Go to the Globe and Mail homepage

Jump to main navigationJump to main content

(C. RICHARD COTTON/AP)
(C. RICHARD COTTON/AP)

How to hit the grain market’s 'sweet spot' with ETFs Add to ...

Soybeans and corn recently entered their period of seasonal strength. What are the prospects this year?

Corn and soybean futures have a history of moving higher into the spring. Grain prices revolve around the production schedule throughout the year, hitting lows around harvest time and peaking ahead of the planting season. Corn and soybeans follow a similar production schedule. Crops are planted between April and June, depending on weather and soil conditions, and are harvested in October and November. Increased supply during the harvest season tends to pressure prices lower, leading to attractive buying opportunities for farmers looking to initiate hedges or investors looking to gain exposure to the commodities. The opposite holds true just prior to the planting season.

More Related to this Story

According to EquityClock.com, the seasonal “sweet spot” for corn and soybean prices is from the end of January to the middle of May. Over the past 20 years, corn has gained an average of 6.0 per cent during this timeframe with positive results recorded in 15 of the past 20 periods. Similarly, soybean prices have recorded gains during 16 of the past 20 periods with gains averaging 7.0 per cent.

What about this year? Grain prices have dropped as much as 50 per cent since July 2012 due to record production in 2013. However, extraordinary weather conditions and improving foreign demand for grains may reduce available supply, supporting prices over the short-term. In their latest report, the U.S. Department of Agriculture raised projected export demand for corn by 150 million bushels for the 2014 planting season. This is the second straight month that export projections have increased due to strong demand for animal feed.

Ending stocks, which is the amount of crop left over after all demand has been satisfied, has a higher likelihood of contracting further, rather than expanding, over the near term. In addition, colder-than-average weather has limited the ability to ship grain down the Mississippi River and slowed the speed of trains transporting grain, causing delays in moving the crops across the country. The substantial snowfall amounts in the northern U.S. states could also delay the planting season, particularly if the ground remains frozen further into April and May. Greater demand for railcars for moving crude oil also has reduced the availability of railcars for moving grain.

On the charts, corn and soybean prices have improving technical profiles. Both commodities broke above base building patterns on higher than average volume last week and established an intermediate uptrend. Units also moved above their 20- and 50-day moving averages. Strength relative to the S&P 500 Index turned positive.

Investors can participate in the grain market through a variety of investment vehicles. The most liquid investment vehicles are contracts that trade on futures markets. Investors also can participate through Exchange Traded Notes backed by futures contracts. One of the most liquid is the iPath Dow Jones-UBS Grains Subindex Total Return ETN. Contents of units are weighted approximately 35 per cent corn, 42 per cent soybeans, and 23 per cent wheat. Other Exchange Traded Notes include Teucrium Corn Fund and Teucrium Soybean Fund. Each fund holds three futures contracts of varying maturities in order to mitigate the effects of backwardation and contango.

Don and Jon Vialoux are authors of free daily reports on equity markets, sectors, commodities, and Exchange Traded Funds. . Daily reports are available at TimingTheMarket.ca and EquityClock.com. They also are Research Analysts for Horizons ETFs Management (Canada) Inc. All of the views expressed herein are their personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons ETFs Management (Canada) Inc.

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular