Crop Shortage, Asian 'Aporkalypse' Could Pop Agriculture Funds Higher

Includes: CORN, DBA, RJA, SOYB


Atlas Grinned, Seeking Alpha 

Jun. 7, 2019




·         Pork prices are jumping in Asia due to African swine flu, causing the biggest animal epidemic in recorded history.


·         Corn and soybean production in the US is at extreme lows for this time of year according the USDA, due to flooding.


·         Here are two agriculture ETFs that can benefit from the supply squeeze, and their relative advantages and disadvantages.


It’s not very often that Bloomberg, usually a level-headed financial news outlet, publishes an article that look like it belongs in Zerohedge. On June 1, Bloomberg came out with a very gloomy piece on the state of US agriculture that bills 2019 as the worst year for crop yields in modern history. Bloomberg isn’t the only one sounding alarmist these days on agriculture though. A headline article at the United Kingdom outlet The Guardian is also sounding rather doomish on the so-called “Aporkalypse” in China caused by African swine fever. This has so far resulted in the culling of 1.2 million pigs.


The Guardian quotes an animal epidemiologist, Dirk Pfeiffer of Hong Kong University, making a rather extreme statement: “This is the biggest animal disease outbreak we’ve ever had on the planet.”


This might be an overreaction, but in case it isn’t, one may want to get into agricultural ETFs here. There aren’t many available that can take advantage of this situation, but here I’d like to compare two that are available and rate them in the context of what is happening now. These are the Invesco DB Agriculture Fund (DBA) and the Elements Rogers International Commodity Index Fund (RJA), two similar funds with similar price action that nevertheless have differences that need to be taken into account and considered if you are so inclined to taking advantage of an agriculture supply shortage.


Corn And Soybean Situation


According to Bloomberg, there is a definite feel that many farmers are in serious trouble due to the weather and the US supply of agricultural staples, particularly corn and soybeans, will be constricted this coming year. The article combines elements from the ongoing trade war and the extreme rainy weather in midwestern United States to make the case that agricultural commodities are on their way higher.


Here is a quote from the article so you can get a general feel for what’s going on:


    “It is fair to say that there has never been a geopolitical situation in modern times like the one we have right now,” Matt Campbell, a risk management consultant at INTL FCStone, said in an email.


    There has never been weather like this, either. The 12 months that ended with April were the wettest ever for the contiguous U.S. That spurred other firsts: Corn plantings are further behind schedule for this time of year than they have been in records dating to 1980 and analysts are predicting an unheard-of 6 million acres intended for the grain may simply go unsown this year.


This is a tone that is not typical of Bloomberg, and in my opinion should be taken seriously by agriculture investors.


The newly imposed tariffs on China have already locked farmers out of Chinese soybean markets via the retaliatory tariffs that China has already imposed specifically on soybeans, and couple that with drastic rainfall that is flooding agricultural fields and ruining crops, we have a double whammy against US farmers. The difficulty here is that these two factors – retaliatory tariffs against US agricultural exports and a constricted US agriculture supply – are to some extent countervailing forces. The lowered ability to export due to retaliatory Chinese tariffs keeps supply within the United States and lowers prices, but the decline in production due to weather is much worse than the extra domestic supply due to retaliatory Chinese tariffs.


How much worse? Agricultural exports are forecast as of May 30th at $137B, vs. $143.3B in 2018, a drop of only 4.4% (see page 2). According to the latest USDA crop report released June 2, the drop in production in corn and soybeans specifically is much more drastic than what will be a 4.4% supply bump due to the trade war. Taking the relative strength of the countervailing forces into account, assuming relatively stable demand for corn and soybeans, prices are set to rise.


If we go to page 2 of this USDA report, we find that corn emerged, by this point in the year, is only 46% of available planted land. This compares with 84% on average at this point in the year from 2014 to 2018. That’s a 55% reduction in corn supply taking into account 18 states that account for 92% of US corn production by acreage.


If we move down to soybeans the situation is even worse. Soybeans planted, taking into account 18 states responsible for 95% of US soybean production, is only at 39% planted versus a 79% average at this point in the year from 2014 to 2018. Emerged soybean statistics are even worse, 19% versus 56% by this time of year. Last year was 65%, representing a massive 71% decline in soybean production at this point.


Other agricultural commodities aren’t in as dire straits as corn and soybeans. The most direct exposure by ETF to corn would be the Teucrium Corn Fund (CORN) but this is a thinly-traded security with low liquidity and only $60M in market cap. The Teucrium Soybean Fund (SOYB) is even more thinly traded, with a market cap of only $24M, and both have expense ratios over 1%, so not particularly ideal for any sizable positioning. Plus, these funds don’t take advantage of the pork situation, which is widely expected to get much worse. Half the world’s pigs are raised in China according to the Guardian piece.


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