A heatwave and drought are gripping the Midwest and causing grains futures and the exchange traded funds that track them to go vertical.
Still, agriculture ETFs pulled back Wednesday following bullish news when crop production forecasts were cut. Also, traders are extremely bullish on grains and the sector may need to work off overbought conditions.
Of course, the weather is the wildcard and agriculture ETFs could rally more if the drought continues.
In a phone interview, Sal Gilbertie, Chief Investment Officer and co-founder of Teucrium, said that the United States Department of Agriculture expected a surplus from the near record planting. However, the Midwest scorcher, the worst drought in 24 years, quickly turned things around.
"The drought is real," Gilbertie said. "Each day the drought continues it causes the corn crop to worsen."
Early Wednesday, the USDA announced significant yield cuts due to the record heat.
For instance, an estimated 96.4 acres of corn were planted with anticipation of 89.1 million acres to harvest at 166 bushels per acre, which would equal 14.8 billion bushels. The USDA report changed the forecast from 166 bushels to 146 bushels per acre, a 12% yield drop, and below last year's 147.2 bushels.
The next USDA crop report is slated to come out on August 10.
"The drought is affecting all ags, but especially corn, since it is now in the pollination stage," Gilbertie said. "Investor caution is advised since July has been a month in which the corn market has put in cyclical highs in the past - there are always concerns in July about pollination, even when there is no drought."
Gilbertie noted that as corn goes, so goes the rest to the agricultural industry. Farmers tend to either plant corn or soybeans and corn is used to feed livestock. There is only one chance to produce and if you miss it, then you have to wait for next year's crop to grow.
"Temperatures will not be as hot as they have been, but still warm enough to keep evaporation rates high and, therefore, crop stress will continue across parts of the region," Drew Lerner, a meteorologist with World Weather Inc, said in a Reuters report.
"This is a perfect example that people need to look at ags ... need to layer them in during pullbacks," Gilbertie added. "Ags are portfolio stabilizers. People can't let themselves or animals go hungry."
He also pointed out that 99% of investors don't participate in the commodities futures market. Nevertheless, investors can start implementing agriculture ETF and ETN plays in an asset allocation model, like what they are already doing for precious metals, gold and silver.
On Wednesday, corn and other grains were falling hard after the initial pop. This suggests that the agriculture and corn trade may be overcrowded.
Those seeking exposure to the soft commodities may take a look at some ETF options, including:
- Teucrium Corn Fund (CORN)
- Teucrium Soybean (SOYB)
- Teucrium Wheat (WEAT)
- Teucrium Agricultural Fund (TAGS)
- PowerShares DB Agriculture Fund (DBA)
Teucrium Corn Fund
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.