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Should You Ride the Momentum in Grain ETFs?

Grain prices are on a tear lately with the dual benefits of USDA’s acreage report and weather concerns. PowerShares DB Agriculture ETF DBA added about 0.8% in the last five trading days (as of July 10, 2017) versus 0.3% loss in the SPDR S&P 500 ETF SPY. Let’s delve deeper into the drivers:

USDA’s Acreage Report

Investors should note that some favorable indications in USDA’s June acreage report also gave a push to agricultural ETFs. In the report released on June 30, 2017, corn planted area for all types in 2017 is estimated to be 3% lower than the last year at 90.9 million acres.

All wheat planted area for 2017 is estimated at 45.7 million acres, down 9% from 2016. The area for all varieties of wheat planted for 2017 is now the smallest since 1919, according to the U.S. Department of Agriculture (USDA).

Weather Concerns

Drought conditions in North America and dryness in European Union, Ukraine and Australia are hurting crop yield. Wheat, soybean and corns have staged a sharp rise in recent trading. Among the pack, wheat is leading.

Benchmark wheat futures in Chicago has risen over 37% this year, marking their fastest start since 1979. Spring wheat prices touched a four-year high. Drought and decreasing acreage across the High Plains are doing this favor to wheat prices.

The UN food agency, the Food and Agriculture Organization cut its forecast for world wheat production in 2017-18 by 3.3m tons to 739.9m tons citing weather issues. The National Australia Bank (NAB) forecast that Australian wheat yields will likely fall by more than a third in 2017. Agreed, inventories are still ample, but the latest trend is a positive for grain price. Teucrium Wheat ETF WEAT rose over 3% in the last five days (as of July 10, 2017).

Coming to corn, prices are at a 13-month high on concerns of high heat in the U.S. corn belt. Teucrium Corn ETF CORN was up about 3.3% in the last five days (as of July 10, 2017). CBOT soyabeans are at a four-month high thanks to weather issues, as per Financial Times.

Teucrium Soybean ETF SOYB jumped about 6% in the last five sessions on inclement weather. However, acreage report is not favorable for soybean. Soybean planted area for 2017 is estimated to be 7% higher than last year to a record high 89.5 million acres.

Bottom Line

Apart from weather issues which appear short-term in nature, there is hardly anything in favor of grains. This is especially true given the stronger greenback on strengthening Fed tightening bets and ample global grain supplies. In fact, one analyst believes that “wheat prices went too far in a rather well-supplied world situation.” So, there is little promise for grain ETFs.

Still, investors can play WEAT and CORN which have a Zacks Rank #3 (Hold) with a High risk outlook. The positive weighted alpha is 10.90 for WEAT and 4.30 for CORN. However, soybean still has a murky outlook, which may turn darker as soon as weather concerns fade. Currently, SOYB has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook. The fund has a positive weighted alpha of 1.00.

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SPDR-SP 500 TR (SPY): ETF Research Reports
 
PWRSH-DB AGRIC (DBA): ETF Research Reports
 
TEUCRM-SOYBEAN (SOYB): ETF Research Reports
 
TEUCRM-WHEAT FD (WEAT): ETF Research Reports
 
TEUCRM-CORN FD (CORN): ETF Research Reports
 
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