Agriculture-related ETFs such as funds for corn and soybeans remain elevated after the worst drought in over 50 years decimated crops over the summer.
Agriculture prices have appreciated about 270% since the year 1999. The demand for ethanol in the U.S. has pushed corn prices higher and the growing population has helped secure the long term outlook for these commodity prices. Exchange traded funds that track agricultural commodities have given investors access to this area of the market.
"Reflecting increasing demand and higher prices, global production of corn has increased rapidly since the end of 1999, but annual US production in 2012 is expected to decline over 13% due to a particularly severe drought in the Midwest 'corn belt'. This has lifted prices over the past couple of quarters. But aside from ethanol production and current weather-related disruptions, there are other major drivers of grain prices," Simon Smith wrote for ETF Strategy.
Corn and soybean harvests have maintained record pace as dry weather conditions plagued farmers in the mid-west this year. Analysts have called the soybean harvest 38% complete and corn harvest 55% complete, reports Reuters on Investor's Business Daily. However, prices for these commodities have fallen as profit taking and larger-than-anticipated yields have materialized. Wheat has fallen 3% and soybeans are down 2% early this week.
"Any time you have yields rising and you're in the middle of a harvest and you've got the funds relatively long, it's very difficult to sustain a market. You have to feed a bull market everyday and there's nothing to feed it right now," Jim Gerlach of A/C Trading said.
A pause in the agricultural commodity bull run does not mean that the fundamentals are dead for this sector of the market. In fact, as the world population continues to grow at a pace of 1% per year, this equals 70 million more mouths to feed. Plus, dietary changes in emerging middle classes worldwide have added to the grain demand. Meat-based diets also put further strain on the grain supply and puts demand higher.
Focused ETFs can give investors the right type of targeted exposure or broad sector exposure to this area of the market. The futures contract-based nature of these funds is something investors should bear in mind, as the spot prices will differ from the front-rolling contracts.
- Teucrium Corn Fund (CORN)
- Teucrium Agricultural ETF (TAGS)
- Teucrium Soybean Fund ETF (SOYB)
- Teucrium Wheat Fund (WEAT)
- US Commodity Agriculture Index (USAG)
Teucrium Corn Fund
Tisha Guerrero contributed to this article.