By Matt McCall
Last week's surprising USDA crop report sent agricultural commodities to their biggest one-day gains so far this year.
On Friday, the USDA reported that the average yield per acre for this year’s corn crop would drop to 115.8 bushels of corn, well below the prior estimate of 162.5 bushels per acre. That lower yield would result in the tightest supply and demand balance for corn in 14 years.
Even more telling is the USDA's predictions for corn's stock-to-use ratio, which is a measure of a commodity's leftover inventory expressed as a percentage of total demand or use. Corn's is expected to fall to 6.7 percent, the second lowest number ever. Essentially, it means that if farmers produced no corn in 2012, the stock left over at the end of the 2011 season could only cover 6.7 percent of projected 2012 demand.
That news rallied corn futures, which rose 9 percent on Friday. The buying carried over to Monday, when the futures surged another 5 percent; December corn even traded at a new two-year high. The two-day rally was the biggest since 1998.
Weather Related Issues
The biggest factor in moving ag prices around the globe has been inclement weather. U.S. farmers had to deal with flooding in the spring and an abnormally hot summer in the Midwest, which reduced yields.
But as we've covered before, the US was not the only country plagued by uncooperative weather: Russia also suffered their worst heat wave in hundreds of years this summer. This sent wheat futures to two-year highs, and the country, one of the world’s largest wheat exporters, was forced to ban exports during the crisis.
Brazil, the world’s largest sugar producer, was also hit with a lack of rainfall earlier this year, lowering output. This, coupled with increasing global demand, sent sugar futures up nearly 100 percent in a matter of months.
The list of examples could go on and on, but it's clear that weather will continue to play a major role in the price of commodities in the future.
Investors interested in playing corn futures without opening a futures account can do so through the Teucrium Corn Fund (NYSEARCA:CORN), a fund that invests in three corn futures contracts with varying expiration dates. Friday's news sent CORN 14.6 percent higher, to its best level since it began trading in June.
Those looking to spread out their exposure to grains among several commodities can seek out the iPath Dow Jones-UBS Grains Subindex ETN (NYSEARCA:JJG). The ETN tracks the movement of a basket of three commodities: soybeans (38 percent), corn (37 percent), and wheat (25 percent), and charges an expense ratio of 0.75 percent.
For even broader exposure, however, investors have a number of choices.
The iPath Dow Jones-UBS Agriculture Subindex ETN (NYSEARCA:JJA) is composed of seven different commodities with soybeans, corn, and wheat making up two-thirds of the allocation. Also included in the mix are soybean oil, coffee, cotton, and sugar. The expense ratio is 0.75 percent.
The PowerShares DB Agriculture ETF (NYSEARCA:DBA) is even more diverse than JJA, because it also includes exposure to livestock. It has a total of eleven commodities , and the big three (soybeans, corn, and wheat) make up just 34 percent of the ETF. Its expense ratio is 0.85 percent.
But an increase in the price of agricultural commodities will also likely flow over to related companies. The Market Vectors Agribusiness ETF (NYSEARCA:MOO) is composed of 47 companies involved in the agriculture business, including Deere (NYSE:DE) as its number one holding. (The farm and construction machinery, which benefits from increased spending by farmers, surged 5 percent the day the crop report was released.) Other top holdings include agricultural chemical companies Mosaic (NYSE:MOS), Potash (NYSE:POT), and Monsanto (NYSE:MON).
Secondary Commodity Plays
As the price of grains increase, so too will the cost of feeding the livestock that will eventually end up as meat in the grocery store. That higher cost of feed could lead to higher costs for pork and cattle.
The iPath Dow Jones-UBS Livestock Subindex ETN (NYSEARCA:COW) gives investors exposure to live cattle (64 percent) and lean hogs (36 percent). The concentrated ETN could experience major volatility, but is definitely a secondary play on rising grain costs.
Another subsector often overlooked are the soft commodities. Sugar, cotton and coffee have all surged in 2010. All three have exchange-traded products that track the single commodity, but there is also the iPath Dow Jones-UBS Softs Subindex ETN (NYSEARCA:JJS) that offers exposure to coffee (39 percent), cotton (33 percent), and sugar (28 percent).
Picking the Right Play for Your Portfolio
Every investor is unique in that the goals and risk tolerance vary greatly. The investor that can take more risk has the option of investing in the sugar futures through an ETN. The investor that seeks exposure to the entire sector can choose DBA and create instant diversification. Either direction you decide to go, there is something for everyone.
Disclosure: No positions