Grain ETFs soar as corn, wheat and soybean sear in US Midwest heat wave

Jul 11th, 2012 | By | Category: Commodities

The unrelenting heat wave afflicting the US Midwest continues to scorch crops including corn, wheat and soybean. With searing heat and little sign of much-needed rain, the prices of these commodities have risen dramatically.

Grain ETFs soar as corn, wheat and soybean sear in US Midwest heat wave

ETPs such as the London-listed ETFS Grains DJ-UBSCI (AIGG), the Xetra-listed Source Grains T-ETC (SGRAIN), and the NYSE-listed Teucrium Agricultural ETF (TAGS) have soared as a result of searing heat in the US Midwest.

ETFs and ETCs tracking these commodities, such as the ETFS Grains DJ-UBSCI ETC (AIGG), the Source Grains T-ETC (SGRAIN), and the Teucrium Agricultural ETF (TAGS), have soared, providing a reminder of the potential return benefit of maintaining an allocation to commodities.

In June, the Dow Jones-UBS commodity sub indices for corn, soybean meal and wheat returned 25.40%, 15.52% and 14.39%, respectively. Similarly, as of July 5, the S&P GSCI Grains index was up 30.89% since the end of May (the S&P GSCI Grains Index reflects price changes in corn, wheat and soybean).

The performance of these soft commodities is simply a case of supply and demand.  Rain is crucial to crop growth and there has been very little of it in the US Midwest grain belt since the mild winter and early spring prompted early planting of most crops in Northern America. Low soil moisture conditions and excessive heat have significantly reduced 2012 yield estimates.

A recent US Department of Agriculture (USDA) Quarterly Stocks and Acreage report looking at corn, the largest component of the S&P GSCI Grains Index, with a weight of 39%, revealed the impact the heat wave was having on crop yields – and thus future supply. According to the report, as of June month-end US corn stocks were well below market expectations and down 14% year-on-year. A more recent update suggested that the US corn crop was in the worst state since the disastrous 1988/89 North American drought.

The latest report from the USDA said that the corn crop will average just 146 bushels an acre, down 20 bushels from its June estimate. As a result, the USDA reduced its forecast for corn ending stocks by 37% from last month.

Soybean and wheat have been affected too, though not to the same extent as corn. That said, the soybean market saw gains as participants pondered whether US farmers may scale back the last of their soybean planting as a result of poor conditions.

While relief will eventually come, it is likely to come too late for much of the crop.

As a consequence, analysts at Barclays indicated in a written report released June 29 that market participants may be reconsidering the outlook for the market: “A slew of weather-related supply disruptions indicate that the optimistic scenario of agricultural surpluses that 2012 was supposed to herald may not transpire, and that weather risks, both current and potential, may cause a re-think on supply and price expectations.”

For investors looking to gain exposure to grains there are a number of Exchange Traded Products (ETPs) tracking the broad sector and individual commodities.

The following products from ETF Securities are listed on London Stock Exchange (LSE) with cross listings on a number of exchanges, including Deutsche Börse (Xetra) and NYSE Euronext. They are registered across much of Europe and have UK Reporting Status.

ETFS Grains DJ-UBSCI ETC (AIGG)
ETFS Grains £ DJ-UBSCI ETC (AGGP)
Track the DJ-UBS Grains Sub-Index (Total Return). Fee 0.49%

ETFS Corn ETC (CORN)
Tracks the DJ-UBS Corn Sub-Index (Total Return). Fee 0.49%

ETFS Soybeans ETC (SOYB)
Tracks the DJ-UBS Soybeans Sub-Index (Total Return). Fee 0.49%

ETFS Wheat ETC (WEAT)
Tracks the DJ-UBS Wheat Sub-Index (Total Return). Fee 0.49%

The following products from Source are listed on Deutsche Börse (Xetra) and SIX Swiss Exchange. They are registered across much of Europe and have UK Reporting Status.

Source Grains T-ETC (SGRAIN)
Tracks the S&P GSCI Grains Index Total Return. The S&P GSCI Grains Index is comprised on Corn (38.9%), Wheat (35.7%) and Soybean (25.5%). Fee 0.94%

Source Corn T-ETC (SCORN)
Tracks the S&P GSCI Corn Index Total Return. Fee 0.94%

Source Soybeans T-ETC (SSOYB)
Tracks the S&P GSCI Soybean Index Total Return. Fee 0.94%

Source Wheat T-ETC (SWHEAT)
Tracks the S&P GSCI Wheat Index Total Return. Fee 0.94%

For US-based investors, they could consider the Teucrium Agricultural ETF (NYSE: TAGS). TAGS provides investors with exposure to corn, wheat, soybeans and sugar.

For investors who believe the horse has already bolted, ETF Securities offers a number of inverse products.

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