Forget Stocks, Buy Soft Commodities

By Casey Murphy | Updated September 02, 2014 AAA

So far in 2014, investing in commodities has proven to be the best place to put your money to work. Coffee and other soft commodities have led many asset classes higher and it looks like this trend will continue as we progress through the second quarter.

As we head into the planting season, traders will want to shift their focus from their coffee mugs to the farmers’ fields. Many traders probably haven’t noticed that prices of soft commodities such as corn, sugar and soybeans are mounting a comeback. As you can see below, so far in 2014, the various soft-commodity indexes are outperforming the Dow Jones Industrial Average and the S&P 500, which are both hovering around breakeven. 

As you can see below, so far in 2014, the various soft-commodity indexes are outperforming the Dow Jones Industrial Average and the S&P 500, which are both hovering around breakeven.

Soft Commodity ETFs

Exchange traded notes that track soft commodities have been among the top performers. Below we’ll take a look at a few of the key funds leading the way higher. This list would make for a good starting point for any trader looking to increase exposure in this area. For more information, check out Trading The Soft Commodities.

The PowerShares DB Agriculture Long ETN (NYSE:AGF) attempts to replicate (before fees and expenses) the price and yield performance of the Deutsche Bank Liquid Commodity Index. The fund is roughly comprised of equal weighting towards corn, wheat, soybeans and sugar. Trading in this ETN is extremely thin and as a result may be much more volatile than what many traders would like.

For those who enjoy risk, increased trading since the beginning of March has put this ETN into an interesting technical setup. The price is nearing the long-term support of its 50-day moving average. This strong support level is often used by traders as a gauge for entering their stop-loss orders.  In addition, the recent golden crossover (50-day moving average crossing above 200-day moving average) suggests that this could be the beginning of a long-term trend higher.

For those who enjoy risk, increased trading since the beginning of March has put this ETN into an interesting technical setup.

The charts of other exchange traded notes are trading in a similar pattern to AGF so we’ve chosen not to show them here, but if you are interested in adding soft commodity ETNs to your portfolio then the other popular choices include the iPath Pure Beta Softs ETN (NYSE:GRWN) and iPath DJ-UBS Softs Total Return Index ETF (NYSE:JJS)

A Look At The Star Performers

To get a better idea of why the soft commodity funds are performing so well, we’ve included the charts of corn, soybeans and sugar. The first chart is of the Teucrium Corn ETF (NYSE:CORN), which is the most popular method for traders looking to gain exposure to corn prices aside from trading futures. For those who are new to this product, the fund consists of a weighted average of closing settlement prices for various corn futures contracts that trade on the Chicago Board Of Trade.  Year-to-date the fund is up just over 11.5%.  Interestingly, the 50-day moving average is also crossing above its 200-day moving average, which suggests that the long-term trend will remain upward and is likely a big factor for the strong performance of the ETNs mentioned earlier in this article.

To get a better idea of why the soft commodity funds are performing so well, we’ve included the charts of corn, soybeans and sugar.

In the next chart you’ll see the spot futures price of soybeans. From a technical perspective the chart is in an extremely strong uptrend and many bullish traders will likely be looking to add to their positions over the coming weeks. As was the case in the aforementioned charts, the recent bullish crossover of the 50-day and 200-day moving averages suggests that this is the beginning of a longer-term uptrend. For more information, see Moving Averages: Strategies.

In the next chart you’ll see the spot futures price of soybeans.

Looking at the spot price of sugar, it seems that the bulls are having a tougher time sending prices higher than they are with the other soft commodities. True, the chart shows a bullish golden crossover, but unlike the other charts, the price has fallen below the averages and appears to be facing strong resistance to moving back above. Traders will want to keep a close eye on how the price reacts to the nearby averages over the coming days. A move above $0.17 would suggest a continuation of the uptrend.

Looking at the spot price of sugar, it seems that the bulls are having a tougher time sending prices higher than they are with the other soft commodities.

The Bottom Line

So far in 2014, soft commodities have proven to be a winning trade for those who were analyzing the charts and caught the trends early. Many of the major ETNs look poised to outperform the broad markets and when looking at several of the key components of these funds, it appears that this trend is set to continue. Strong setups in corn and soybeans suggest that this is a trade that many traders will be looking to make as we head toward the summer months. There is some weakness on the part of sugar prices, but a swift move back above its nearby 200-day moving average will reaffirm that soft commodities are on track for a prolonged move higher.

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