Corn’s Pain Could Be These ETFs’ Gain

The Businessweek headline says it all: “U.S. Corn Growers Farming in Hell as Midwest Heat Spreads.” The article spells out just how miserable this year’s corn crop is. According to Rabobank International, corn prices have jumped 37% in the past three weeks and may hit $8 a bushel, a near-record. It’s all because of the worst drought since 1988, in the twilight of Ronald Reagan’s two-term presidency.

Some investors, of course, are  interested in making a buck from this terrible situation, so they’re currently weighing their options for how to do so. Rather than focus on individual stocks, I thought I’d take a look at this from an ETF perspective. What’s a good play?

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Is it too late to buy the Teucrium Corn Fund (NYSE:CORN)? As of July 9, the fund has gained 26.3% over the past month and is up 13.4% year-to-date compared to the S&P 500’s 2.2% gain over the past month and 8.8% YTD. It’s been red-hot.

Launched a little over two years ago, it’s the only ETF that allows you to bet on corn prices exclusively. Last year its share price hit a high of $50.69 on Aug. 31 due to downward revisions in the crop size and increased demand for corn feed. The pessimism of grain traders was unfounded, and by the end of September CORN was trading below $40.

However, the current situation appears much more dire, so I doubt the drop would be as dramatic should supply somehow turn out to be better than expected. Long-term investors probably shouldn’t touch this ETF, but if you’re a speculator I don’t see a problem with owning it, nor do I think you’ve missed all the action.

Statistics from the federal government suggest that 94% of corn, soybeans, wheat and cotton in the U.S. relies on rain for moisture, meaning this drought will clearly affect more than just corn. Therefore, it might make sense to widen your scope to include these other crops.

One way to do that is with the PowerShares DB Agriculture Fund (NYSE:DBA). It replicates the performance of the DBIQ Diversified Agriculture Index Excess Return (Index), which is composed of futures contracts in some of the most widely traded agricultural commodities. The four crops just mentioned account for 40% of the fund’s weighting. Other commodities include sugar, coffee, cocoa, cattle and hogs.

If corn’s going to be hurt by the drought, it stands to reason that these other commodities could be also. It’s a more diversified play on rising prices.

A second possibility is the Teucrium Agricultural Fund (NYSE:TAGS), which is a fund-of-funds that invests in all four of its own commodity funds: corn, wheat, soybeans and sugar.

A company I’ve been a fan of for several years is Valmont Industries (NYSE:VMI), which operates several different businesses, including one that provides irrigation products to farmers. Along with Lindsay (NYSE:LNN), Valmont manufactures and markets center-pivot irrigation systems that keep land from becoming arid. More farmers are using these systems to provide insurance against the type of weather conditions they’re currently facing.

Because I’m looking at the ETF perspective, I”m going to recommend the PowerShares Water Resources Portfolio (NYSE:PHO), which replicates the NASDAQ OMX US Water Index and invests in U.S. exchange-listed companies participating in water-related enterprises. Valmont’s weighting is 4.21% and Lindsay’s 4.72%, both top 10 holdings. The fund’s performance since its inception in 2005 hasn’t been great, so consider this a contrarian pick.

Jefferies Asset Management offers the Jefferies TR/J CRB Global Commodity Equity Index Fund (NYSE:CRBQ), which invests in companies around the globe that are engaged in the production and distribution of commodities and their related products. Approximately 38% of the portfolio is agriculture-related with the rest invested in energy, precious metals and base metals. Just over half of the portfolio is in U.S. or Canadian companies. Less than three years old, it definitely has failed to impress investors so far. Buy only if you’re also a believer in the energy sector.   

These are just some of the ETFs that will be affected by the current Midwest drought. How this all shakes out we’ll soon find out. Short or long, it’s going to be an interesting summer and fall for investors — and a painfully long, hot one for farmers.

As of this writing, Will Ashworth did not own a position in any of the stocks named here. 

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