Monday, June 16, 2008

Corn Rocks - but We've been Frozen Out & Best Performing Commodity ETFs/ETNs Year to Date

A reader emailed me about potentially switching out from Powershares DB Agriculture Fund (DBA) and into iPath DJ GrainsETN (JJG) which is a potential option. The main difference in the 2 vehicles is the former includes sugar as a weighting whereas the latter focuses solely on the corn, soybeans, and wheat. Both have similar year to date performance, but in the past few months JJG has pulled ahead a bit on a relative basis. Frankly I have been wanting to be in corn alone since wheat spiked (March-ish) but we cannot do that in the US short of having a commodities trading account - in London one could buy the corn ETF (CORN), which is up 43% the past 6 months. How frustrating to not be able to access something like that here, especially when we called it ahead of time...

We mentioned in the spring that after the historic rise in wheat [Feb 8: Wheat is the new Corn], farmers would be planting a ton of this product in 2008 to take advantage of those prices, and moving away from corn. [Mar 31: USDA Crop Report] That's exactly how things played out [Apr 3: Corn Jumps to $6 - Start Stocking up on Soda Pop]... and wheat prices dipped (dipped is being kind, it's more like shellacked) on expectations of a huge crop later this year. Since both ETFs/ETNs above have wheat and soybeans in their holdings they have returned only 7-8% in the trailing 6 month period (mostly due to the pain from wheat since its spike). So 43%.... vs 7-8%. That makes a huge difference.

With that said, wheat has been cut nearly in half from its "bubble" highs and really is it that hard to guess whats going to happen next spring? After the historic prices we are going to see in corn by this fall, NEXT year's crop is going to be corn heavy - causing a shortage in... yeh you guessed it... wheat. So maybe buying here with a year time frame on the wheat side would not be such a bad thing. And so we'll go year after year, as too many humans want to eat well, and too much farmland is being devoted to such things as new homes and apartments, the world over.

The frightening thing is that while in more developed countries with mature capital markets, farmers can hedge their sale prices in the futures markets and borrow against that to buy the necessary seed, fertilizer, equipment - that is NOT the case in developing markets. So some farmers are simply unable to pay for fertilizers (which are now priced on a global scale), petrol is making running equipment too expensive, and some are simply walking away from farming. And that only creates more shortages. I guess some of the poor 2nd/3rd world farmers can go back to inefficient use of farm animals, but you still need to feed said animals and well... it's all circular - they're expensive to feed as prices go up on food! So there is no escaping it. Inflation is pure evil. These are the type of things that make me stare at the ceiling in the deep of the night and worry... not a good situation at all.

Below is a list of the major commodity ETFs/ETNs ranked by Year to Date performance, courtesy of Richard Shaw's blog. Note, this list is not exhaustive - we've seen a flurry of commodity ETFs hit the market the past 3-6 months [Apr 17: Four New Agriculture ETNs] but this list does show you where the gains have been. Aside from corn (which is not on this list since we don't have the investment vehicle available in the US) all the usual energy suspects are showing, headed by natural gas.

(click to enlarge)

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