Good Times Return for Commodities (Stocks)

By Brad Zigler

Real-time Monetary Inflation (per annum): 8.0%

In case you haven't noticed, several commodities have swung to a bullish mode now, particularly RBOB gasoline, the soybean complex and corn. Less well-developed are the trends in the petroleum complex, softs such as coffee, sugar and orange juice, feeder cattle and wheat.

What's been good for commodities has been better still for commodity producers, at least as measured by their stock prices.

Monday saw new highs scored in the MOO/GCC price ratio. The Market Vectors Agribusiness ETF (NYSE Arca: MOO) tracks nearly four dozen producers of agricultural [ag] chemicals and equipment and livestock that make up the DAXglobal Agribusiness Index. The GreenHaven Continuous Commodity Index ETF (NYSE Arca: GCC) is an ag-heavy fund mimicking the current iteration of the Commodity Research Bureau Index.

A rising ratio indicates the relative strength of commodity stocks versus commodities themselves. Equities signaled a turning point two months ago and, with a resurgent stock market, have been steadily grinding upward ever since.

Agribusiness Stocks (MOO)/Commodity Futures (GCC) Ratio

Drivers of the commodity stock surge include Texas-based rendering and recycling firm Darling International, Inc. (NYSE: DAR), now trading 20% above its 50-day moving average, The Andersons (Nasdaq: ANDE), a multi-line ag chemical and equipment producer, up 36% over its 50-day average, and fertilizer maker Potash Corp. of Saskatchewan (NYSE: POT), currently changing hands at a price 27% above its 50-day average.

While agribusiness has led the way upward for commodity stocks, other segments have also developed strength. The ratio of the broad-based Market Vectors RVE Hard Assets Producers ETF (NYSE Arca: HAP) to the GreenHaven portfolio also reached a new high Monday.

Commodity Producers (HAP)/Commodity Futures (GCC) Ratio

Investors looking for exposure to commodities have a choice between a direct route through futures such as that offered by the GreenHaven portfolio or a more indirect pathway found through commodity stocks. As tempting as the returns of the MOO and HAP funds may be, investors shouldn't lose sight of the fact that these are equity portfolios and, as such, will also increase one's stock market exposure. Futures-based funds like GCC don't.

Comments

[Stephen Yu:]

Another way to look at the high MOO/GCC and HAP/GCC ratios is that the commodity producer stocks are temporarily overbought, and that it is now cheaper to buy commodities than their stocks.

May 20 03:07 PM