The Perfect Storm For The Corn ETF?

by on August 18, 2010 | Updated November 6, 2012 | ETFs Mentioned:

Population growth is a fairly common and straightforward driver of economic growth; as the number of people in a given market increases, so too does demand for products and services. Generally a positive development for the overall health of the global economy, there are some potential hazards to consider. In recent years various analysts have been warning of a developing resource crisis as the world population climbs steadily higher. Currently sitting at roughly 7 billion people, the surge is not expected to slow anytime soon; worldwide population is predicted to hit 8 billion by 2025 and 9 billion as early as 2045. That means a lot of new mouths to feed in coming years, with limited resources for increasing food production [see Free Report: Everything You Need To Know About Commodity ETFs]  

Enter Agriculture ETFs, offering investors an opportunity to bet that the ever growing demand for food worldwide will push up prices. This ETF space has been growing along with our population, as investors looking to both speculate on and hedge against movements in commodity prices have embraced these vehicles as an efficient tool. Many of these funds are characterized by significant volatility; they tend to fluctuate with news of changes in supply or demand from around the world [see also Ramadan Creates Sweet Future For Sugar ETF (SGG)]. A slew of recent events, which may have been insignificant on their own, have lined up to create an interesting trend for one of the most widely-traded and important agricultural commodities, corn.

To start things off, the U.S. has been subject to one of the hottest summers in recent memories, with crops yields suffering in the Midwest and South. Farmers have prepared for corn yields to fall anywhere from 5 to 10% this year due to dry conditions, setting the state for a shortage to cause a spike in prices. Also contributing to a jump in grain prices is increasing demand from China; the emerging market has historically boasted its agricultural independence, but has already imported 1.2 million metric tons of corn from the U.S. in 2010 [see Can Chinese Demand Boost The Corn ETF?]. Finally, the wheat shortage in Russia has given upward momentum to agricultural prices. Devastating fires throughout the country have ravaged farmlands, forcing one of the world’s most important wheat exporters to enforce a ban on sending the commodity overseas [see Grains ETF Soar As Russia Ends Wheat Exports]. That sent wheat prices higher, but could also be good news for corn and other agricultural products. Because many developing demand massive quantities of rice, maize, and wheat to feed their populations, Russia’s ban may force them to identify alternatives and buy those up instead. All of these factors have given corn prices a tremendous summertime boost; front month corn futures have popped over 23% from the end of July, buttering up commodity investors [also see Many Uses Of Commodity ETFs].

ETF Ways To Play

When looking for ETF exposure to the booming commodity of corn, we outline several ETF options below:

Corn Fund (CORN): The underlying holdings of this fund consist of corn futures contracts traded on the CBOT. This relatively new fund has already gained about 15% since its inception earlier this year. CORN is the first pure play on this commodity, making it an interesting fund to watch as the summer draws to a close [see CORN's fact sheet here].

iPath DJ-UBS Agriculture ETN (JJA): This debt security is linked to the Dow Jones-UBS Agriculture Subindex Total Return, a benchmark that is currently composed of seven futures contracts on agricultural commodities traded on U.S. exchanges. Corn futures make up about 16.3% of that index.

iPath DJ-UBS Grains ETN (JJG): This ETN measures the Dow Jones-UBS Grains Subindex Total Return, which is currently composed of three futures contracts on grains traded on U.S. exchanges. Corn futures account for nearly a third of that commodity basket; soybeans (45%) and wheat (24%) account for the rest [see all of JJG's fundamentals here].

PowerShares DB Agriculture Fund (DBA): DBA follows the Deutsche Bank Liquid Commodity Index Diversified Agriculture Excess Return, a rules-based benchmark composed of futures contracts on some of the most liquid and widely traded agricultural commodities. Corn makes up about 12% of DBA; other commodities include soybeans, sugar, and live cattle.

[For more ETF ideas sign up for our free ETF newsletter]

Disclosure: No positions at time of writing.