Panic, Drought, Massive Gains For The Grains

It is no secret that grain prices have been soaring as a number of savvy commodity investors have been cashing in on the latest trend to take the world of hard assets. Many are also aware that a nation-wide drought has been the culprit of said price rises. But while the drought has been widely covered, few realize just how severe it has been. For starters, the trailing 12 months have been the hottest on record for the U.S. since records have been kept (dating back to 1895). Combine that with the lack of rain in the past few months and you have the worst drought seen in nearly 70 years, putting a major pinch on the prices of a number popular commodities [see also Five ETFs To Own During The Next Market Collapse].

Two of the biggest jumps have been seen in corn and soybean futures, as the two foods have jumped by about 50% and 35% respectively in the past month and a half. But despite the issues at hand, the Fed doesn’t see the temporary price spike as an inflationary event that needs to be combated. “It’s kind of like a transitory oil price spike. We get good rains next year and it’s gone, it isn’t something that the Fed will fight as inflationary,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. But consumers beware, the full impact of this price spike may not be felt until the first half of next year, making this issue a year-long affair.

Congress is currently weighing the effects of passing another farm bill that would fund those who have been hit hardest by the drought. A similar bill in 2008 provided $50 million to farmers all across the country whose crop yields were destroyed due to adverse weather conditions. According to a U.S. drought monitor, the majority of the country is abnormally dry with a number of regions falling under the  worst category of “exceptional” drought [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].

Notable Drought Performances

The following commodity ETFs have racked up strong performances given the recent drought and will continue to do so until these conditions cease. It should be noted that the past week has brought some much needed rain to the majority of the country which may calm these funds down in the coming days. All performances are as of June 1, 2012.

  • DJ-UBS Grains Total Return Sub-Index ETN (JJG) - 49%
  • Teucrium Corn Fund (CORN) - 40%
  • DJ-UBS Agriculture Subindex Total Return ETN (JJA) - 38%
  • Pure Beta Grains ETN (WEET) - 37%
  • DB Agriculture Fund (DBA) - 18%

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Disclosure: No positions at time of writing.

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