Wheat ETF: Leader or Laggard?

Zacks

Following a lackluster 2013, agricultural commodities such as wheat have enjoyed a smooth ride this year on chilly weather and drought conditions in the U.S. Southern Plains. Fears of export limitations from Ukraine, one of the largest exporters of wheat, have raised supply concerns and drawn attention to this commodity (read: Wheat ETF Surging on Ukraine Issues, Weather Outlook).
 
But things lately took a rapid turn as wheat fell over 9% over the past 10 days. The decline came after heavy showers in wheat growing areas such as western Nebraska, northeast Colorado, eastern Kansas and eastern Oklahoma that eased dry conditions last week. Abundant supply forecast by the USDA also affected the commodity.
 
Though the global wheat supply is expected to fall 2% year over year for the 2014–15 season, stockpiles will likely rise 1%. Further, consumption and wheat trade would also decline 1% and 6%, respectively, thereby leading to lower wheat prices. 
 
However, wheat yet again advanced in Wednesday trading on speculation that the recent slide would boost demand from importers. In addition, the scorching heat in Russia over the next few days would also hurt production of the commodity. This is especially true as southeast Russia and Kazakhstan will likely see temperatures above 32 degrees Celsius (89.6 degrees Fahrenheit) by the end of this week, as per the World Agricultural Weather data.
 
Further, tensions in Ukraine appear to be easing as the Russian President Vladimir Putin is pulling out troops from Ukraine’s borders in order to avoid further sanctions from the West. The withdrawal of Russian troops will reduce tensions, to some extent, in the region and result in favorable conditions for wheat fundamentals (read: 3 Commodity ETFs Surging on Russia Sanctions).
 
Given the current fundamentals, it is difficult to say much about the wheat price movement over the next few days. But if tensions in Russia fail to deescalate and hot weather in the region continues to disrupt wheat production, the price of the commodity might move higher.
 
As such, investors should keep a close eye on the pure play Teucrium Wheat Fund (WEAT), and catch any opportunity when it arises.
 
Wheat ETF in Focus
 
This fund provides exposure to the wheat market in a unique way and reduces the effects of both contango and backwardation. Unlike many commodity ETFs, this product doesn’t just cycle into the next month as expiration approaches, rather it utilizes a much more in-depth approach.
 
The ETF uses three futures contracts for wheat, all of which are traded on the CBOT Futures Exchange. The three contracts include the second-to-expire contract, weighted 35%; the third-to-expire contract, weighted 30%; and the contract expiring in the December following the expiration month of the third-to-expire contract, weighted 35%.
 
The fund has amassed $12.3 million in its asset base and trades in small volume of about 34,000 shares a day. The product is the high cost choice in the agricultural space as it charges a fee of 2.23% per year. The ETF has added about 7% in the year-to-date time frame but lost more than 9% over the last 10 trading sessions. The fund has a Zacks ETF Rank of 3 or ‘Hold’ rating with High risk outlook (see: all the Agricultural ETFs here).
 
Technical Look
 
The ETF has broken its near-term range and its short-term moving average (9-Day EMA) is currently below the long-term average (200-Day EMA), suggesting some more pullback for this ETF. This is further confirmed by a downswing in Parabolic SAR, although this figure should definitely be monitored closely.
 
Moreover, RSI is below 40, suggesting that WEAT is slowly approaching the oversold territory and has room for a strong run-up in its prices in the coming months.


 
Bottom Line
 
The wheat ETF is lagging the broad agricultural fund (DBA) by wide margins from the year-to-date look despite the strong rally in the first four months of the year. This is because the fund has seen some horrendous trading over the past few days on abruptl changes in supply/demand dynamics (read: 4 Agricultural Commodity ETFs Soaring in 2014).
 
Before taking the long position in the fund, investors could wait until the fund bottoms out. On the other hand, risk-tolerant investors could tap the current beaten down prices of wheat but should have patience during extreme volatility.  
 
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