The Ag ETF Price Disconnect: Investors Don't Get Spot Prices

July 12, 2012

Investors must understand what kind of exposure an agricultural ETF has on the futures curves.

 

[This article previously appeared on IndexUniverse.com and is republished here with permission.]

 

As the crack team at our affiliated website, HardAssetsInvestor.com, has been chronicling, agricultural commodities prices are soaring. In fact, corn prices were "limit-up" earlier this week.

The culprit is a heat wave the likes of which we haven't seen since 1982, and the resulting expectation of production declines, but the returns to ETF investors have been lukewarm at best. What gives?

ETF investors don't get spot prices.

Stop me if you have heard this before, but I will say it again: ETF investors in commodities don't get access to the spot market. In fact, they don't even get access to the front-month futures contract on the commodities.

I realize this comes as little surprise to loyal readers of our blogs, but the contrast between the performance of spot corn, soybean and wheat prices and their ETF counterparts has been striking.

What's perhaps even more interesting is that ETF investors in single-commodity agricultural ETFs don't even get access to the front-month futures contracts on those commodities.

Take a look at the chart below which shows the performance of the front-month contract of the three popular agricultural commodities mentioned above—corn, wheat and soybeans.

Futures since 6/1: Corn/Wheat/Soybeans

To borrow a sports analogy, those are video game numbers: corn up 43 percent since June 1; soybeans up 24 percent; and wheat up 32 percent. Now take a look at the performance of the ETFs covering these commodities.

 

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