In the past month, Wall Street has been on a freefall with key U.S. indexes entering a bear market territory due to the coronavirus outbreak and the oil-price war. While there are very few corners that have outperformed the S&P 500 (down 29.2%) in the past month, agricultural products or soft commodities made it to the hidden-gems list.
Several soft commodity ETFs like iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO - Free Report) (up 3.4% past month), Teucrium Corn ETF (CORN - Free Report) (down 9.7%), Teucrium Wheat ETF (WEAT - Free Report) (down 9.6%) and Teucrium Soybean ETF (SOYB - Free Report) (down 8.2%) outperformed the broader market despite a strong dollar. Notably, a subdued greenback normally backs commodity investing (read: U.S. Dollar Climbs: ETFs to Gain/Lose).
Why Soft Commodity ETFs Look Appetizing
The coronavirus outbreak has resulted in lockdowns in many cities around the globe. People are indulging in panic buying of food stuffs, which is spurring demand for some agricultural commodities. Market is abuzz with the news that U.S. millers are purchasing wheat for flour production amid rising demand from consumers.
If we take an example of coffee, “brokers and wholesalers are currently short on beans and having difficulties securing new supplies. Top producer Columbia is in the middle of its growing season, while in Brazil the latest crop hasn’t yet been harvested. Thus, high demand for beans has yet to be fully met from these two major producing nations” per an analyst.
In any case, the 2020 outlook for commodities looked bright owing to the U.S.-China mini trade deal signed on Jan 15, 2020. China had vowed to purchase additional $200 billion of American goods over the next two years — $52.4 billion worth of energy, $32 billion in agriculture, $37.9 billion in services and $77.7 billion of manufactured products. The incremental purchases were add-ons to the 2017 U.S. export numbers (read: Phase-One Trade Deal to Boost These ETF Areas).
Per CNBC, agricultural purchases by China include soybeans, wheat, corn, cotton, flour, honey and swine meat. Notably, China purchases about half of the soybean produced in the United States and is the second largest buyer of American cotton. There are news that China bought wheat from the United States recently for the first time since 2017 to take advantage of “cheap freight and cheap prices."
Lest we forget, commodities normally share an inverse relationship with equities and bond markets from an investing point of view. Heavy demand and higher prices for commodities normally attract investors, who were investing in stocks and bonds previously. This is probably one more reason why the above-mentioned soft commodities witnessed lower losses than the broader market in the latest market bloodbath.
Will the Trend Last Long?
Once the virus scare subsides, transportation will be normalized. The artificial shortages and higher demand, being noticed now in the market, will ease out. There will not be much pent-up demand for food items once the economies get active. Plus, there are heightened global recession fears, which might lead many consumers to cut back on their unnecessary purchases. So, commodity ETFs are likely to underperform the equities over the medium term.
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