Time To Short Grains ETFs?

by on June 21, 2010 | ETFs Mentioned:

Before the onset of the recent global recession, a decade-long commodity boom had delivered handsome returns to investors who established exposure to natural resources, as the prices of everything from apples to zinc climbed steadily on mounting scarcity concerns. During this prolonged run-up grains prices skyrocketed as food crises materialized, with a sharp economic pullback arriving just in time to cool demand and dissolve severe global shortages. 

With signs emerging that the global recovery continues to progress and lingering concerns about a surge in inflation, exposure to food commodities may seem like a smart bet (see Beyond TIP: Ten ETFs To Protect Against Inflation). But some are concerned that huge supply surpluses will keep prices in check for the foreseeable future, creating a dire situation for small farmers and increasing the costs of subsidies for an already cash-strapped government. “Some traders and economists are speculating that if the U.S. and world economies don’t heat up soon, surpluses could turn into price-depressing gluts,” writes Scott Kilman.

A number of factors have contributed to a sharp increase in grain harvests. Growing conditions have been nearly perfect; a warm spring and timely rains have created some of the best growing conditions in recent memory. With the memory of devastating shortages still fresh, governments and farmers around the globe stepped up grains production. “Growers from Latin America to the former Soviet Union have expanded so quickly that the global acreage devoted to the 16 biggest grain and oilseed crops has climbed 82 million acres since 2006—akin to creating another U.S. corn belt,” writes Kilman.

Grains ETFs In Focus

With record corn, rice, and soybean harvests on the horizon around the world, the future for agricultural commodity prices is uncertain. For investors looking to establish exposure to grains prices–either long or short–there are a number of ETF options (see all ETFs in the Agricultural Commodities ETFdb Category):

  • iPath Dow Jones-UBS Grains ETN (JJG): This exchange-traded note offers exposure to a diversified basket of agricultural commodities; as of May 31 the underlying benchmark consisted of futures contracts on corn (35%), wheat (22%), and soybeans (42%). JJC charges an expense ratio of 0.75%.
  • ELEMENTS MLCX Grains Index ETN (GRU): This ETN offers similar exposure, tracking the performance of an index comprised of futures contracts on corn, soybeans, soybean oil, and wheat.
  • Teucrium Corn Fund (CORN): As its ticker suggests, the recently-launched CORN offers pure play exposure to corn futures contracts. CORN’s holdings are blended between second-to-expire contracts (35%), third-to-expire contracts (30%), and contracts expiring in the December following the expiration month of the third-to-expire futures contract (35%).

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Disclosure: No positions at time of writing.

Growers from Latin America to the former Soviet Union have expanded so quickly that the global acreage devoted to the 16 biggest grain and oilseed crops has climbed 82 million acres since 2006—akin to creating another U.S. corn belt