How To Trade The Worst Drought In 50 Years

Includes: CORN, GRU, JJG, SOYB
by: David Zanoni

The worst drought in the United States in 50 years has destroyed crops which is increasing the price of corn, soybeans, and wheat. Two-thirds of the mainland U.S. is plagued with drought. Corn is used in 75% of all grocery items. It is fed to cattle, pigs, and chickens and is also used to make ethanol which is used in the gasoline supply. The lowered supply of corn, soybeans, and wheat is driving up the prices of these commodities, which will eventually hit the grocery shelves late this year and early 2013.

Consumers who will be facing higher food prices can invest in certain ETFs to hedge against the higher food costs.

Teucrium Corn (CORN) is an ETF that is designed to replicate the percentage daily change of a weighted-average of three corn futures contracts that are traded on the Chicago Board of Trade (CBOT). Be aware that this ETF has a high net expense ratio of 2.55%.

The CORN ETF has already run-up significantly from around $36 to $50 for a 39% gain in just a little over one month. The ETF has options available, so investors have some flexibility as far as strategy. For example, if you think that the ETF has run up too far, too fast, you can buy a put spread in anticipation of a short-term sell-off. When you are bullish on the price of corn, buy the ETF outright or consider buying a call spread to profit as the corn prices rise.

Teucrium Soybean (SOYB) is an ETF that is designed to replicate the daily percentage change of a weighted average of three soybean futures contracts traded on the CBOT. This ETF has a high expense ratio of 3.05%.

Soybeans are in a different situation than corn. The corn crops that are suffering from the drought are no longer salvageable at this point. However, new forecasts of rain in the Midwestern U.S. can still benefit the soybean crop. The price of SOYB has increased from $22 to over $27 in a little over a month. However, the price has pulled back to $26 on hopes that the rain can save the crop. Minnesota and the Dakotas have had productive rain up to an inch or more, while Nebraska, Kansas, Missouri, Iowa, and Illinois had less impactful rain.

Unfortunately, SOYB does not trade options, so if you think that the price of soybeans will continue downward, you could consider shorting the ETF.

ELEMENTS MLCX Grains Index Total Return (GRU) is an exchange traded note (ETN) that seeks to replicate the performance of the MLCX Grains Total Return index. This is a more balanced investment as it is spread across the following four commodities: corn, soybeans, soymeal, and wheat. GRU also has a more attractive expense ratio of 0.75%.

GRU increased in price from around $6 to $8.50 for a 42% gain in just a few weeks. It has since pulled back to $8. The ETN does trade options, but they are very thinly traded and probably not liquid enough for viable trades. This is a good investment for those who are bullish on overall grain prices.

iPath Dow Jones-UBS Grains Subindex Total Return (JJG) is another ETN that is composed of corn, soybeans, and wheat futures. It has a net expense ratio of 0.75%. JJG reflects the returns that are potentially available through an unleveraged investment in the futures contracts on physical commodities plus the rate of interest that could be earned on cash collateral invested in certain Treasury Bills.

JJG increased from about $45 to almost $65 for a 44% gain in just a few weeks before pulling back to $61. Although this ETN trades in options, the bid/ask spreads are wide, so you may not get the price that you want. It would probably be better to own the underlying ETN for a bullish position in the grains.


The price of corn, wheat, and soybeans can be volatile with unpredictable weather conditions. Therefore, the ETFs and ETNs that follow the price of these commodities can also be volatile. These investments may not be for everyone. However, traders who wish to follow such commodities have these choices as trading vehicles.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.