Trying to Find Opportunity With Commodities ETFs as Oil Slides

Oil continues tumbling and that is weighing on other commodities, including agricultural commodities. For example, the PowerShares DB Agriculture Fund (NYSEArca: DBA) is off 1.1% over the past week and that is not even the worst performance among agriculture ETFs.

The PowerShares DB Agriculture Fund tries to reflect the performance of the Diversified Agriculture Index Excess Return, which is comprised of futures contracts on the most liquid and widely tracked agriculture commodities.

Some oil market observers see more declines coming for crude. Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices. Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.

The bad news for commodities is that many are usually not highly correlated to oil, but those correlations are rising as oil slides.

“Generally there is a low correlation of 0.28 between non-energy and energy commodities, using daily data back to Jan. 2, 1987.  Recently, the correlation has been rising, and while not excessively high, the pace at which it is increasing is noticeable.  On Jan. 13, 2017, precisely two months ago, the 30-day correlation between the S&P GSCI Energy and S&P GSCI Non Energy was -0.11, increased to 0.05 by Mar. 1, and is now 0.35, going from uncorrelated to moderately correlated in a short time,” according to S&P Dow Jones Indices.

Even some of the commodities that historically perform well in the face of oil declines are currently slumping. For example, corn, which often endures oil weakness pretty well, is faltering. The Teucrium Corn Fund (NYSEArca: CORN), the only corn-specific ETF on the market, is off 4.1% over the past week.

“Normally several of the agriculture and livestock (coffee, soybeans, wheat, live cattle, lean hogs and corn) do well on average when oil drops.  Historically, corn holds up best, gaining 56 basis points on average in months oil falls.  Further, none of the non-energy commodities typically lose more than 1% in an average month that oil loses, but now the losses are substantial with greater than 1% drops month-to-date in 12 of 13 non-energy commodities that are down with oil,” according to S&P Dow Jonnes.

For more news and strategy on the Agriculture market, visit our Agriculture category.

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