Corn ETF in focus on recent price volatility

After a bright stretch in the first four months of 2014, agricultural commodities slumped on a stronger dollar and a favorable weather outlook and accelerated crop plantation. Several crops including corn, soybean and wheat shared this trend.

However, to investors’ great surprise, corn prices briefly snapped this trend as worries over weather caused traders to purchase contracts of this important agricultural commodity. This led corn prices to take the biggest leap in six months. Corn prices jumped 2.7% on September 5, the highest level since March 4.

Inside the Jump in Corn Prices

Corn is the most important U.S. crop. Per Bloomberg, frost worries in key corn growing states in the Midwest, caused a spike in corn prices. A wet and cooler weather forecast for these areas of the country later this week resulted in apprehensions about the success of the ripening and drying procedure of the crop, per an analyst. As a result, the latest jump has put corn futures or the corn ETF namely Teucrium Corn Fund (CORN) in focus.

A Brief Escape from the Trend

However, the rise in CORN wasn’t meant to last, as the commodity ETF soon resumed its fall lower. The product faced resistance last week, and with an even stronger dollar, the outlook is unfavorable for CORN. This is especially true following the USDA’s latest report which has corn farmers expected to harvest 14.4 billion bushels of corn, up from last year’s record of 13.9 billion, putting even more pressure on prices.

Corn ETF in Detail

For those seeking to play the commodity in ETF form, CORN is an intriguing play. The fund is the only ETF on the market that targets this important commodity, and it utilizes a novel procedure to divide exposure among various contracts.

The fund looks to reduce contango by spreading out exposure across the curve, as opposed to just rolling over from front month to front month. The fund will be using the second-to-expire contract (35%), the third-to-expire contract (30%), and the December contract that is following the third-to-expire contract (35%).

This process looks to reduce the impact of contango on the overall return picture, though it could add to the total costs in the fund. It is also worth noting that this will result in the fund deviating a bit from spot prices and even from front-month contracts, so headline returns might not always match up.

The product is expensive as it charges 275 bps in fees per year which is much higher than the average expense ratio prevailing in agricultural commodities ETFs. On a year-to-date basis, the fund lost about 20% YTD.

Bottom Line

At the present level, the corn inventory has also been hovering at the record level. Global stockpiles might hit the maximum level since 2000 before the 2015 harvest season starts, as per the data by USDA.

In short, even if the production scenario deteriorates, the excess inventory should not fall short of the current and neat-term future demand especially given the slowdown in China – a major consuming nation – and the declining importance as a key ingredient in ethanol production.

Nevertheless, there is another side to the coin. CORN ETF could be considered a bargain opportunity right now. The product is now trading at over a 50% discount to its all-time high set in August 2012. Thus, any weather-related shock in the U.S. or change in the international backdrop has high chances of reversing the product’s subdued pricing trend.

After all, CORN has a Zacks ETF Rank #2 (Buy) right now and could be reaching levels low enough to persuade some longer-term focused investors to make a play on this commodity.
 
TEUCRM-CORN FD (CORN): ETF Research Reports
 
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Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.

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