Opta Lehman Brothers Commodity ETN: The Best Play on the Soybean

With corn having a great run last year, it is often forgot how important the soybean is, and even better how difficult it is to get exposure. There are several ETFs that give exposure to this commodity, but few give a great deal to the soybean. The DB Multi-Sector Commodity Master Trust ETF (DBA), which I believe is the best going forward as it has equal distributions of investment of 25% corn, soybeans, wheat, and sugar cane, is the closest to Opta Lehman Brothers Commodity Index Pure Beta Agriculture Total Return ETN (EOH), which is weighted 41% the soybean.

EOH is exposed to the grains sector including corn, soybean meal, soybean oil, soybeans and wheat. Their softs sector includes coffee, cotton and sugar. EOH invests 77% in grains and 23% in softs. After soybeans, sugar accounts for 16%, corn 12%, soybean meal 11%, soybean oil 7%, wheat 6%, coffee 4% and cotton 4%.

The recent shift from beans to corn has been large due to corn pricing increases. The ethanol boom and increase in international feed for livestock has pushed inventories down. The soybean has been the commodity of choice with respect to growing in wet areas as it is not as difficult to grow and does not need as much fertilizer as corn. The price increase in corn pushed fertilizer out of the equation because the margins became better and paying for more fertilizer was still better. Even with increases in fertilizer pricing, it will not affect the farmer substantially until next year. As most farmers buy their fertilizer a year in advance, they are still paying last year's prices, so corn should still be the crop of choice going forward. Many of the farmers in my area that I have spoken to also have stated they are planting corn.

The soybean can also be invested in through Bunge (BG), but this play can almost be a short on the commodity as the price of the soybean directly increases Bunge's costs and hits their margins. Other factors affecting the price of the soybean are increased biofuel production. The United States has already made it mandatory with respect to biodeisel and I would guess the current number will increase, just like the bill that pushed a substantial amount of ethanol by 2012. This bill will further push more acres to corn. After the recent pullback I like this as a buy based on bullish commodity fundamentals for 2008.

Lastly, the United States will continue to not care about food inflation as long as it curbs energy inflation. Pushing corn to ethanol will continue over the next 10 to 20 years until other methods of automobile energy are able to be obtained. In the short term, this continues to help the United States and hurt countries with lower wages.

Disclosure: none