Eric Dutram: With the exception of a few days here and there, this summer has delivered sweltering heat across much of the nation. Temperatures have set records in many parts of the country and especially so in much of the main grain growing regions in the Midwest and South.
Thanks to this heat, which has come at a terrible time for one of America’s most important crops, corn, prices for a number of commodities have been surging while predictions regarding supplies have also slumped. In fact, the most recent forecast called for a 20 bushel per acre reduction in the corn market (down to 146 bushels), while the soybeans predictions have dropped 3.4 bushels—down to 40.5 bushels– as well.
This has already translated into some impressive performances in the grain sector as soybeans have gained more than 30% since the beginning of June while corn prices have added more than 60% in a similar time period. These enormous gains come after pretty much flat—if not negative—performances during the first part of 2012, showcasing just how intense the fear has become in the segment (read Three Defensive ETFs for a Bear Market).
Given the heavy use of corn for ethanol and major droughts in a few other key grain growing regions of the world, investors could be looking at high prices not only at the pump but at the dinner table as well. In fact, recent corporate earnings have already suggested that this might be the case as evidenced by some food inflation concerns by both (NYSE:MCD) and (NYSE:CMG) in their recent reports. This trend could be especially true if another round of QE is initiated and a weaker U.S. dollar pushes all commodity prices through the roof once again.
Thanks to this, investors may want to consider preparing for an uptick in food prices later this year, particularly if the major drought continues and crop yields continue to plummet. For investors concerned about this issue, we have highlighted three ETNs below which could benefit from this uncertain environment and the likely prospect of more commodity price increases in the near future:
iPath Dow Jones-UBS Grains ETN (NYSEARCA:JJG)
Thanks to surging corn prices and a similar situation in the soybeans market, grains have been on fire as of late. This trend has been further supported by a shift towards wheat by some farmers as well as overseas weakness in this corner of the grains world (see Beat the Heat with These Three ETFs).
Due to this broad trend across the space, an investment in grains has been a pretty good one over the past month or so, and could continue to be one in the short term if more adverse weather is present across the nation. One of the purest ways to tackle this rising food price trend is with JJG, a product that tracks the broad grains market.
This ETN holds the aforementioned three grains, putting just under half of the portfolio in soybeans, 30% in wheat, and 24% in corn. Investors should also note that the product is structured as an ETN and thus has credit risk but doesn’t actually hold the securities and is instead a senior unsubordinated debt security of UBS. In terms of performance, the note has added over 36% in the past month alone and nearly 40% over the past three months, making it one of the top performers in the time period.
iPath Dow Jones-UBS Livestock ETN (NYSEARCA:COW)
Grains are also key input into the price of meat, helping to fatten up herds cheaply and quickly. Due to this, higher grain prices often translate into more expensive beef, chicken, and pork.
While the livestock ETF market isn’t exactly huge, investors do have the relatively liquid COW as a way to play the space. The product puts roughly 70% of its exposure in live cattle contracts while lean hogs account for the rest of the portfolio (also read The Comprehensive Guide to Consumer Staples ETFs).
Much like its counterpart on the list, COW is an ETN so tracking error isn’t a problem although there is the credit risk of UBS. Volume is relatively good on this fund although the daily average is still below 40,000 shares a day.
Although grains are a big input cost for meat prices, COW hasn’t yet surged as a result of the increases. The ETN is up just 1.8% over the past three months and just 0.4% in the past one month period. However, this could mean that investors still have time to get in on the note, especially if herd sizes continue to shrink and feed costs rise heading into the fall.
E-TRACS UBS Bloomberg CMCI Food ETN (NYSEARCA:FUD)
For a broad play on the food segment of the commodity market, investors should look no further than FUD. The product provides broad exposure to the space and it does so at 65 basis points a year, 10 basis points less than the other two products on this list (see Time to Buy the Food and Beverage ETF?).
FUD’s basket currently includes 10 different commodities, all of which can be classified as ‘softs’. Top holdings right now include sugar (24%), soybeans (19%), and corn (16%) while other in-focus commodities also make an appearance in the product as well.
Unfortunately, despite the lower cost, volume is pretty bad in the note, coming in at about 6,000 shares a day. This means that bid ask spreads might be quite wide in the note, possibly promoting a higher total cost overall.
Still, the product has performed admirably over the past month, adding 19% in the time period. However, it is important to note that it has added just under one percent over the past 52 weeks suggesting that the segment had been beaten down and is now once again approaching its high for the year.
However, investors should note that all three of these products don’t have the most favorable Zacks ETF Ranks at this time. FUD has a rank of 3 or ‘Hold’ while COW and JJG both have ranks of 4 or ‘Sell’. This suggests that these products are not expected to perform very well over the long haul, at least when compared to other funds in the segment (see more in the Zacks ETF Center).
Yet with that being said, the Zacks ETF Rank has a relatively long time horizon of one year, so investors could still see further gains in the food ETF segment before trending back towards earth. Either way, it looks to be a very volatile next few months in the agricultural segment and investors would be wise to stay focused on the both the weather and projected crop yields as we approach the crucial harvest season.
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