Which Grains ETF To Invest In Amidst Midwest Drought

Includes: CORN, DBA, JJG
by: Bidness Etc

Corn Prices & Midwest Drought

The Midwest drought has continued to adversely impact grain yields, which has resulted in an increase in most grains' prices, notably corn, soybeans, and wheat. The recent press release by the United States Department of Agriculture (USDA) has resulted in higher-than-expected cuts in corn's yield forecasts (a 12% cut as against expectations of 9%). Consequently, corn futures have surged by more than 3%, and other agricultural commodities will also gain. For those investors who want to play on a future rise in grain (or particularly corn) prices, we recommend investing in grains ETF like Teucrium Corn (NYSEARCA:CORN), iPath Dow jones UBS Grains Total Return Sub-Index ETN (NYSEARCA:JJG) or PowerShares DB Agriculture Fund (NYSEARCA:DBA).

Midwest Drought and Grain Yields

Grain yields have been severely impacted due to one of the harshest ever droughts in the U.S. Midwest. Specifically, corn and soybean crops have been hampered the most. Consequently, corn prices have surged to their near 13-month high levels, while soybean prices are also at record high levels.

In its weekly report, the USDA has further reduced the percentage of corn crop in good-to-excellent condition to 40% from 48% last week, and 56% the week earlier. Today, the USDA has updated its "crop production, world demand/supply, and ending stocks forecasts". It has cut its estimate of U.S. corn output from its previous expectations from a record 14.79 billion bushels (in June) - a 75-year high - to 12.97 billion bushels (a decline of 12%), which has even missed analysts' average estimate of 13.5 billion. This is expected to further increase grain prices.

Currently, the spot-month corn price is $7.70/bushel, which is very close to Monday's 13-month high of $7.77/bushel, and last summer's record price of $7.99-3/4 per bushel, when prices rose amidst "worries about flood damage". Soybeans are currently trading at $15.36/bushel after declining slightly from $15.71 (on Monday), which was the highest level "since the global food crisis in 2008".

In the previous major U.S. drought of 1988, corn prices surged from $1.94/bushel in May to $2.72/bushel in July, an increase of almost 40%.

As a way to play the upside in grain (and more importantly, corn) prices, three potential ETF candidates are Teucrium Corn (CORN), iPath Dow jones UBS Grains Total Return Sub-Index ETN (JJG) and PowerShares DB Agriculture Fund (DBA).


CORN is a pure play on corn prices, as it provides investors direct corn exposure without requiring a futures account.

For the other two ETFs (JJG and DBA), corn is one of the major constituents, but due to a large number of commodities comprising the latter, corn's percentage share in the latter is small (12.5%) relative to the former (39%).

Source: ETF Database Source: ETF Database




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Annual Dividend Yield




Consequently, as corn prices have increased by 30% in the previous month, the YTD return on JJG (27%) is way above that of DBA (2%), because the former has registered an increase of more than 21% over the past month because of higher exposure to corn. However, JJG's relatively higher beta (1.8) increases its risk exposure as compared to DBA (whose beta is 1).

Like JJG, CORN has also benefited last month with an upsurge of more than 24% on a month-to-date basis. However, its YTD return is less than that of JJG because the latter includes two more commodities (soybean and wheat), whose prices have also rallied lately. In addition, the higher volatility of CORN (as is evident from its high beta of more than 2) makes it a more risky ETF.

If an investor wants to play on the further worsening of the Midwest drought, these ETFs can be good potential options. In fact, the recent 12% yield reduction by the USDA is the biggest July reduction since the 1988 drought, which further substantiates our stance.

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

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