For investors looking for smooth gains in the agriculture sector, the past year or so hasn’t been very friendly. The term “roller coaster” comes to mind as extreme weather conditions have gone from sunny to cloudy and back again.
Growing conditions and crop estimates continue to be revised with every bout of sunshine or rain, and overall, that has caused futures for corn, soybeans and wheat to go from record highs to record lows in a matter of a few months.
While that’s made for a bumpy ride for longer-term investors, those willing to do a bit of tactical commodity trading using a few key ETFs could have cleaned up riding this coaster. And now with pricing for these agricultural staples now back once again in the pits, investors could have another opportunity to ride the Ag sector to gains in the months ahead.
After one of the worst droughts in U.S. history, followed by torrential rainfalls, it seems Mother Nature has finally gotten conditions right. So right, in fact, that analysts are predicting record corn and soybean crops.
Cool weather and perfectly moist soil conditions have raised expectations about a bountiful corn and soybean harvest. These near- to below-normal temperatures through August’s first half will favor corn plantings and soil moisture will stay favorable over southern and eastern states. Analysts now predict that plantings will outpace the USDA’s aggressive forecast — already near record production — and reach 14.2 billion bushels in 2013. At the same time, those weather conditions will benefit soybean crops, pushing harvest estimates up as well.
That has pushed futures pricing for the two grains down to lows not seen in years.
Corn fell nearly 6.3% in July, making that the sixth-straight monthly drop and the worst stretch of such price decreases since 1996. That stretch of price declines for the grain have now pushed corn futures down to their lowest price — around $4.58 per bushel — since 2010. Meanwhile, soybeans have declined to 17-month lows and recently touched $12 per bushel.
All in all, soybeans and corn have fallen 15% and 32%, respectively, since the beginning of the year.
Signs of Rising Demand & Weather Issues
Despite the steady price declines and predicted bumper crops, there could be some bullish news on the horizon for investors and futures pricing: rising demand from key emerging market buyers. While economic growth might be slowing in places like China and India, people still need to eat. And it’s no secret that China has a tendency to load up on required commodities when prices are dirt cheap.
Chinese demand for wheat rebounded on record low prices after poor weather hurt the country’s own growing season. Likewise, Chinese soybean demand has rebounded amid the lower prices. According to the USDA, private exporters reported export sales of 120,000 metric tons of soybeans for delivery to China during the 2013-14 marketing year, while total Chinese soybean imports jumped up 23% from a year earlier to 6.93 million tons.
On the corn front, China bought a record 5.23 million tons of corn in the marketing year ending September 30. Those purchases were made at a much higher average corn price than we have now. The Chinese will undoubtedly continue to buy corn to feed their growing middle class population; long-term Chinese corn demand imports are forecast to reach 19.6 million metric tons by 2022.
Then there’s the weather to consider, as not all the major corn and soybean growing belts will produce bumper crops.
The wet spring morphed into a dry summer in key producing regions like Iowa, northern Illinois and southern Wisconsin, which will likely force lower corn and soybean yield potential. The “spotty” dryness will contribute to crop stress and some independent agriculture analysts are now revising crop forecasts lower. Field predictions for key corn grower Iowa have now been reduced from 200 bushels per acre down to just 150. An earlier fall frost could reduce figures even more.
Two ETF Plays
All in all, rising demand and potentially lower-than-predicted crops have some traders estimating that the lows for corn and soybeans may be in.
For investors, that makes the Teucrium Corn ETF (CORN) and Teucrium Soybean (SOYB) potential buys. The ETFs track a basket of three futures contracts for their respective commodities — specifically the second-to-expire, third-to-expire and the contract expiring in the December — and are the easiest and only pure ways to play rebounding futures pricing. While they haven’t been a good overall performers this year, they have seen periods of rising share prices as traders react to the wonky weather patterns we’ve had since last summer’s epic drought.
However, with the bottom potentially in for corn and soybeans as demand rises and any other weather-related headaches crop up, the pair could finally see at least some significant short term gains entering into the fall.
For those investors — or in this case, traders — looking for values, both CORN and SOYB could be a nice play for some quick gains as the market digests the grains’ bullish catalysts.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.