Look for Strong Returns in Soft Commodities

In my May 25th article I recommended the purchase of corn futures with the Teucrium Corn ETF (CORN). Since then, the price has risen double digits and now I believe there is further upside, but through a different trade. The first leg is long the Market Vectors Agribusiness ETF (MOO) with a second leg short the SPDR S&P 500 Trust ETF (SPY), a trade that seeks to benefit from the outperformance of agriculture stocks versus the overall stock market.

I have chosen the DB Powershares Agriculture fund for the sake of simplicity although there are a few well managed agriculture funds that may be more attractive. This is a particular space where I believe a money manager with extensive expertise in the agriculture sector can offer real value in excess of his management fees. I will spare you with the long-term investment case of emerging market demand on the back of rising incomes and increased protein consumption.

The trigger here is short-term and its name is China. The US is the largest producer and exporter of corn with 40% of world corn production and 60% of world exports. China accounts for both 20% of world corn production and demand as well as the second largest consumer of corn behind the US. This Chinese consumption/production ratio of about one clearly misses the mark on Buffet’s recommended margin of safety. (more)