ETFs: Supply Shock Could Provide Strength In Wheat (DBA, AGF, GRU, JJG)
As fears that a supply shock could broaden the supply and demand imbalance in wheat have pushed the commodity to a 13-month high and there still may be opportunities for some strength in the wheat market going forward.
A driver in further positive price support in wheat is harsh weather conditions. A severe drought in Russia, one of the major wheat exporters of the world, that production in the Kremlin will decline, leading to a fall in exports to keep prices of the commodity in line domestically. Additionally, excessive rainfall during planting and harvesting time in Canada could further hinder global supply of wheat and further add to positive price support.
In fact, severe weather conditions have lead to the Food and Agriculture Organization to state that production of wheat in key producing areas is expected to decrease by at least 10 million to 15 million tons this year. As a result, some nations have already taken measures to slow down exports to meet domestic demand. One such nation is Ukraine, who has implemented stricter wheat quality controls to curb to potential of huge domestic price spikes.
Another factor that could lead to positive price support for wheat is increased demand from the expected global population growth and increased purchasing power of individuals in emerging markets.
For those looking to gain exposure to wheat, here are a few possibilities:
- PowerShares DB Agriculture (NYSE:DBA), which allocates nearly 9.2% of its assets to wheat.
- PowerShares DB Agriculture Long ETN (NYSE:AGF), which seeks to replicate an index that allocates nearly 25% of its assets to wheat.
- iPath DJ-UBS Grains TR Sub-Idx ETN (NYSE:JJG)
- ELEMENTS MLCX Grains Index TR ETN (NYSE:GRU)
Although an opportunity could exist in wheat, it is equally important to consider its inherent volatility and risks. To help protect against this, it is important to implement an exit strategy which identifies a price point at which downward price pressure is likely to be seen. Such a strategy can be found at http://www.smartstops.net/.
Kevin Grewal serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton.