Should You Buy CORN?

June 14, 2010

 

Enter CORN, the new corn ETF I mentioned earlier. Unlike many futures-based commodity funds, CORN doesn't just hold the front-month contract. Instead, it holds contracts for the second and third months out, and then the following December. That means that right now, CORN holds September and December 2010, as well as December 2011.

Why December? Due to the vagaries of agricultural commodities, natural glut and shortage periods arise, dictated by global trends in harvesting, planting and the cost of storage. In the case of corn, December is almost always a "kink" in the curve (believe it or not, farmers are still harvesting in December, as I reported last Christmas.):

 

Corn contango

 

Right now (the pink line), December 2011 isn't exactly cheap, and it's still in contango vs. September. But December 2012 is actually at a substantial discount to July 2012 ($4.14 vs. $4.22 per bushel), and last year at this time (the black line) the second-December contract was trading lower than the near-December contract.

These kinds of time-series plays are common in commodities, and they're part of the reason many people believe futures essentially have to be actively managed, so as to take advantage of these kinds of seasonal and weather-related differences. In the case of CORN (and corn), however, the pattern is likely repeatable enough that the strategy will reliably mitigate contango to a certain extent, and get investors closer to spot than a pure front-month-roll game plan could.

If you're hot on China or bearish on the weather, CORN is a solid pure play, and its fundamental construction logic is sound. However, you'll pay a pretty penny for your virtual bushels. Corn has a management fee of 1 percent, and an expected total expense ratio of 1.72 percent. That's quite a bit to pay for such a cheap grain.

 

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