both charts go up and down, but the price of stocks has risen during most years. On the other hand, the price of pork has gone up and down a lot more each year, but over time it has stayed in a narrow range. This chart only goes back to 1998, but if you go all the way back to 1960, the trend has been pretty much the same.
The difference between stocks and commodities
So why hasn’t the pork price risen like the price of stocks?
We all know the price of a stock is partially related to a company’s profits. As the company reinvests some of its profits, it grows its capacity and makes bigger profits. So, if a company grows, the share price (generally speaking) will rise.
The price of pork, like any commodity, is cyclical and depends on supply and demand. When the price is high, people buy less pork. But, when the price is high, farmers want to cash in on those higher prices, so they increase the size of their herd of pigs. Within months the market becomes flooded with pork.
At some point, there will be too much pork and not enough demand. This is when farmers must lower their price to compete with other farmers– which is great for consumers. Low prices lead to more demand, because people can afford to eat pork chops and bacon sandwiches more often. But farmers don’t like low prices, so they cut back on the size of their herd until the price rises. This is the cycle that causes prices to go up and down. Over time, the total amount of supply and demand have both gone up – so the price of pork is still very close to where it was 16 years ago.
There are a few other things that affect supply and demand too. Outbreaks of African Swine Fever in China and other Asian countries can result in erratic supply. The price of feed also varies which affects the size of the herd and the time at which hogs are sold. In addition, the pork market is affected by shipping and storage costs, tariffs, and of course trade wars.
Pork is better for trading
If the price of pork doesn’t rise over the long term it doesn’t make a very good long-term investment– but it can be traded. That means buying low and selling high. This is nothing new. In the glory days of floor trading, pork belly contracts were one of the biggest futures markets. Pork belly futures aren’t traded anymore, but lean hogs’ futures contracts are, and this is why the price of these contracts is used as the price of pork.
Exchange-Traded Funds (ETFs)
Futures trading is complicated and expensive. But there is another way for a regular investor to trade pork with as little as $500. ETFs can be traded using a standard stock trading account and not much cash up front.
The WisdomTree Lean Hogs (HOGS) fund is an exchange-traded commodity fund that tracks the price of lean hogs quite closely. Unfortunately, it is only listed on European exchanges like the LSE.
The iPath Livestock ETN (COW) is an exchange-traded note that includes live cattle and hogs. Nearly 70 percent of the price represents cattle, but the prices of beef and pork do track one another as they are often used as substitutes. The result is that this fund does a pretty good job of tracking the price of lean hogs.
Beware – even the pros don’t get it right
This is still a market that needs to be approached with caution. In May last year, Jeff Daniels at CNBC pointed out that “with African swine fever ravaging China’s hog industry, U.S. experts are expecting pork prices to go higher and likely stay elevated well into 2020.” The reality is that prices promptly fell 30% in a matter of weeks. This just goes to show, as always, do your own homework when looking at an investment.