Agriculture ETFs May Rally More on Drought: Teucrium Investment Chief | ETF Trends

A heatwave and drought are gripping the Midwest and causing grains futures and the exchange traded funds that track them to go vertical.

Still, agriculture ETFs pulled back Wednesday following bullish news when crop production forecasts were cut. Also, traders are extremely bullish on grains and the sector may need to work off overbought conditions.

Of course, the weather is the wildcard and agriculture ETFs could rally more if the drought continues.

In a phone interview, Sal Gilbertie, Chief Investment Officer and co-founder of Teucrium, said that the United States Department of Agriculture expected a surplus from the near record planting. However, the Midwest scorcher, the worst drought in 24 years, quickly turned things around. [ETF Chart of the Day: Agriculture]

“The drought is real,” Gilbertie said. “Each day the drought continues it causes the corn corp to worsen.”

Early Wednesday, the USDA announced significant yield cuts due to the record heat.

For instance, an estimated 96.4 acres of corn were planted with anticipation of 89.1 million acres to harvest at 166 bushels per acre, which would equal 14.8 billion bushels.  The USDA report changed the forecast from 166 bushels to 146 bushels per acre, a 12% yield drop, and below last year’s 147.2 bushels.

The next USDA crop report is slated to come out on August 10. [Corn, Grains ETFs Break Out]

“The drought is affecting all ags, but especially corn, since it is now in the pollination stage,” Gilbertie said. “Investor caution is advised since July has been a month in which the corn market has put in cyclical highs in the past – there are always concerns in July about pollination, even when there is no drought.”