Can The Soybean ETF Continue Its Bull Run? (CORN, WEET, JJG, SOYB)

Eric Dutram: In the early part of the summer, commodity investors were zeroed in on grains like wheat and corn thanks to the drought. This was for good reason, as both of these commodities had incredible returns during the time period, far outpacing index returns for broad stock and commodity benchmarks.

In fact, ETNs tracking Corn (NYSEARCA:CORN) and Wheat (NYSEARCA:WEET) are among the best performing in the commodity world on a year-to-date basis, adding double digits in the time frame, while the iPath Dow Jones-UBS Grains ETN (NYSEARCA:JJG) is actually the best performing commodity product in the entire ETP world from a year-to-date look, adding more than 37% since January 1st (see Beyond Corn: Three Commodity ETFs Surging This Summer).

Thanks to these impressive moves and the ubiquitous nature of corn and wheat, many investors have overlooked another key staple product that has not only had a great year, but has been storming higher in recent sessions as well; soybeans. This product, as represented by the Teucrium Soybean ETF (NYSEARCA:SOYB) is quietly up 25% YTD and it could continue to march higher in the near term thanks to unfavorable crop reports.

This could be especially true given the latest USDA crop projections that just hit the market, sending soybean futures higher yet again. In this latest release, American soybean production will be down 14% from 2011 and will be at the lowest level since 2003, possibly pushing U.S. output below Brazil for the first time ever in the key crop (read Buy American with these Three Commodity ETFs).

Furthermore, the USDA prediction was less than the Bloomberg News analyst prediction, and is roughly 60 million bushels less than what the USDA thought just a month ago. The situation becomes even worse when investors add in a soybean-hungry Asia into the mix, as China, the biggest importer of the staple, looks to see demand rise to just over 75 million tons for the year, the ninth straight increase, according to Bloomberg Businessweek.

Clearly the supply situation has baked into soybean futures and ETFs an incredible price increase over the past few months. SOYB is actually now one of the top five commodity ETPs on a year-to-date look, while the commodity product is currently sporting a double digit return since the start of August as well.

However, some believe that prices are starting to top out for the commodity, or that the product is due for a breather in the near term. Still, the futures curve is in heavy backwardation at least until 2015—at time of writing—so investors could see some gains in the near term before the product pulls back (see USAG in Focus As Agricultural Commodity ETFs Soar).

Additionally, a slowdown in China could curtail demand for soybean and one of its main uses, as a feed for hogs. Should this take place, the high projections for Chinese demand could be a little off base and may give soybeans some room on the supply/demand front heading into 2013.

Lastly, it is also important to note how SOYB’s structure could influence returns going forward. After all, the product, unlike many commodity ETFs, doesn’t just cycle into the next month as expiration approaches, rather it uses a much more in-depth approach.

The ETF uses three futures contracts for soybeans, all of which are traded on the CBOT. The three contracts include (1) the 2nd-to-expire contract, weighted 35%, (2) the 3rd-to-expire contract, weighted 30%, and (3) the contract expiring in the November following the expiration month of the 3rd-to-expire contract, weighted 35%.

Teucrium believes that this spread out approach can reduce contango and thus help investors achieve better returns during unfavorable commodity environments. However, this strategy could backfire in rare times like this in which the market is extremely backwardated, as the product could gain less from the roll as it might if it was just shifting from one month to the next (see Is USCI The Best Commodity ETF?).

Thanks to this, SOYB could be an interesting short-term play, but it might not do as well as some investors might expect over the longer term. Not only will the futures curve not be as helpful, but a slowdown in China or recent rains in the heartland could help to boost the supply/demand balance in favor of production.

Given this reality, investors should use caution when investing in this commodity ETF, although the short term trend is definitely bullish and could provide quick traders with gains before September is over. After all, the company’s Corn ETF, while a top performer from earlier in the summer, has been flat to negative in the trailing one month period despite the relatively favorable supply picture (also see What Happened to the Sugar ETF?).

Although CORN is still up significantly on the year, there should be some concern among agricultural ETF investors that a comparable situation is happening in the soybean market as well. SOYB’s current performance is eerily similar to what CORN saw earlier in the year, so while the curve may be favorable and supplies tight, investors should definitely proceed with caution before taking a dive on soybeans to close out 2012.

Written By Eric Dutram From Zacks Investment Research  

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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