Severe Weather Creates Commodity Opportunities

By Matthew McCall | September 07, 2010 AAA

The S&P 500 remains 10% off the yearly high set in April and investors are weary of the future prospects of equities. As stocks struggle to regain their 2010 highs, another asset class has been quietly moving higher. A few select commodities have been flying under the radar and hitting new highs, despite the negativity towards investing at this time.
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The Softies
The iPath Dow Jones-UBS Softs ETN (NYSE:JJS) is up 10% year-to-date and trading at the best level since it began trading in the middle of 2008. The ETN is composed of futures contracts on three commodities: coffee, cotton and sugar. All three of the components have been on a tear recently, helping push the ETF to the new highs. What makes the ETN even more attractive is the low correlation of 0.16 to the S&P 500, suggesting it trades almost independent of the U.S. stock market.

All three commodities in the JJS have their own specific ETNs that allow investors to concentrate on a single investment. The iPath Dow Jones-UBS Cotton ETN (NYSE:BAL) invests in cotton futures and is up 20% in 2010. The iPath Dow Jones-UBS Coffee ETN (NYSE:JO) invests in coffee futures and is up 36% in 2010. The iPath Dow Jones-UBS Sugar ETN (NYSE:SGG) invests in a sugar futures contract and is down 20% this year. SGG is interesting because it had more than doubled from January, 2009 through January, 2010 before falling over 50% to start 2010.

Food
Severe and unusual weather has left its mark on countries around the world, including massive floods in Pakistan and an unprecedented heat wave in Russia. The weather and increasing demand for food around the globe has pushed up the price of food commodities such as corn, wheat, soybeans and rice.

The iPath Dow Jones-UBS Agriculture ETN (NYSE:JJA) is invested in seven commodities, with nearly half of the allocation in corn and soybeans. Wheat makes up 18%, coffee 10%, soybean oil 9%, cotton 7% and sugar 6%. Year-to-date, the ETN is up 7%, but from the June low, JJA has gained over 30% and is at a fresh 23-month high. The annual expense ratio is 0.75%, which could be considered high, except JJA gives investors instant diversification into commodities without a futures account. (For related reading, see Commodities: The Portfolio Hedge.)

While there is no ETN for rice, wheat, or soybeans, there is an ETN that tracks the price of corn futures. The Teucrium Corn Fund (NYSE:CORN) invests in a basket of corn futures and since the low in late June is up 28%. The new fund does not trade a large amount of shares, but it should begin to attract more money as the price of corn increases.

Another alternative to CORN, that also offers exposure to soybeans and wheat, is the iPath Dow Jones-UBS Grains ETN (NYSE:JJG). The ETN is up 5% on the year, and is well off the highs set several years ago.

The Bottom Line
There are a number of reasons the softs and agricultural commodities have done well recently, but the main factor has been supply issues. The exceptional weather has created havoc around the world as civilizations struggle to get enough food to live. Unfortunately, this issue is not going away anytime soon, and the investments above will be a way to profit. (For more, see Cashing In On A Commodities Boom.)

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