The agricultural commodity market experienced quite the
volatile 2012, thanks to the massive drought in the Midwest
growing region last summer that resulted in lower yield and
steeper price increases for grains like corn and soybean.
With a majority of agricultural land affected by drought,
total crop production was the least in several years, hampering
not only crops, but livestock as well (See:
Beyond Corn: Three Commodity ETFs Surging this
In short, the highly volatile agricultural commodity market is
largely a function of weather and thus subject to extreme
volatility. Below is what we see in store for corn, wheat, and
soybean in 2013:
Imbalance May Drive Prices, But….
The persisting drought condition in some top corn-harvesting
states will affect this year's production and should raise prices
in early 2013. Per the USDA, retail food price inflation has
averaged 2.5%-3% each year on average for the past 20 years. But
the Department has warned of a slight increase from the
historical averages in 2013.
For the 2012/13 year, USDA forecasted total corn supplies at
around 11.8 billion bushels, 13% lower year over year and soybean
meal prices in the range of $455--$485 per short ton, up from an
estimated $394 per ton for the 2011/12 marketing year. In such a
backdrop, the global demand for grains will keep the prices firm
in the near term, but this is just one side of the coin.
Prices to Calm Down as the Year Moves
This scenario should reverse as the year progresses with
easing supply concerns and favorable weather conditions. Crops
have already seen its peak last year and could see a decline this
year. Further, anemic growth in the global economy and lingering
concerns over macro uncertainty, which might drag down overall
agricultural consumption in 2013.
There are also some external factors to regulate pricing like
the recent cancellation of a big U.S. soybean order by China, one
of the biggest importers of soybeans.
Now, industry sources are saying that China booked the
soybeans at a price well above current levels and called off the
contract watching the softening trend of prices. Soybean futures
fell 2.0% to a one-month low following the cancellation. In fact,
the prices began to simmer in September last year (See:
Can the Soybean ETF Continue its Bull Run?
Corn and wheat prices are also trending lower with weak export
demand. The competitive scenario is also heating up.
Argentina, the second-largest corn exporter in the highest
number of years and currently enjoying relatively uninterrupted
weather conditions, remains a key exporter to world
Coming to wheat, the product will likely see a supply surplus
as suggested by the report of USDA
that says U.S. wheat ending stocks for 2012/13 is anticipated to
rise 50 million bushels mainly due to a shrinkage in exports.
Higher global supplies stemming from China, Australia (see:
Australia ETF Investing 101
) and Canada will pull down demand for U.S. wheat and its prices.
Relatively good harvest weather is supporting foreign countries.
Further, the recent rains in most states could boost the
supply/demand balance in favor of production.
With this backdrop, some of the agricultural commodity ETNs
might very well be weak picks for investors in 2013. These are
IPath DOW Jones UBS Grains Sub index
IPath DOW Jones UBS Grains Sub index
). But before considering selling these ETNs, let's take a look
Ebbing Fourth Quarter 2012 Returns
While SOYB seeks to gain exposure in Soybean by investing in
futures contract of the underlying commodity, CORN invests in
corn futures contracts. Returns for both the products declined a
respective of 7.8% and 8.4% in the fourth quarter of 2012.
Most other funds are also on a downhill ride since New
Year's Eve with a respective negative year-to-date return of
0.91% and 1.99%. Meanwhile, WEAT has registered a sharp fall of
11.1% in the fourth quarter while this year, it receded
Higher total expenses for these ETNs (including expense ratio
and bid/ask spread) also add to the woes, potentially making
these funds less attractive in the sector for play. The expense
ratio for SOYB is 2.08%, CORN is 1.49% and WEAT is 2.34% while
bid-ask spreads are average but can sometimes
spike (currently they are 0.11%, 0.06%, and 0.15%,
Buy the Ultimate Commodity with These Water
Returns for one of the largest products in the agricultural
commodity space ─ JJG investing in three futures contracts on
grains ─ fell 10.6% in the fourth quarter and the uncertainty has
continued this year with modest losses.
Another high-asset ETN ─ JJA -- following the same trend which
is mainly exposed to Soybeans, corn and wheat collapsed 9.8% in
the year-end quarter with another round of losses noticed
The market is abuzz with reports of short selling of corn
crops in 2013 with the purpose of repurchasing them at a lower
price afterwards. We believe, the time has come when the
agricultural commodity futures will begin to deteriorate and
chances for these products to gain is less (see
Is USCI the Best Commodity ETF?
SOYB, CORN, JJG, JJA currently carry a Zacks #5 Rank (Strong
Sell rating) while WEAT retains a Zacks #4 Rank (short-term Sell
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TEUCRM-CORN FD (CORN): ETF Research Reports
IPATH-DJ-A AGG (JJA): ETF Research Reports
IPATH-DJ-A GRNS (JJG): ETF Research Reports
TEUCRM-SOYBEAN (SOYB): ETF Research Reports
TEUCRM-WHEAT FD (WEAT): ETF Research Reports
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