Grains Chopped to Pieces in Ugly June

Montreal, Canada

A bowl of Wheaties cereal might make you big and strong, but investors and speculators betting on a recovery in wheat and other grains this week were sorely disappointed following a bearish USDA crop report this morning. The entire grains complex is getting decked.

The grains are pulling back sharply today following an explosive surge from June 2010 through April 2011. Droughts, pervasive floods and soaring demand drew all sorts of open interest from hedge funds looking to ride the bull market; a deep correction in June has sent them running for cover as some contracts suffer hefty losses.

As global equities have mounted a pretty impressive recovery over the last four days, the grains rank as one of the worst performing sectors.

The S&P 500 Index, which is now down 2% in June, is faring much better than a basket of the grains like corn, wheat and soybeans; the iPath Dow Jones-UBS Grains Index ETN (NYSE-JJG) is down a whopping 12% this month. The Tecreum Corn Fund (NYSE-CORN) is down 7.7% in June. A diversified ETN holding a mix of agriculture futures, the iPath Dow Jones-UBS Agriculture ETN (NYSE-JJA), has lost 9.6% this month.

Over the last four weeks the volatile weather patterns that importantly affect crop yields finally turned positive after months of relentless rains or drought. The United States finally got a boost in June as Mother Nature salvaged what was increasingly looking like a bad harvest; the U.S. is the breadbasket to the world and the largest exporter of corn.

The grains were undoubtedly overbought heading into June. But it’s a big mistake to believe the bull market is over just because of a bearish USDA crop report. The long-term secular trends favoring the grains complex remain intact, namely volatile climate change, falling water tables, population growth exceeding arable supplies of foodstuffs and the lowest grain inventories in more than a decade.

Other peripheral trades, including potash and especially phosphate, are great long-term growth stories feeding on the low inventory cycle.

Take advantage of lower prices and dollar-cost average into your favorite ETFs and ETNs this summer. Good harvests won’t last.

Average rating
(0 votes)