Commodity ETFs lower in March, but fundamentals remain supportive

Apr 18th, 2012 | By | Category: Commodities

The Dow Jones-UBS Commodity Index, which can be accessed via the London-listed ETFS All Commodities DJ-UBSCI ETC (AIGC), was down by 4.14% in March.  Overall, 15 out of 20 index constituents decreased in value.  Livestock was the worst performing sector, down 8.06% for the month.  Weaker-than-expected domestic demand outweighed continued strong exports, further pressuring Lean Hogs.

Soybean demand set to rise

Chinese soybean imports are set to soar, yet production hasn't kept up.

Agriculture, as a whole, was relatively unchanged, up 0.34%, though individual commodity performance was varied. The USDA’s Prospective Plantings report and Quarterly Stocks report were released at the end of the month, revealing lower-than-expected acreage numbers for Soybeans and Wheat.  Indeed, the Dow Jones-UBS Single Commodity Indexes for soybean meal and soybean had the strongest gains in March, with returns of 10.14% and 6.29%, respectively.

According to a Commerzbank report, there were concerns that soybean acreage in the US could be cut in favour of corn as corn prices increase. It was also likely, the Commerzbank report noted, that an increase in price over recent weeks was brought about by speculation that crop shortfalls in Brazil and Argentina due to drought could boost Chinese demand for US soybeans.

“According to the China National Grain and Oils Information Centre, Chinese soybean imports could soar 20% to 28.4 million tons in the first half of the current year, despite the fact that the production estimate for 2011 was increased at the same time to 14 million tons,” noted the Commerzbank report. This, it continued, “would suggest a sharp rise in Chinese soybean demand.” Exposure to soybean can be gained via the London-listed ETFS Soybeans ETC(SOYB).

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Corn, while declining for the month, rallied into the end of March as the USDA’s Prospective Plantings report and Quarterly Stocks report also showed that ending stocks were near multi-year lows. Exposure to corn can be achieved through the ETFS Corn ETC (CORN) listed in London.

Energy decreased, down 7.24%.  While Natural Gas was the main contributor to negative returns, petroleum prices were also under pressure as discussions surrounding a potential bilateral Strategic Petroleum Reserves (SPR) release involving the US and the UK impacted markets.  Industrial Metals declined, losing 5.39% for the month.  Concerns over potential near-term softness in Chinese demand weighed on the sector.  Inventory builds in Chinese warehouses fuelled concerns that future demand may soften.

Precious Metals also declined, down 3.37%.  Both Gold and Silver had a difficult start to the month following Federal Reserve Chairman Ben Bernanke’s semi-annual economic report to Congress on 29February, in which he did not signal further monetary easing.

Nelson Louie, Global Head of Commodities in Credit Suisse’s Asset Management division, said: “While commodities were generally lower in March, this was due to commodity markets remaining vulnerable to global supply shocks.  We believe that the majority of the price increase of oil over recent months was driven by tight fundamentals, with much of the risk premium related to supply risk, such as geopolitical risk. ”

Agriculture remained vulnerable to weather disruptions and has recently been supported by reports of dry weather in South America and a dramatic cooling of temperatures for much of Europe in February.  In base metals, new mining capacity proved more difficult and expensive to obtain while labour disputes continue to threaten existing production.  This may bode well for component prices as macroeconomic risk subsides.”

Christopher Burton, Senior Portfolio Manager for the Credit Suisse Total Commodity Return Strategy, added: “The commodity markets were disappointed by dips in Chinese and European preliminary economic indicators, along with several of the regional surveys in the US.  While some suggested that the global rebound is running out of steam, recent positive data – including housing starts, building permits and existing home sales – have contributed to further optimism in the market.

“In addition, the decline in US weekly initial jobless claims at the end of March provided reassurance that the US labour market recovery remains on track. We believe investors will continue to benefit from the inflation protection and diversification potential of holding diversified commodities exposure within a portfolio of traditional assets.”

For investors looking to access commodities, there are a number of London-listed ETFs and ETCs to consider, offering exposure to a range of markets including energy, livestock, agriculture, industrial metals and precious metals.

Broad Commodity
ETFS All Commodities DJ-UBSCI ETC (AIGC)
LGIM Commodity Composite Source ETF (LGCU)
iShares S&P GSCI Dynamic Roll Commodity Swap ETF (SDYC)
ETFS GBX Daily Hedged All Commodities DJ-UBS PD (PALL)

Energy
iShares S&P Commodity Producers Oil and Gas ETF (SPOG)
iShares S&P GSCI Dynamic Roll Energy Swap ETF (SDRE)
ETFS Natural Gas £ ETC (NGSP) ETFS Brent 1yr ETC (OSB1)

Agriculture & Livestock
iShares S&P Commodity Producers Agribusiness ETF (SPAG)
Lyxor S&P GSCI Agriculture & Livestock 3 Month Forward ETF (AGLG)
Lyxor S&P GSCI Inverse Agriculture & Livestock 1 Month Forward ETF (AGSG)
iShares S&P GSCI Dynamic Roll Agriculture Swap ETF (SDRA)
ETFS Agriculture £ DJ-UBSCI ETC (AGAP)
ETFS Forward Livestock DJ-UBSCI-F3 ETC (FLIV)

Industrial Metals
Lyxor S&P GSCI Industrial Metals 3 Month Forward ETF (MELG)
Lyxor S&P GSCI Inverse Industrial Metals 1 Month Forward ETF (MESG)
iShares S&P GSCI Dynamic Roll Industrial Metals Swap ETF (SDRM)

Precious Metals
iShares S&P Commodity Producers Gold ETF (SPGP)
iShares Physical Gold ETC (SGLN)
Source Physical Gold ETC (SGLD)
DB-X Physical Gold ETC (XGLD)
ETFS Physical Gold ETP (PHAU)
ETFS Gold ETC (BULL)
iShares Physical Silver ETC (SSLN)
DB-X Physical Silver ETC (XSIL)
Source Physical Silver P-ETC (SSLV)
ETFS Physical Silver ETP (PHAG)
ETFS Precious Metals DJ-UBSCI ETC (AIGP)
Source Precious Metals T-ETC (SPMETL) (SIX Swiss Exchange)

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