Commodity ETFs Plunge On Supply Forecast - Commodity ETFs

The second half of 2011 wasn't exactly kind to many commodity investors as a stronger dollar and concerns over growth in emerging markets sank many natural resource products. However, the last few weeks of the period suggested to many that strength might be just around the corner in some sectors of this asset class, as prices began to slowly rise off of lows. Unfortunately for those with a focus on the grains market, hopes for a better start to 2012 were soon dashed as the USDA released its first report of the new year, throwing markets into disarray in the process.

 In the report, inventories of corn and wheat look to be on the rise this year, reigniting concerns over a bear market in the grains sector.  In fact, the USDA reported that the U.S. would have inventories of close to 846 million bushels of corn before the harvest was over, crushing analyst expectations by 12% in the process. Add this to the fact that global supplies have seen records for five straight years and concerns over a supply crunch this year seem to be unlikely to say the least.  “The reports this morning was bearish in nearly every category.” said Tomm Pfitzenmaier of Summit Commodities in Des Moines. “The yields were raised rather than lowered. The carryout was left the same when the trade was looking for a reduction. The problem here is going to be that nearly everyone had been assuming that the report would be friendly and it is not.” As a result of these events, corn futures trading in Chicago fell by a little over 6.1% on the day, finishing around the $6.1/bushel level (read A Primer On ETF Investing).

Meanwhile, the situation in the wheat market wasn't much better as global wheat supplies are expected to reach close to 210.02 million metric tons, the most in more than a decade. In addition to surging output from major wheat producers such as Australia and Russia, American farmers are also increasing their acreage devoted to the crop, pushing the total up to 41.947 million acres of winter wheat. Furthermore, drought conditions are beginning to ease and worries over failing crops in many parts of the country are a thing of the past. Crop “conditions are probably getting better every day,” Darrell Holaday, the president of Advanced Market Concepts in Wamego, Kansas, said to Bloomberg. “I don't think there's anything on the world wheat market to be bullish about.”  Thanks to this confluence of factors, wheat futures for front month contracts finished the day lower by about 5.6% in Chicago trading.

ETP Impact

This news led to a rough day in the commodity space of the ETP world as a number of products experienced heavy losses during yesterday's trading session. While the ultra-popular DBA managed to escape much of the losses due to high allocations in more globally-focused products-- such as cocoa and coffee—ETNs and ETFs with a spotlight on grains saw the worst of the session (read ETFs vs. ETNs: What's The Difference?).  

For example, the broad-based DBA lost a modest 1.5% in the session, while grain focused ETNs, such as JJG and WEET, lost 4.8% and 4.4%, respectively. Beyond these more diversified products, losses were even greater in funds that just focus on single commodities such as corn or wheat. For investors curious as to how funds tracking these commodities did today, Teucrium's CORN was down close to 5.5% in the session while WEAT plunged by 6% (read E-Trade Debuts Commission Free Trading Program).

Outlook

Thanks to the general bearish tone in many of the grains markets to start the year, it is hard to see short-term upside in any of these products. However, for those who believe that weather will strike some of the key producing regions of the world later on this year, or if emerging markets continue to rise, this could be an interesting entry point. For all other investors, however, and especially those who want to shun risk but still be invested in the space, a closer look at any of the more diversified products would probably be a good idea during this uncertain time (read Is USCi The Best Commodity ETF?).

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