It was a great day for the beaten down Corn ETF (CORN) to open up the week, as worries over weather caused traders to buy up contracts of the important agricultural commodity. The ETF surged by over 6.6% on the session, with volume that was roughly three times normal.
Fears that caused this spike centered around weather in key corn growing states in the Midwest, specifically Iowa and Illinois. Wet and cold weather is forecast for these areas of the country later this week and some are worrying that it will delay plantings by farmers of this year’s crop (Read Corn ETF Continues Plunge).
This was a bit surprising to those of us in the Midwest, as recent weather has been quite balmy with reasonable temperatures, a trend that was a sharp departure from what had been seen for much of April. However, it does appear that a continuation of the poor April weather trend could be spilling into May, as temperatures look to approach the low 40s(F) after a bout of rain.
This apparently caught many off guard, leading to some short covering in the commodity which had broadly been trending lower for the past few months, helping to account for the magnitude of today’s surge. "You caught all those people leaning the wrong way," said Jim Gerlach, president of A/C Trading Co., a Fowler, Ind., commodities brokerage in a WSJ article. "You're definitely getting a knee-jerk reaction based off that."
Longer term though, this is a bit troubling as the USDA shows that at this point in the year, roughly 16% of the crop has been planted, at least when looking at the five year average. This contrasts with this year’s plantings which only come in at 4% of the total, suggesting that farmers are falling a little behind, a situation that could result in a reduced supply (see Should You Avoid These Agricultural ETFs in 2013?).
Still, there isn’t a panic just yet, as there is still a great deal of time to get the process underway, especially if the weather turns more favorable next week. And, it is important to remember that many were already expecting a bumper crop this year for corn, so we could be going lower once more after a round of short covering.
Corn ETF in focus
For those seeking to play the commodity in ETF form, the apt ticker of CORN from Teucrium could be an interesting play. The fund is the only ETF on the market that targets this important commodity, and it utilizes a novel procedure in order to divide up exposure to various contracts (also read Teucrium Launches New Basket Agriculture ETF).
The fund looks to reduce contango by spreading out exposure across the curve, as opposed to just rolling over from front month to front month. The fund will be using the second-to-expire contract (35%), the third-to-expire contract (30%), and the December contract that is following the third-to-expire contract (35%).
This process looks to reduce the impact of contango on the overall return picture, though it could add to the total costs in the fund. It is also worth noting that this will result in the fund deviating a bit from spot prices and even from front-month contracts, so headline returns might not always match up.
It is also worth pointing out that our models view CORN very unfavorably at this point in time, as we have assigned the fund a Zacks ETF Rank of 5 or ‘Strong Sell’. This means we look for it to underperform in the next year, a situation that could materialize if CORN falls back after this recent move higher.
Instead of CORN, we view a few other commodities as better picks in the agricultural space, specifically in the coffee market with JO. Coffee isn’t suffering the same issues as its counterpart CORN, and could thus be a better pick for investors at this time (see USCF Launches Agricultural Commodity ETF).
That is why we have assigned the ETN a Zacks ETF Rank of 1 or ‘Strong Buy’, suggesting that it will outperform. So for investors seeking to get out of corn now, or for those looking to make a long play in the agricultural market, coffee could be a better pick, especially if this latest move higher by corn turns out to be a mirage, much like the past moves higher have been in this volatile commodity.
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