Long-term outlook for corn, soybean and wheat ETFs strong, as grain demand surges

Sep 25th, 2012 | By | Category: Commodities

Since the end of 1999, agriculture prices have increased at a more rapid pace than most other commodities. The grains, consisting of corn, soybean and wheat, have led the way, increasing by over 270%.

Long-term outlook for corn, soybean and wheat ETFs strong, as grain demand surges

The long-term outlook for grain (corn, soybean and wheat) is strong, as population growth, changing dietary habits and ethanol production look set to drive prices higher.

Due to world-production weighting, corn is the most significant commodity in the S&P GSCI Agriculture index, with a sector index weight of 32.3% (at the end of August).

This has been the best performing sub-sector among the S&P GSCI Grain commodities since the end of 1999 and the past five-year period (see S&P GSCI Corn performance below).

A key factor behind the increase in the price of corn over the past decade has been the US government mandate for the production of corn-based ethanol.

At the beginning of the year 2000, the amount of corn being used for ethanol production was less than 5.0%. In 2012, ethanol production is estimated to consume about 40% of the US corn crop.

Reflecting increasing demand and higher prices, global production of corn has increased rapidly since the end of 1999, but annual US production in 2012 is expected to decline over 13% due to a particularly severe drought in the Midwest ‘corn belt’. This has lifted prices over the past couple of quarters. But aside from ethanol production and current weather-related disruptions, there are other major drivers of grain prices.

The world population is currently growing at about 1% per year. With seven billion of us already, 1% growth translates into an extra 70 million mouths to feed every year. This in itself is enough to drive grain prices higher, but demand is being exacerbated by dietary changes in the emerging markets where much of this population growth is occurring.

In the US, each person consumes about 130 kg of meat annually. Europeans eat a similarly large quantity – about 100 kg. By contrast, in China each person currently consumes only 55 kg of meat (albeit up from 39 kg a decade ago), while in India it is relatively miniscule 7 kg. If China, India and other emerging markets follow a typical development path, we can expect them to eat ever greater quantities of meat, approaching levels seen in the West.

However, meat-based diets require vast quantities of grain.  Livestock is reared on grain feed, making meat production heavily resource intensive. Indeed, it takes approximately 7 kg of grain to produce just 1 kg of meat.

So, while there may be blips (in the form of bumper crops) along the way, in the long term all these factors seem to suggest that grain prices are only heading in one direction.

Fortunately, investors looking to capitalise on this theme have an array of exchange-traded commodities (ETCs) and exchange-traded funds (ETFs) at their disposal, allowing them to achieve broad agricultural exposure or target specific commodities, such as corn, soybean or wheat.

The following products from Source, a London-based provider, are listed on the Deutsche Börse (Xetra) and the 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 investors looking to track the DJ-UBS commodities index series, ETF Securities, a London-headquartered firm, offers a range of products listed on London Stock Exchange (LSE). Many of these products are cross-listed on European exchanges, including the Deutsche Börse (Xetra) and the NYSE Euronext. They, too, 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%

For US-based investors looking for a piece of the action, they could consider the Teucrium Agricultural ETF (TAGS), which provides investors with exposure to corn, wheat, soybeans and sugar, or the United States Agriculture Index Fund (USAG), which tracks 14 agricultural commodities, including soybeans, corn, soft red winter wheat, hard red winter wheat, soybean oil, soybean meal, canola, sugar, cocoa, coffee, cotton, live cattle, feeder cattle and lean hogs. Both these funds are listed on the NYSE Arca.

Alternatively, US investors could investigate the Barclays-issued iPath Pure Beta Grains ETN (WEET) or the iPath Dow Jones-UBS Grains Sub-index Total Return ETN (JJG), both of which provide exposure to wheat, corn and soybean.

S&P GSCI Spot Index Changes

S&P GSCI Spot Index Changes: Five years and since the end of 1999, through August 31, 2012. (Source: S&P Dow Jones Indices).


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