July 18, 2012

BILL KIERNAN Director, GAI Research & Insight

The great drought of 2012 means poor returns for farmers and high food prices for consumers. Investors in Ag ETFs stand to benefit.
 

Corn is ubiquitous, and as corn goes, so goes all of agriculture, consumer food prices, plastic prices, food packaging prices… and the list goes on.   Earlier this year, the U.S. Department of Agriculture (USDA) projected a year-end surplus of corn from the near record plantings. Expectations loomed large in the spring, resulting from farmers planting an estimated 96.4 million acres of corn and, with a predicted 89.6 million acres harvested at an average yield of 166 bushels per acre we’d have a 14.8 billion bushel monster of a crop on our hands. Analysts fretted about oversupply, and commodity prices declined, resulting in more calls that farmland is overvalued.
 

Analysts are good with math.  They can take beginning commodity inventories, add the projected crop, calculate ending inventory, proclaim an impending over-supply, apply price elasticity models and proclaim that agricultural commodities are overvalued.  What they can never predict though is Mother Nature. 
 

The unrelenting drought that has gripped the U.S. for the past several weeks has caused the steady lowering of U.S. crop estimates as the growing season continues and the drought fails to abate. On Wednesday, the USDA announced an adjusted yield forecast of 146 bushels per acre; a 12% drop, surprising many analysts who didn’t expect such deep cuts to the projections.  All of this is certainly bad tidings for farmers and, down the line, consumers, when food prices rise on tight commodity supply.  However, there are some who are realizing profits.
 

ETFs indexed to corn and grain prices are rallying.  For instance, after last Wednesday’s cut in corn yield projections by the USDA, Teucrium Corn Fund(NYSEAcra: CORN) rose 2.2% in early trading leading all unleveraged ETFs.  In the past month, Teucrium is up 28% while iPath Dow Jones-UBS Grains ETN (NYSEAcra:JJG) is up 26%. 
 

Teucrium Corn Fund:

iPath Dow Jones-UBS Grains ETN:

Even when there is no drought, there is always concern about corn in July because it is in pollination.  This year’s pollination-time drought has hit corn doubly hard, but corn is not alone.  Of major U.S. crops, 94% of corn, soybeans, wheat and cotton rely on rain for moisture, and down the line livestock rely on corn and soybeans for feed.  Widening the view of ETFs profiting from the current dire corn situation, consider the largest agriculture based ETF, PowerShares DB Agriculture (NYSEAcra: DBA) with $2 billion assets under management.  The fund invests in futures contracts of various agricultural commodities.  Its top holdings are soybeans, corn, live cattle, sugar and cocoa.  DBA has gained more than 11% in the past month and is +1.35% for the year.

Powershares DB Agriculture: 

The price of corn is up 48% since June and has hit $7.50 per bushel.  Some analysts are predicting we could see corn at $10 per bushel and soybeans at $20 per bushel.  Will our weather change and the crops recover?  Not likely, because it usually it takes a hurricane or major storm event to change weather patterns in the U.S., and the National Weather Service predicts no major changes in our current weather patterns for the next several weeks.  By then, the corn will be past its productive stage, and from my vantage point, much of it seems too far gone already. 
 

The next crop forecast by the USDA will be given on August 10^th.  If the current conditions continue, harvests will be a disaster, but commodity linked ETFs will likely soar.
 

Video Report:  USDA Reports Corn in 18 States Hurt By Drought