Can Chinese Demand Boost The Corn ETF?

by on August 10, 2010 | ETFs Mentioned:

Earlier this summer a sight appeared on China’s eastern coast that hadn’t been seen in nearly 15 years: a ship full of U.S. corn docking at a Chinese port. Several more ships packed with U.S. maize followed, sparking speculation over a seemingly sudden and severe shift in the country’s agricultural policies. Historically, China has imported only limited quantities of grain, priding itself on agricultural self sufficiency. But so far in 2010, the country has imported about 1.2 million metric tons from the U.S., the world’s largest producer.

The sudden surge in Chinese demand has puzzled analysts, many of whom offer up competing views over the implications of recent purchases. Some see it as a sustainable trend, the arrival of an era of major exports to an increasingly-wealthy Chinese population. Others think the surge in demand for U.S. corn is a non-recurring event driven by recent extreme weather conditions in Russia and other parts of the world [also see ETFs To Play A U.S. Export Boom].

“Predicting China’s corn demand is complicated by the Chinese government’s intense secrecy,” writes Brian Spegele. “The Communist Party has long considered grain self-sufficiency a core element of national security, and the leadership reaffirmed earlier this year that China aims to produce at least 95% of the grain it consumes through 2020.” The Communist Party in China keeps the size of its grain reserves secret, meaning that there is no way for outsiders to gauge the extent to which China will be agriculturally self sufficient in the future. If Chinese corn demand has begun to outpace supply, the country could become dependent on U.S. exports to feed a population that is growing in both size and wealth. That scenario could obviously give corn prices a boost, as a previously untapped market could quickly become a major consumer of U.S. corn [also see All American ETF Options].

Corn ETF In Focus

Investors in the Teucrium Corn Fund (CORN) have no doubt been watching developments in China with tremendous interest. CORN, which began trading in June of this year, offers investors a way to establish efficient exposure to exchange-traded futures contracts on corn. The fund invests in corn futures trading contracts trading on the CBOT, allocating 35% of holdings to the second-to-expire contract, 30% to the third-to-expire contract, and 35% to the contract expiring in the December following the third-to-expire contract. Currently, that means that holdings are split between contracts expiring in September 2010, December 2010, and December 2011 [see CORN's holdings].

For more ETF ideas make sure to sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.