The Drought's Effect On ETFs

August 27, 2012

The drought’s effects on the Midwest has led to the lowest U.S. corn yields in years; here’s how it’s affecting your portfolio.

Without a doubt, states in the Corn Belt and Great Plains are facing one of the worst droughts on record. But its full effects won’t be known until harvest time, and it could end up having real implications for your ETF portfolio.

The drought has sent a few corn, grain and biofuels ETPs on a meteoric rise over the past three months, and with conditions expected to persist, the worst of the drought may still be ahead.

A handful of examples include:

  • Teucrium Corn Fund (NYSEArca: CORN), + 40 percent
  • iPath Dow Jones UBS Grains Total Return ETN (NYSEArca: JJG), +39 percent
  • iPath Pure Beta Grains ETN (NYSEArca: WEET) , +37 percent
  • iPath Pure Beta Agriculture ETN (NYSEArca: DIRT) , +34 percent
  • Elements MLCX Biofuels (NYSEArca: FUE) , +33 percent


Corn and Grains ETFs


The up-move in corn, grain and biofuels is understandable.

As recently as last week, yield forecasts were still headed downward. On Friday, the Professional Farmers of America (PFA) released the results of its tour through the drought-affected region.

Grim Forecasting

Adding to the already-painful U.S. Department of Agriculture report, the PFA forecast an even grimmer yield for 2012 crops. The report forecasts a 2012 crop yield 19 percent lower than last year’s harvest and 21 percent below the 2010 harvest.

On the flip side, livestock has headed in the other direction. Farmers facing the prospect of reduced crop yields have been forced to sell livestock to make ends meet. In response to the abundant supply of livestock, prices have slid.

In the world of ETPs, that means securities such as the ETRACS CMCI Livestock Total Return ETN (NYSEArca: UBC) has lost one-tenth of its value so far this year.

Shipping products by water in and out of the drought-affected region has proven difficult, as well. According to Bloomberg, “Last week, more than 100 vessels were halted near Greenville because of groundings. Transport prices are rising.”

The port of Greenville has been one of the hardest-hit and, according to Port Director Tommy Hart, “The biggest impact is a 25 percent increase in shipping costs.”

However, the shipping and transportation ETFs currently on the market have limited exposure to the affected region, and price moves for shipping and transportation ETFs have been negligible.

Contrary to intuition, the drought has had little impact on water-focused ETFs, which have seen modest gains over the past three months.

The PowerShares Water Resources Portfolio (NYSEArca: PHO), the largest water ETF, is up 6 percent over the past three months. Not bad, but petty compared withthe move in corn and grain ETFs since the drought began. Still, PHO is lagging the SPDR S&P 500 ETF (NYSEArca: SPY), which has advanced 7.5 percent in the same period.

A Mixed Bag

Weather will be the ultimate factor over the next few months leading up to harvest time. Tropical storms headed toward the region could spell relief for parched corn country, but could also be devastating if major flooding occurs.

In all, the drought has drastically reduced corn and grain supplies but has increased livestock supply. Combined, this has pointed corn and grain ETFs toward the moon and caused the livestock ETF, 'UBC,' to stumble. Meanwhile, shipping as well as water ETFs have been relatively unaffected.

Whether you’re looking to hedge your portfolio or speculate, grain and corn ETFs are the best way to make your move.

The 30-45 percent up-move in the most popular corn and grain ETFs have been as robust as they have been genuine.

But depending on weather conditions between now and harvest time, these ETFs might go higher still or fall back precipitously.

At the time this article was written, the author had no positions in the securities mentioned. Contact Spencer Bogart at [email protected].

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