Soybean ETF in Focus on Supply Concerns

Zacks

The agricultural commodity market has been very volatile thanks to a drought in the Midwest last summer. This lack of rain resulted in lower crop yields and steeper price increases for grains like corn and soybeans (read: Corn ETF Jumps on Weather Forecast).

This trend could continue at least in the near term given tight domestic supply for soybeans and unfavorable weather conditions. Soybeans have been in focus this week as many are forecasting a delay in the planting of soybean in the U.S., the world’s largest exporter.   

As of May 5th, only 2% of the soybean crop had been planted in the U.S., well below the 22% last year at this time and the five-year average for this time frame of 12%, according to the Department of Agriculture. This is because later-than-normal winter wheat harvest may prevent framers from seeding soybeans in double-cropping regions.

Generally, winter wheat plantings start in late May or early June, but this year, crops are expected to be two to four weeks behind the normal schedule thanks to dryness and, more recently, freezing weather. Also, snow, rain and cold through western and central areas of the U.S. Midwest is delaying plantings further.

Demand

According to the latest data, China, one of the biggest importers of soybeans, has seen year over year decline in imports by 0.90 million tons. This has been due to a variety of factors, such as a sluggish economy, but it could hurt soybean prices going forward if the trend continues (read: Should You Avoid These Agricultural ETFs in 2013?).

Looking ahead, projections over Chinese demand appear to be quite important for the market. But beyond that, investors will also have to look closely at the USDA report which is scheduled to be released later this week.

Soybean ETF in Focus

Given the current dynamics, soybeans could be headed for some more volatile trading ahead and traders may want to take a closer look at the product. One of the only ways of doing this is via the Teucrium Soybean Fund (SOYB), an ETF option for the soybean market.  

Unlike many commodity ETFs, the product doesn’t just cycle into the next month as expiration approaches though, instead utilizing a much more in-depth approach.

The ETF uses three futures contracts for soybeans, all of which are traded on the CBOT. The three contracts include (1) the 2nd-to-expire contract, weighted 35%, (2) the 3rd-to-expire contract, weighted 30%, and (3) the contract expiring in the November following the expiration month of the 3rd-to-expire contract, weighted 35% (see more in the Zacks ETF Center).

Teucrium believes that this spread out approach can reduce contango and thus help investors achieve better returns during unfavorable commodity environments. However, this strategy could backfire in times of market backwardation, as the product could gain less from the roll as it might have if it was just shifting from one month to the next.

Still, SOYB could be an interesting short-term play if supply continues to be tight and demand remains strong. However, the fund has been extremely volatile this year, losing 3.70% so far in the time frame (read: 3 Commodity ETFs Still Going Higher).

The ETF has assets of about $5.8 million under management and is less liquid with small daily trading volume. The product is the high cost choice in the space as it charges a fee of about 193 bps per year. Further, a large bid/ask spread increases the cost of investment to those who are looking to make a quick trade.

However, the ETF is the only option that investors have to target the market, at least in concentrated form. And with the crop falling behind schedule and an important report due out soon, this may be a fund that traders will want to keep a close eye on in the days ahead.

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