Commodity ETF Alert April 2012 Issue
No doubt about it, corn has had its fair share of ups and downs over the past year…
Prices zoomed from $5.90 a bushel in early July 2011 all the way up to $7.75 two months later… a 31% jump. Supply worries had the essential grain trading within a whisker of all-time highs last August.
But it wasn’t long before corn bulls ran out of steam…
Once investors realized 2010/11 corn supplies were abundant, they took prices back down quickly. By late September 2011, corn had plummeted back down to $5.80- a 25% drop.
Ever since that big fall, corn has traded in a relatively tight range between $5.90 and $6.60 a bushel.
For six long months, investors have been waiting for corn bulls to start bucking again.
And now the rodeo may be about to start…
A highly anticipated report, the World Agricultural Supply and Demand Estimate (WASDE), came out early this morning.
And by the looks of it, corn has a very good chance of jumping towards the 2011 highs by late summer.
Let me explain…
Even though US farmers are expected to plant a record 91.9 million acres of corn this spring, the USDA estimates 2011/12 ending corn inventories will be at their lowest level in 16 years.
How does the USDA arrive at that number?
Let’s take a look…
First of all, USDA estimated beginning corn stocks for 2011/12 are 1.12 billion bushels. That may sound like a lot, but it’s actually 580 million bushels below where inventories stood at this time last year.
The USDA then adds in production for this year- an estimated 12.3 billion bushels.
If estimates are correct, this year’s corn crop will be slightly smaller than each of the last two years.
All told, 13.5 billion bushels of US corn will be available when imports are added into the picture. No doubt about it, that’s a lot of corn.
But here’s where the bulls make their case…
The amount of corn going into ethanol production is running at record highs.
In fact, the USDA estimates 5 billion bushels of corn will go into making the biofuel this year. To put that in perspective, ethanol production took up a mere 2.1 billion bushels in 2006/07.
That’s right folks, US ethanol production has surged by over 100% in just five years…
Rising ethanol production, along with strong exports, has the USDA estimating 2011/12 total corn usage will come in at 12.7 billion bushels- the third highest on record.
But that’s not all…
According to this morning’s WASDE report, the USDA estimates ending corn inventories will drop to a mere 801 million bushels later this year. That’s 30% lower than last year’s ending inventories of 1.12 billion.
And here’s the key…
According to USDA estimates, this year’s ending corn stocks will be 48% below the 7-year average of 1.5 billion bushels. What’s more, the USDA’s estimated stocks-to-use ratio, a key measure of supply/demand, is a mere 6.3% for 2011/12.
That’s the lowest ratio we’ve seen since the turn of the century…
What’s all this mean?
The US needs cooperative weather and an absolute bumper crop in order to keep up with corn demand this year. Without a doubt, investors are keeping a very close eye on the situation. Let’s get long the corn market, as this uncertainty will only build as we enter the summer.
ABOUT CORN
We’re getting long corn via the Teucrium Commodity Trust Corn Fund (CORN). CORN is an ETF reflecting returns potentially available through investments in corn futures. The Teucrium CORN fund does a better job at alleviating the contango/backwardation issue present in other grain ETFs.
TECHNICALLY SPEAKING
As you can see, CORN is down substantially from its 2011 highs. If USDA estimates stay the same, higher corn prices are coming our way soon. But keep in mind, USDA estimates are in a constant state of flux. We’ll be keeping a very close eye on this trade in coming months.
WHAT TO DO NOW:
Teucrium Commodity Trust Corn Fund (CORN) is trading at $39.41.
Buy CORN up to $40.00 per share.
Our profit target is $46.00 or more.
Don’t forget your position sizing.
| COMMODITY | TICKER | CURRENT VALUE | LAST MONTH | CHANGE |
| Energy | JJE | $17.81 | $18.92 | -5.9% |
| Grains | JJG | $47.50 | $46.63 | +1.9% |
| Industrial Metals | JJM | $36.33 | $38.26 | -5.0% |
| Precious Metals | JJP | $89.87 | $93.89 | -4.3% |
| Softs | JJS | $66.70 | $65.25 | +2.2% |
| Livestock | COW | $28.41 | $29.82 | -4.7% |
| All Commodities | DJP | $41.96 | $43.27 | -3.0% |
ENERGY COMMODITIES
Energy Information Administration (EIA) oil inventory reports show ample crude supplies here in the US. As a matter of fact, crude stocks rose 16.1 million barrels in the last two weeks alone. Those inventory gains were well above energy analysts’ estimates.
Of course, rising supplies lead to falling prices…
Since we last spoke, oil’s fallen from $107 a barrel down to $101. It’s now becoming readily apparent the only thing holding crude over $100 a barrel is the ongoing problems with Iran.
It’s tempting to sell our USL position for a nice profit at these levels. But let’s hold our oil position just a little longer.
Why?
Talks between Iran and six world powers- the US, Britain, Germany, Russia, China, and France – are scheduled to begin in Istanbul, Turkey this Friday.
World leaders need to make major headway in resolving the dispute over Iran’s nuclear program at this meeting.
If they don’t, we could see Middle East tensions escalate…
As of today, we’re sitting on a 22% gain in our USL position. Let’s keep holding USL through the unbelievably important meeting with Iran this weekend.
GRAIN COMMODITIES
Like I said earlier, corn could be on the verge of a major move higher as summer draws near. Add it to your portfolio now…
INDUSTRIAL METALS
A recent upward turn in the US Dollar is taking a toll on our industrial metals trade. Palladium prices dropped from $710 an ounce to $640 over the past two weeks.
What’s causing the dollar rally?
A strengthening US economy decreases the odds of another round of quantitative easing (QE) by the Federal Reserve… and that’s a good sign for the dollar.
If the US economy can continue on an upward trajectory, the dollar will likely remain on firm footing.
Remember folks, the US Dollar plays a major role in commodity price movements. A rising dollar will sometimes override bullish supply/demand fundamentals of specific commodities.
And that’s what’s happening with palladium right now…
If palladium doesn’t start showing strength soon, we’re going to have to cut it from our portfolio to control our downside risk. However, if the dollar weakens, we still have a very good chance palladium will rise.
Keep holding PALL for a bounce until further notice.
PRECIOUS METALS
Last week’s release of the Federal Open Market Committee (FOMC) meeting notes revealed the Federal Reserve may not release QE3 as soon as investors think.
And like I said a second ago, that’s a bullish development for the US Dollar. The news sent gold and silver down last week, while the dollar moved higher.
But don’t give up hope for gold and silver just yet…
Last Friday’s weak US jobs report put precious metal’s momentum back in the hands of the bulls. Job additions in March were well below analysts’ expectations. And that means the possibility of additional QE measures remain on the table- whether Ben Bernanke likes it or not.
As of today, we’re sitting on small losses in both gold and silver. However, the recent pullback is giving us the perfect opportunity to buy these precious metals. If you haven’t already, buy PHYS up to $15.00 and SLV up to $33.00.
SOFTS
Soft commodities are a mixed bag right now…
Recent South American crop reports suggest sugar’s supply woes aren’t over yet. Dry weather in the Centre South region of Brazil has soft commodity analysts raising their 2012 sugar price targets.
We’re currently sitting on a 5% gain in SGG. Let’s keep holding for higher sugar prices in coming months.
However, cocoa isn’t faring quite so well…
Reports of ample cocoa bean supplies are coming in from Ivorian Coast ports. As a result, cocoa dropped to $2,100 a ton last week- the lowest price since mid-February.
Unfortunately, that has our NIB trade losing ground.
Let’s give cocoa prices a little more time to firm up. Analysts are still expecting the cocoa market to fall into a supply deficit later this year. And that means higher prices should be right around the corner.
Keep NIB at a hold until further notice…
LIVESTOCK
Both live and feeder cattle prices have broken to the downside recently. Much of the drop is due to the “pink slime” controversy you’ve likely seen on the evening news. Fears of a consumer backlash towards beef products have cattle prices on the defensive.
Lean hogs prices haven’t fared much better with prices falling to $0.84 in recent trading.
- This month we’re adding corn (CORN) to the portfolio. See above for all the details.
Category: Commodity Trading
