Nothing moves the agricultural commodities markets more than the weather, and for years, conditions have played havoc with futures pricing.
Last summer’s record heat and extreme dryness made for awfully poor planting conditions. That lack of rain caused more than two-thirds of the Lower 48 to experience severe drought conditions; corn production was cut by 27%, soybean and wheat prices surged and farmers collected a record $11.6 billion on insurance claims for crop damage in 2012.
This year, Mother Nature decided to drench the Midwest. Months of storms across America’s Heartland have flooded parched plains, only to oversaturate the dry land. These overly wet conditions continue to delay plantings, and analysts predict that we could be looking at another summer season of high prices.
Yet, as overall commodity prices have floundered in recent weeks, investors have been given the perfect opportunity to load up on ag-based futures before the summer harvest begins.
But that opportunity won’t last long.
Still Delayed Plantings
While farmers were planting the most acres since 1936, the USDA forecast a record corn harvest this year at 14.14 billion bushels. Unfortunately, that prediction was made before the heavens decided that “wet” would be the new black this summer.
The northern Great Plains and central Midwest have received more than double the normal rainfall in the past two weeks, while states such as Iowa and Illinois have seen six times the normal amount of precipitation –and the rain keeps coming. As much as 2 inches of rain will fall in some areas over the next seven days as a weather system is “parked” over region. That will cause the Midwest to be wetter than normal for the rest of the month.
Add that to the already soaked conditions of April through May, and it’s easy to see why planting conditions have been absolutely abysmal.
Throughout May, corn and soybean planting was severely delayed due to the soggy fields across much of the Corn Belt. Accordingly, by the beginning of June, only 91% of the U.S. corn crop and 57% of soybeans have been planted. Likewise, wheat plantings in key producer North Dakota are the worst since 1981. Farmers had sown just 62% of the spring-wheat crop as of the beginning for the month. That’s on pace to be the slowest plantings since records began 32 years ago according to the USDA.
The severe delay might limit planting to only 4.7 million acres — the worst since 1969 and 24% less than early USDA forecasts.
Rain has taken its toll on already-planted crops, too. Corn that has emerged is less than five-year averages, and harvests in the “poor” category are rising. Meanwhile, excessive moisture across the Midwest has raised concerns about disease-related yield losses for soft, red winter wheat grown in America’s heartland.
All in all, conditions are ripe for higher futures prices for grains come this summer.
Four ETF Picks
Despite all the makings of grains market rally, futures pricing remain off of their highs. The reason has to do with the general commodities’ recent “falling out.” Investors have dumped risk assets fearing the end of the Federal Reserve’s quantitative easing, which many believe has been propping up several asset classes over the past few years.
That’s providing one heck of a buying opportunity for longer-term investors in grains given the upcoming weather-related crunch.
So what should you buy if you’re bullish on lower crop outputs in the U.S.? The iPath DJ-UBS Grains Total Return Sub-Index ETN (JJG) could be your first stop. The exchange-traded note tracks three futures contracts for corn, wheat and soybeans — with weightings of 43%, 20% and 37%, respectively.
Like many commodity investments, the fund is down about 2% down year-to-date and is roughly 19% below its 52-week high. With more weather-related turmoil expected to come in the next few weeks, JGG could be a winner as prices rise this summer. Looking at a three-year chart of JJG, that pattern has come true the past few summers as either drought or excess rain has hindered output. JJG charges 0.75% in expenses.
The potential rally in prices could take corn up to $6.40 a bushel this summer, which would surpass January’s high of around $6.05. As we’ve highlighted before, Teucrium Corn ETF (CORN) is the easiest and only pure ETF way to play corn prices. Tracking a basket of three futures contracts for corn — specifically the second-to-expire, third-to-expire and the contract expiring in the December — CORN has already started to move in response to the wet weather. Rising about 4.6% in the last week of May, the ETF could see more gains as the rainy weather starts to have a material impact on the corn plantings and prices.
Likewise, its sister funds — Teucrium Wheat (WEAT) and Teucrium Soybean (SOYB) — have ticked upward as the rainy conditions carry on. WEAT especially could be a potential value, as current estimations for global wheat production shows a surplus. However, those production numbers don’t account for any weather “hiccups” here or abroad — such as recent flooding in Germany, Europe’s second largest grower of wheat.
The bottom line is that as wacky weather continues to set up higher prices for grains this summer, investors would be smart to add a little agriculture to their holdings.
As of this writing, Aaron Levitt did not hold a direct position in any of the aforementioned securities, but he is long the PowerShares DB Commodity Index Tracking (DBC), which owns corn, wheat and soybean futures.