Drought Drives ETFs

The worst drought in more than 50 years is shriveling crops in the Midwest, sending grain prices soaring to new contract highs this week.

Commodity focused exchange-traded funds have been on a run since June, offering investors a hedge against rising food prices. Single-commodity focused funds from Teucrium Trading, the first company to introduce single agricultural commodity ETFs, are soaring double-digits.

A new report released this week by the U.S. Department of Agriculture designated 1,584 counties across 32 states as disaster areas, with more than 90% of the areas due to drought.

Corn futures closed July up nearly 20% as nearly half of the country’s corn crop is rated very poor to poor condition. The surge in corn prices boosted futures to the biggest two-month rally since the last major drought of 1988. Gains for June and July totaled 45%.

The fund family’s Corn ETF (NYSE:CORN) provides investors direct exposure to corn by mirroring daily movements of three futures contracts traded on the Chicago Board of Trade. Over the past six weeks, CORN has jumped 30% and is currently trading over $50.

And corn isn’t the only grain taking a significant hit from the lack of rain.  The USDA's National Agricultural Statistics Service reported 37% of the country’s soybean crop is in very poor to poor condition, a 3% increase from the previous week. Teucrium Soybean (NYSE:SOYB) is up more than 12% over the past six weeks as soybean prices have climbed approximately 20%.

Wheat is also suffering from the dry weather. Prices have risen about 50%, sending the Teucrium Wheat Fund (NYSE:WEAT) soaring approximately 23% since June 20.

“We’ve seen corn at all-time highs and soybeans pressing against that level,” said Spencer Patton, Steel Vine Investments Founder and CEO. “There’s no doubt the drought is detrimental to the market.”

The drought’s financial impact extends beyond farmers and ranchers; food shoppers across the country are now facing higher prices. The U.S. Agriculture Department forecasts food prices to outpace other consumer costs through the end of the year.

Although prices are still high and at risk of rising again, some say the worst of the drought is already priced into the grains.

“We’ve really gotten to the top end of the grain move,” said Patton. “If people get in the game now, it’s going to be a disaster. Investors should take profits. The only way I see corn and soybean prices moving to another level is if the drought gets dramatically worse. Right now, I think we’re more likely to get a pullback.”

If the market does correct, ETFs which have steadily climbed over the past few weeks may be poised to drop. So what’s the next smart investment? According to Patton, its companies selling supplies to help farmers and ranchers recover.

“Deere (NYSE:DE) and Monsanto (NYSE:MON) are good plays,” said Patton. “The companies will still see some upside even if grain prices fall. Strong demand for fertilizer will boost the stocks.”

The Department of Agriculture will update its crop estimates on Aug. 10.