Corn Prices Lead Agriculture ETFs on Drought Forecast
July 23rd 2012 at 2:00pm by Tom Lydon
The recent price pressure for corn is a plus for the exchange traded fund Teucrium Corn Fund (NYSEArca: CORN). The drought in the mid-west prompted the USDA to make successive cuts to crop projections over the past several weeks.
“The fallout of the aridity hasn’t been relegated to the corn markets. Wheat and beans have seen substantial positive price performance. Front-month wheat has jumped to over $9 per bushel from roughly $6.30 a month ago. Over the same period, soybeans jumped to $16.80 from $13.80,” Abraham Baillin for Morningstar wrote in a recent article. [Grain ETF Spikes 10% on Week on Mid West Drought]
The recent adjustments of the USDA cut to crop projections has created a supply shock. Corn prices have jumped and September corn futures are up 50% from mid-June contracts. Analysts are pondering if corn prices will weaken once the harvest takes place.
Nevertheless, the hot, dry weather is not expected to let up soon. The corn focused ETF is up 27.3% since June 21, creating interest in this single commodity fund. Investors should note that funds focused on one commodity tend to be more volatile than a mixed basket.
“A couple [of clients] have [had] questions about whether there’s more left” to the surge in corn prices, said Dave Chojnacki, market technician at Street One Financial “I told them, it’s had a big run, and it’s going to meet some resistance unless something else pushes them higher.” [Ag ETFs May Rally More on Drought: Teucrium Investment Chief]
Don’t forget that last week, the U.S. Department of Agriculture estimated that corn production would fall 12% in July.
Reasons investors hold commodities in their portfolios include diversification benefits, a hedge against inflation and overall price speculation. [How Record Corn Prices Are Affecting Food-Related ETFs]
CORN is the only fund that holds futures contracts for corn specifically. Other ETFs that benefit from this run-up in prices, but mitigate the risk of a single commodity include:
- PowerShares DB Agriculture Fund (NYSEArca: DBA) includes corn, wheat, sugar and soybeans
- iPath Dow Jones UBS Agriculture Sub-Index ETN (NYSEArca: JJA)
- Market Vectors Agribusiness (NYSEArca: MOO)
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.