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Agricultural ETFs Making a Comeback: Will the Rally Last?

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U.S. agricultural ETFs have been displaying a favorable trend lately thanks to unfavorable weather. The agricultural segment has had a rough run in recent weeks as investors flocked to the stock market. We all know that if the stock market performs well, commodity investing normally loses steam as investors mainly remain invested in equities. However, things have been changing lately.

What’s Behind the Recent Rally of Agricultural ETFs?

In the ongoing rally, corn deserves special mention. The grain is on its way to post weekly gains of more than 5% amid concerns over extensive damage after a storm hit the top U.S. growing region Iowa, per Reuters. Up to 43% of the state’s corn and soybean crop has been damaged due to the storms, a huge hit to the $10 billion industry.

The USDA said on Aug 12 that U.S. farmers would reap a record corn harvest and the second-biggest soybean crop, thanks to the favorable weather, per Reuters. “[This] would normally send prices lower this time of year. However, based on the positive reaction in prices, it is highly likely the bearish data was already taken for granted,” said Al Kluis of Kluis Advisors to customers in a daily note, as quoted on agriculture.com.

Moreover, China is expected to continue buying U.S. crops despite the trade tensions. A weaker greenback (thanks to a super-dovish Fed) has also contributed to the rally. Not only corn and soybean, prices of livestock are also on the rise.

Chicago Mercantile Exchange live cattle futures continued to rally on Aug 13, recording about a six-month high price, as exports to China rose. “China was a big buyer of U.S. beef in the latest week, with sales of 1,927 tonnes for the period through Aug. 6, the most since 2002, according to the U.S. Department of Agriculture”, as quoted on Reuters. Beef slaughter rates continue to jump.

Moreover, corn and soybeans are consumed by livestock feeders. With the storm devastating cornfields, threat to the livestock market has also emerged. No wonder, the storm left livestock prices soaring too.

ETFs in Focus  

Teucrium Corn (CORN), Teucrium Soybean (SOYB - Free Report) , iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW - Free Report) , Teucrium Sugar (CANE - Free Report) and Invesco DB Agriculture Fund DBA) have been hovering at a one-month high. These exchange-traded products have gained 4%, 2.6%, 3%, 2.6% and 1.8% in the past five days (as of Aug 13, 2020).

Will the Rally Continue?

There has been a sustained drop in coronavirus cases in the past week at roughly 50,000 new cases per day, per an article published on Yahoo Finance. If the momentum continues, risk-on trade will be charged-up and equities will be preferred over commodities.

Secondly, upbeat economic data are likely to be released in the coming days if the U.S. economic recovery speeds up. This will boost the greenback and mar commodities’ strength. Moreover, the COVID-19 outbreak has soured the relationship between China and the United States further lately, which may put the fate of the phase-one trade deal in jeopardy in the medium term. This is yet another threat to agriculture investing.

Investors should note forget that the latest jump in grain prices came on the heels of inclement weather. Once the concern subsides, we might again see bumper crop production. So, the winning trend in the agriculture-space may be short-lived.

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