Corn, Agriculture ETFs Rocket on Supply Concerns and Drought
August 11th, 2012 at 6:57am by Tom Lydon
A USDA report revealed lower-than-expected crop yields as the worst U.S. drought in half a century withered corn crops, pushing prices to record highs. Investors seeking to capitalize on the rising food prices may take a look at opportunities in agriculture exchange traded funds.
Early Friday, the United States Department of Agriculture announced that the country’s corn production dropped 17% year-over-year, which is worse than the previous estimates of 15%, reports Paul Vigna for The Wall Street Journal. [ETF Chart of the Day: Agriculture]
The USDA calculates that the average corn yield in the U.S. is just 123.4 bushels per acre, the lowest level in 17 years, compared to the 146 bushels per acre projected last month. [How High Can Corn ETF Rally on Drought?]
Meanwhile, poor weather conditions around the globe have hit regional crops, notably a scorcher in Russia and a deluge in Brazil, pushing up world prices. The United Nations Food and Agriculture Organization calculates that global food prices increased 6% in July.
“I think there should be more inflows if we’re going to track the persistent rise in agricultural prices,” Matthew Lemieux, a research analyst for Lipper, said in a Reuters report. “The consensus is that we’ll see flows rise until we see some change at least in the U.S. drought and other conditions that are pushing prices up globally.”
Corn futures hit a record high $8.49 per bushel Friday. The government report estimates that corn could go as high as $8.90 per bushel, compared to the $6.40 per bushel calculated in July and $4.80 per bushel projected in April, according to USA Today.
“Largely what traders expected for corn and the price was built in,” Sal Gilbertie, Chief Investment Officer and co-founder of Teucrium, said in an interview. “Those who need corn still haven’t bought, thinking the price was going to go down, but any decline would bring on more buying from demand.”
With much of the damage already done in corn crops, grains traders now have their eyes on soybeans.
“The new story is in soybeans. Soybeans could be saved with rain. But if there is no rain, prices could run further,” Gilbertie added.
The higher corn prices, a major ingredient in livestock feed, is also forcing ranchers to put young cattle to markets early and to sell more cattle to offset the rising costs, which will translate to cheap meat for the consumers, Bloomberg reports.
“Near term, there is an adequate supply of meat from all species,” Michael Martin, a spokesman for Cargill, said in the article. “As we move into 2013, the supply of beef, in particular, could be constrained by the U.S. herd being the smallest in 60 years.”
Agriculture ETFs include:
- Teucrium Corn Fund (NYSEArca: CORN)
- Teucrium Wheat Fund (NYSEArca: WEAT)
- Teucrium Soybean Fund ETF (NYSEArca: SOYB)
- PowerShares DB Agriculture Fund (NYSEArca: DBA). DBA holds a basket of commodities futures contracts, including cattle, cocoa, coffee, corn, cotton, lean hogs, soybeans, sugar and wheat.
For more information on agriculture commodities, visit our agriculture category.
Max Chen 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.