Although natural resources finally turned around from a rough
patch registered in the first half of 2013, soft commodities are
still finding it difficult to stay afloat. This is particularly
true for commodities like corn - one of the most important U.S.
In fact, the
) has been down more than 15.7% in the past three month period,
underperforming the broad agricultural commodity fund
PowerShares DB Agriculture Fund
) which was down by 2.1% and equity-based fund SPDR SP 500 ETF (
) which actually gained in the said period.
Thanks to a massive drought in 2012 which created supply crunch in
the food market, CORN emerged as a star performer in the latter
half of 2012. But this is just one side of the coin.
The bright scenario of last year in corn investing began to fade as
the year 2013 progressed with favorable weather conditions and
easing supply concerns (read:
Should You Avoid These Agricultural ETFs in
Favorable Weather for Production
The agricultural commodity market is largely a function of weather
and thus subject to extreme volatility. Forecast of
in largest corn producing areas will likely benefit yield in the
coming months thus pushing up the supply of corn and
accordingly the price of the commodity. Based on this news, Corn
futures fell to a three-week low (Read:
Corn ETF Continues Plunge
According to the U.S. Department of Agriculture (USDA), U.S. corn
production will reach a record-high level of
13.8 billion bushels
in 2013 representing 28% growth from the drought-stricken last
year. This, along with tepid demand suggests bearish fundamentals
Pressure on Export
Further, currently the U.S. enjoys the status of being the world's
largest corn exporter. Anemic growth in the global economy and
lingering concerns over macro uncertainty has dragged down overall
agricultural consumption so far this year which has hurt corn
Also Argentina, the second-largest corn exporter, positioned itself
as a key exporter to world economies. As per USDA, Argentine
farmers hailing from southern hemisphere get to enjoy the advantage
of discovering the size of the U.S. crop beforehand and planting
their crops accordingly, resulting in a fast, market-based supply
Hence, stiff foreign competition also lowered the prices of U.S.
corn in the export market. A stronger U.S. dollar is also making
exports expensive, posing another around of threat to the
Alternatives in Ethanol Production
Historically, corn has been used as a key ingredient in
ethanol production. However, the emergence of wood waste and other
vegetative matter as an
alternative source of ethanol
production might dent the demand for this corp.
Given the demand/supply imbalances in corn, the related ETF is
expected to hurtle downward at least in the near term.
CORN in Focus
The fund provides investors a direct exposure to corn. The product
is expensive as it charges 199 bps in fees per year which is quite
higher than the average expense ratio prevailing in agricultural
It trades in moderate volumes of nearly 70,000 shares on average
daily basis that increases the trading cost in the form of a
somewhat wide bid/ask spread.
The fund has so far attracted $47.8 million in assets this year. It
lost more than 19.0% of its value so far in 2013.
As such, CORN currently carries a Zacks ETF Rank of 5 or 'Strong
Sell', indicating that the fund might face significant bearishness
in the months ahead.
Presently, the fund is hovering just over its 52-week low price of
$34.05 per share, currently trading in the Mid-30's per share. We
believe there is little room for upside for the product covered,
based on current supply-demand dynamics.
In such a bearish scenario, investors may want to assume that a
further sell-off is likely. In fact, most of the agriculture-based
funds are expected to slump in the coming days on weather
While the returns are not great, sugar and soybeans are
better-positioned in the agricultural commodities space, having
returned positively in the past one month. Otherwise, metal markets
exhibiting an uptrend in recent weeks would be a better pick, as of
now, for a commodity market play (read:
3 Metal ETFs to Buy on the Commodity Upswing
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TEUCRM-CORN FD (CORN): ETF Research Reports
PWRSH-DB AGRIC (DBA): ETF Research Reports
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