HardAssetsInvestor

Written by Brad Zigler  |

July 01, 2010

The BULLISH News From Yesterday’s Market

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Amid all the tumult that sent stocks tumbling yesterday, some investors missed a big story. Corn prices gapped up more than 29 cents a bushel, or 9 percent, Wednesday. Chicago wheat was taken along for the ride, climbing 25 cents, or nearly 6 percent, but not soybeans. Beans rallied along with the grains, but gave up at the end of the day to settle down more than 2 cents.

What prompted the hitherto slumping corn market to race upward? Two things really, but they both begin with "USDA." The Agriculture Department's quarterly stocks report came in 400 million bushels under expectations, enough to make some observers wonder if there'll actually be enough old crop supply.

Then there's the USDA planting intentions report, which gives clues about newer crops. Intentions were downgraded by a million acres from the March report. Whether or not the shift away from corn planting actually takes place is uncertain, but traders took both USDA reports to heart, er, to their wallets, yesterday.

This has got to be welcome news to the sponsor of the Teucrium Corn Fund (NYSE Arca: CORN). The recently launched ETF spiked 8 percent higher Wednesday to close at $25.94, a level the ETF toppled from a week and a half ago.

Averaging an 11 basis point (0.11 percent) daily tracking error, CORN's done a fair job of mimicking Chicago corn. Since trade reporting started on June 9, CORN's gained 3.1 percent vs. July CBT corn futures' 4.7 percent appreciation.

CORN ETF Vs. Spot Futures

You shouldn't expect CORN to trade like the front month, though. Much of the tracking error actually comes from the fund's construction. CORN doesn't even hold the soonest-to-deliver contract. Instead, it's weighted 35 percent to the second-to-expire Chicago corn contract, 30 percent to the third-to-expire futures and 35 percent to the contract expiring in the December following the expiration month of the third-to-expire futures. This arrangement bridges old crop to new crop (a corn crop year begins with the December contract and ends with the following September's delivery).

With corn now buoyed by bullish sentiment, money flows into the ETF ought to improve. There's still a lot of work needed to consolidate corn's gains, but at least domestic investors now have a security product that delivers pure corn exposure.