Wheat’s a Real Drag for JJG Investors

Brad Zigler

U.S. investors wanting to hedge against corn's recent surge without resorting to futures face a daunting challenge. They can't gain pure corn exposure. No, the best Yanks can do while hitting for the fences is to settle for a ground rule double.

Across The Pond, the rules of cricket apply, but we're getting ahead of ourselves. Back to that in a moment.

The tumult in the corn market has been wrought by heavy rains in the upper U.S. corn belt. Planting, already behind seasonal norms (see "Ethanol Margins Turn Negative"), was halted entirely with the latest deluges, cutting well into new crop supply. Damage to previously planted corn could crimp supplies further.

Not surprisingly, corn prices rocketed northward as the prospect of even tighter ending stocks filled corn processors such as Corn Products International (NYSE: CPO) with dread. CPO's going to have to pay up even more to make corn syrups and cornstarch-based products for downstream users. That'll surely be felt on grocery store shelves soon.

Bushel prices for corn futures have now breached the $7 level, up 56% year-to-date, trumping the returns earned by other Chicago-traded commodities such as soybeans and wheat. Bean futures are up 26%, but contract prices for new crop wheat are actually down 2% for the year. (Need help figuring out futures crop years? See "Crop Years And The Futures Curve.")

For investors using securities products to gain a dollop of commodity exposure, the grain market's wild ride has brought mixed results. The index underlying the iPath Dow Jones-AIG Grains ETN (NYSE Arca: JJG), the elder grain-focused U.S. product, is nominally comprised of 38% corn futures, but corn's recent returns are being diluted by the slump in junior component wheat (21% of the Dow Jones-AIG subindex) and the more sluggish rise of the larger (41% of the subindex) soybean constituent.

JJG's gained 21% so far this year, owing to a lowly 57% correlation to futures. JJG's correlation to the other two grain markets is a much more robust 79%.

iPath Grains ETN (JJG) vs. Component Futures

For those investors not limited to a U.S. brokerage account, a U.K.-domiciled product based upon the single-commodity Dow Jones-AIG Corn Subindex, ETFS Corn (LSE: CORN) offers a purer dollar-denominated exposure to maize. The ETFS repertoire also includes a leveraged (200%) exposure to the corn benchmark (LSE: LCOR) and a short (-100%) exposure (LSE: SCOR).