The Case of Grain Exposure During the Peak Growing Season

Grains and oilseeds feed and increasingly power the world. While agricultural products are critical ingredients in the food consumed daily, they are also inputs in biofuels. Corn is the primary ingredient in U.S. ethanol, while Brazil produces biofuel with sugarcane. The U.S. is the world’s top corn producer and exporter, while Brazil has the same position in free-market sugar.

Processors crush soybeans into oil and meal. Soybean oil is required for biodiesel fuel. As the demand side of the fundamental grain and oilseed markets changes and expands, producers must keep pace with the increased requirements.

Late spring and early summer are critical for agricultural commodities as the weather across the fertile growing regions determines the quality and quantity of products harvested in the fall. Grain and oilseed prices rallied to multi-year, and in wheat’s case, all-time highs in 2022. They have declined from those lofty levels, posting losses in 2023 and Q1 2024. However, prices have stabilized from the Q1 closing levels and the consolidation could mean prices will head higher over the coming weeks and months.

Corn, soybean, and wheat prices declined in 2023 and Q1 2024

• Corn futures fell 30.55% in 2023 and were another 6.21% lower in Q1 2024.
• Soybean futures declined 14.86% in 2023 and fell another 7.89% in Q1 2024.
• CBOT wheat futures dropped 20.71% in 2023 and were 10.79% lower in Q1 2024.

Wheat leads the way in Q2

• Corn futures settled at $4.42 per bushel at the end of Q1. At $4.5050 on June 10, corn was 1.9% higher in Q2.
• Soybean futures settled at $11.9150 per bushel at the end of Q1. At $11.82 on June 10, soybeans were 0.80% lower in Q2.
• CBOT wheat futures settled at $5.6025 per bushel at the end of Q1. At $6.1075 on June 10, wheat was 9% higher in Q2.

The case for higher prices

• The weather over the growing season between June and September is the critical factor for the path of least resistance of grain and oilseed prices. Any weather issues could impact crop levels.
• The world’s over eight billion population requires increasing production to meet the global requirements.
• Corn is the primary ingredient in U.S. ethanol, and soybeans are used in biodiesel. Rising demand from the energy sector only increases the crop requirements.
• The ongoing war in Europe’s breadbasket in Russia and Ukraine could impact worldwide supplies.
• After the declines from the 2022 highs, the current price levels limit the downside risk in corn, soybeans, and wheat futures markets while the upside potential remains significant.

ETFs that track grain and oilseed prices

• The Invesco DB Agriculture Fund (DBA) owns long positions in grains and oilseeds.
• The Teucrium Corn ETF (CORN) tracks a portfolio of three actively traded CBOT corn futures contracts.
• The Teucrium Soybean ETF (SOYB) tracks a portfolio of three actively traded CBOT soybean futures contracts.
• The Teucrium Wheat ETF (WEAT) tracks a portfolio of three actively traded CBOT wheat futures contracts. 

Pick-and-shovel agricultural ETFs that reflect prices

• The VanEck Agribusiness ETF (MOO) owns shares in companies that support agricultural production, including farm equipment, fertilizers, processors, and other related agribusinesses.
• Archer Daniels Midland (ADM) is a leading global agricultural processing and production company.
• Bunge Limited (BG) is another leading agricultural processing and production company worldwide.
• ADM and BG are two of the four ABCD leading agricultural companies and the only two publicly traded ones. Cargill and Dreyfus are privately held companies.

The weather over the coming months will be the primary determinant of the path of least resistance of agricultural commodity prices as it will determine the 2024 crops. However, worldwide conflicts that can interfere with production and logistics, the growing worldwide population, and addressing climate change using agricultural products to produce biofuels are reasons that limit the downside for prices and favor the potential of rallies over the coming months and years. Allocating a percentage of investment or trading portfolios to the products that feed and increasingly power the world provides diversification.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!