Thursday’s ETF To Watch: iPath DJ-UBS Grains Index Fund (JJG)

by on March 31, 2011 | ETFs Mentioned:

Thanks to rising oil prices and poor harvests around the world related to extreme weather, food prices have been escalating for much of the past year. The trend hasn’t just impacted commodity crops such as sugar or cocoa either; staple foods such as corn, wheat, and rice are all soaring higher thanks to a confluence of factors that looks to ratchet up overall price inflation. While any number of factors can impact the prices for these vital commodities, one of the most important is the ‘Prospective Plantings’ report that comes out on the last day of March every year.

In this yearly report, traders will learn just how many acres will be devoted to planting the nation’s key crops, making the release one of the most important price drivers for short-term commodity prices until farmers start actually planting in the spring. Beyond the total number of acres planted, traders will also hone in on how farmers divided up their crop into any of the main products, possibly signaling where farmers believe prices will end up [see all the Agricultural Commodities ETPs].

The most recent USDA forecast calls for U.S. farmers to plant 240 million acres of four key crops: corn, wheat, soybeans and cotton. That figure represents a 10% increase over 2010 levels. If confirmed the totals will represent a robust increase, but some believe that it won’t be enough. “Bottom line is that this will not be enough acres,” said John Sanow, an agricultural market analyst at TelventDTN. “What we have in front of us is the most interesting and dynamic acreage battles in history.” Currently, the USDA is expecting the crop plantings to come in as follows in terms of millions of acres; 92 for corn, 78 for soybeans, and 57 for wheat. Most are likely to focus on corn and soybeans as America is the world’s largest corn exporter and producer while soybeans are in ever-increasing demand in China, which accounts for a large portion of American soybean exports. Wheat, on the other hand, is very popular in European and Australian markets, but with the wheat crisis in Russia and the weather in Australia, the focus could change slightly in this latest crop report [see Agricultural Commodity ETFs In Focus Amid Wheat Shortage].

Thanks to this key report and the likely impact that it will have on the overall market, we look for the iPath DJ-UBS Grains Total Return Sub-Index ETN (JJG) to be active in Thursday trading. The popular ETN, which has amassed just over $330 million in assets, is heavy in its exposure to the key grains in the report and will likely be a big mover on the day. JJG allocates roughly 37% to both soybean and corn futures while wheat futures make up the remaining quarter of the fund’s assets. This concentrated approach ensures that today will be a volatile session for the fund as planting reports for each of these key commodities becomes known to investors. If plantings are up significantly for these grains, JJG could slump on the day as the extra supply may be enough to move the market lower in the near-term. If, however, farmers cycle away from some of these grains into other products or if it appears as though farmers are concentrating on one grain, JJG could surge higher and be one of the main winners during Thursday trading [also read Inside The CORN ETF].

Disclosure: No positions at time of writing.