The price of pigs is the same as a year ago but this Fool lost 47% on his Lean Hogs index tracker. Is this the worst tracker of all time?
"What is a poke?" A question that has vexed me for a while but I didn't look up the derivation of the phrase to buy a pig in a poke until recently. The poke in question is a small sack or bag, from which we get the work pocket. If you bought a suckling pig wriggling in a bag and didn't bother to open it until you got home you might find it was only a worthless cat. A mute one I guess.
I have to admit that last year I bought a tracker of pig prices in a poke. The poke in this case was an Exchange Traded Commodity (ETC) called ETFS Lean Hogs (HOGS). The price of pigs had slumped in US due to high feed prices causing farmers to slaughter early. That was an unsustainable situation since the supply of pigs would have to fall eventually and moreover if feed prices stayed high (as seemed likely before the world economy tanked) the hogs would cost more to rear. Rapidly increasing meat consumption in Asia gave solid long term support.
ETFS Lean Hogs had fallen from $2.90 in 6 months and had previously averaged just above $3 since the tracker became available in 2006. At $1.93 HOGS seemed a bargain. If only I'd looked inside the wrapper.
The whole hog and nothing but the hog
June Lean Hogs on the Chicago Mercantile Exchange (CME) is $57. This chart shows the price in March 2008 was about the same as now, so why has HOGS lost 47%?
The ETFS factsheet says "ETFS Lean Hogs (HOGS) is designed to track the DJ-AIG Lean Hogs Sub-IndexSM and pays a capitalised interest return which cumulates daily. The Sub-Index is an "excess return" index and the interest component combines to give a total return investment."
I don't know what all that guff means but I can check the DJ-AIG Lean Hogs Sub-Index, which is currently $9.70. It was $18.37 when I bought my HOGS, so it's down 47%. At least this figure lines up.
I've been contangoed
In the year that I've been a piggin' investor the price of Lean Hogs futures has predicted a strong rise coming round the corner. That's good, right? No! Unlike gold where you can store £1m in a child's shoebox, it's not economic to store vast values of commodities like oil, grain and meat for years.
If you want to profit from a rise in crude oil then you, or a tracker fund, will have to buy a future. If the future for the month of September for example is higher than the spot price it's called contango in big-shot trader jargon.
The problem I didn't see is that you are paying a premium due to market optimism and if the spot price does not rise by September you have lost money. Come September's you have to close the contract and buy a new one for say December. If that is also in contango the same can happen again.
What now?
I still have my hog tracker. I'm considering selling but I'm not sure yet. Commodity trackers like ETFS Soybeans (SOYB), ETFS Brent Oil 1 Yr (OSB1) and ETFS Commodities (AIGC) are not inherently bad investments; it's simply that for over a year the futures market for the one I bought has turned out to be wrong. It's been expecting a rise in pig prices, as have I and it just hasn't happened.
Lean Hogs futures are showing increasing prices up to Jun 2010. Much of this is seasonality. This chart shows prices peaking in April, May and June. Evaluating this sort of investment is looking like the type of problem Warren Buffett calls "too hard". I'm still very bullish on long-term meat prices but while playing soft commodities is now as easy as purchasing a share in Vodafone (LSE: VOD) it can still be like buying a pig in a poke.
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