Corn ETF Continues Mind-Boggling Rally

by on September 20, 2010 | ETFs Mentioned:

In recent months one of the most impressive performances from the commodity ETF space has come from one of the latest additions to the lineup. Since hitting the market in early June, the Teucrium Corn Fund (CORN) has gained more than 30%, riding an unexpected rally in one of the world’s most important agricultural commodities.

The latest step higher came on Friday, when corn prices surged once again–this time on worries that the U.S. harvest will come in well below initial estimates. As yield statistics flow in from farms in the Midwest, many farmers are reporting that the corn haul is lower than last year. The U.S. Department of Agriculture recently cut its official projection for the 2010 harvest, and many analysts expect that farms across the country will produce an average of 160 bushels of corn per acre–or perhaps even lower. “Although a loss of five bushels an acre may seem small, it makes a big difference to supplies when multiplied across the 87.9 million acres planted, and would likely push U.S. supplies in storage next year below one billion bushels, a psychologically significant threshold. Avoiding that scenario will require higher prices,” writes Ian Berry.

Ripple Effect

The steady run-up in corn prices has turned into big gains for investors in CORN; the futures-based fund is up nearly 35% in a little over three months on the market. The structure of CORN is somewhat unique; instead of investing exclusively in front-month futures contracts, it spreads holdings over three different maturities. That has the effect of limiting the number of rolls made each year, a potentially valuable attribute when markets are contangoed [see Commodity ETF Poised To Benefit From Backwardation].

The sharp rise in corn prices has not only impacted investors in CORN. Ethanol producers who buy significant quantities of the crop could have watched prices of their primary raw material climb. Corn is also used widely by livestock producers as feed for cattle and chickens, meaning that higher corn prices could push up the value of other food commodities as well. And rising food prices could stoke fears of inflation once again. Below, we profile three ETFs beyond CORN that may be impacted by the jump in prices [sign up for our free ETF newsletter].

  • Market Vectors Agribusiness ETF (MOO): This ETF offers exposure to the global agribusiness sector, a corner of the market that has significant exposure to corn prices. If prices continue to climb, it could become more expensive to raise livestock, potentially eating into profit margins.
  • UBS E-TRACS CMCI Livestock ETN (UBC): This exchange-traded note is linked to an index comprised of futures contracts on cattle and lean hogs. If the cost of feeding these animals climbs, it’s possible that the market price will jump as well.
  • IQ Inflation Hedged ETF (CPI): As mentioned above, the widespread use of corn throughout the agribusiness industry has the potential to send a variety of food prices higher in coming weeks. For those who believe that a jump in food prices will be the spark needed to set off a powder keg of inflationary pressures, CPI might be an interesting alternative to traditional inflation-protected bonds.

Disclosure: No positions at time of writing.