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What's Behind the Rise in Soybean ETF?

Sanghamitra Saha

Soybeans prices jumped double digits on Jan 17 after the production outlook for Brazil was tapered. Celeres, a Brazilian consultancy, lowered its soybean output forecast amid inclement weather conditions to 117.2 million metric tons. The USDA also pegged output for the country at 122 million tons last month.

A Commodity Weather Group report shows that temperatures that have been hovering in the low- to mid-90s range in central and northeastern Brazil might worsen through Friday, making things worse for the crop.

If that was not enough, cues of settlement of the U.S.-China trade dispute should support soybean prices. Agricultural products like yellow and black soybean faced a 25% retaliatory tariff from China. Notably, China purchases about half of the U.S. soybean and is the second-largest buyer of American cotton (read: US Farm Belt at Risk on China Tariffs: ETFs in Focus).

Per the Wall Street Journal, Treasury Secretary Steven Mnuchin has been mulling over a proposal to lift some or all U.S. tariffs on Chinese goods in order to push trade talks between the United States and China a step ahead.

Though the more hawkish members of President Donald Trump's trade team, including U.S. Trade Representative Robert Lighthizer, the lead negotiator with Beijing, is not supportive of such a move, President himself is reportedly asking for a benign approach to U.S.-Sino trade relations at the current level.

Will the Gains Last?

Weak import data from the key consumer China is a threat to the price rally.Soybean shipments offloaded in China this year fell about 37% from the first two weeks of 2018, according to tanker-tracking firm ClipperData.

China has reportedly turned to Brazil and other exporters for its supplies due to trade tensions with United States. The trade fear has weighed on prices, with soybean shedding more than a quarter of its value — between the 2017 high in March and the low in September. While prices recovered a bit from easing trade tensions, any false alarms would correct the price.

Against this backdrop, investors may be interested in keeping a close tab on the pure-play soybean ETF Teucrium Soybean ETF SOYB. Below we highlight the fund in detail.

SOYB in Focus

The underlying index looks to reflect the daily changes of a weighted average of the closing prices for three futures contracts for soybeans that are traded on the CBOT. The three contracts will be: (1) 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%.

SOYB was designed to reduce the effects of rolling contracts (and contango and backwardation) by not investing in front-month (spot) futures contracts and thus limiting the number of contracts rolls each year. The expense ratio is 1.74%. The fund was up about 1.5% on Jan 17 and has gained about 1.9% in the year-to-date frame (as of Jan 17, 2019).

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