Corn ETF Surges: Behind A Blockbuster Friday For Commodity ETFs

by on October 8, 2010 | ETFs Mentioned:

Thanks largely to continued weakness in the dollar, many investors in exchange-traded commodity products have realized huge gains in recent weeks. The sliding greenback, which is near record lows against many of its main rivals, has made commodities priced in dollars more affordable to international investors, which has in turn boosted prices. In addition, concerns over supplies in certain markets have added further upward pressure. While concerns about inflation and further quantitative easing have boosted gold to record highs, precious metals haven’t been the only resources on a hot streak; many agricultural commodities have been soaring as well over the past few weeks.

While sugar and coffee both experienced amazing gains in Friday trading, their surges paled in comparison to the Teucrium Corn Fund (CORN). The fund surged by an unbelievable 14.6% on volume that was close to 10 times the average daily amount. The rally was driven by an escalation in supply concerns that have been building over the last month thanks to weak harvest predictions and the Russian wheat crisis that is beginning to strain the grain markets around the world [also read Inside Five Surging Commodity ETFs].

Today’s bombshell came after the U.S. Department of Agriculture forecast lower yields for this year’s crop, trimming 6.7 bushels per acre. The USDA now projects roughly 155.8 bushels an acre, which is sharply lower than the 159.9 that analysts were expecting. This drastic cut drove the market into a frenzy and sent the price of corn surging higher. “Shocker may be an understatement,” said Jason Britt, president of Central State Commodities, a Kansas City brokerage. “It’s very out of character for the USDA to lower the corn yield so much.”

This news of a nearly 4% slash to the projected harvest, which had already been revised downward from August predictions, sent corn futures contracts on the Chicago Board of Trade (CBOT) up by their 30 cent price limit for all four of the closest to expire contracts. And clearly investors think prices have more room to run. “We believe fundamentals still point to tightening supply, which could potentially drive corn prices above $5.50,” Societe Generale said in a research note on Friday.

The ETF had special appeal today because while there is a 6% price change limit for futures on the CBOT, the corn ETF faces no such restrictions, thereby allowing traders to take advantage when prices are soaring higher as was the case earlier today. CORN is a relatively new fund, having been launched in early June by Teucrium. The ETF charges a relatively high expense ratio of 1.0% but it has more than made up for it in terms of total return. CORN is now up close to 48% since inception and has posted a gain of 36.6% in just the past thirteen weeks. If supply problems and dollar weakness continues, look for this staple crop to become a staple choice in traders’ portfolios [see Corn ETF Continues Mind-boggling Rally].

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Disclosure: No positions at time of writing.