Content provided by Michael Hadden, Investment Research Analyst
There are numerous factors that affect market prices: economic cycles, interest rates, demographic trends, even the Twitter activity of a particular account, just to name a few. With so many factors to consider when evaluating an investment, the last thing investors want to hear is that something as random as weather could be playing a part, too.
Well, it’s true. Weather can impact investment returns. No, if it rains in Seattle, Starbucks doesn’t get a boost, but weather can have a significant impact on agricultural commodities. In particular, we are seeing a large effect on corn prices. The topic hits close to home for us at CLS Investments as we are surrounded by corn fields here in Nebraska. Unfortunately, this past spring our area experienced a significant amount of flooding. The overall wet weather across the Corn Belt significantly slowed planting season. Now, some of the top corn-producing states are experiencing a weaker growing season. Below is a table of corn silking progress, which is an indicator of the development of a corn plant. Most corn-producing states – particularly in the heartland – are behind schedule when compared to the five-year average.
With a significant portion of the crop planted later in the season, the U.S. Department of Agriculture is forecasting lower yields for 2019. With demand for corn still high, combined with lower production, it is possible that we will see higher corn prices.
You may be asking how to capitalize on the possible opportunity. Personally, I don’t have a futures account open to wheel-and-deal corn futures. Luckily, Teucrium Funds, an ETF provider, has done that for you. It has ETFs that own various futures contracts across the maturity spectrum in single agricultural commodities, including corn. The ticker is one even I can remember: CORN.
Currently, there is a great investment thesis for corn and the expectation for higher prices, but corn and other commodities may also make sense as longer term, strategic allocations due to their ability to mitigate risk through diversification. As you can see below, CORN is negatively correlated to both U.S. stocks (S&P 500) and bonds (Bloomberg Barclays U.S. Aggregate Bond Index) and has nearly no correlation to international stocks (MSCI ACWI ex U.S.).
This risk diversification enables portfolios to hold up during market volatility. We saw a perfect example of that during May of this year. Corn had great performance, up more than 10%, while equity markets struggled, down over 5%.
Here at CLS, we advocate having an allocation to alternative asset classes as part of a global, balanced portfolio. These alternative asset classes provide risk diversification and a possible opportunity to enhance portfolio returns.