Will These ETFs Skyrocket Again This Summer?

by Jason Jenkins

Last September I wrote about how the U.S. government called the 2012 drought the worst this country has seen in more than 50 years.

Last summer saw a perfect storm for nasty crop weather, where a lack of precipitation met one of the hottest years on record.

At that time, I told you to take a hard look at Darling International (NYSE: DAR), because it would reap the benefits of inflated corn prices. Darling is the alternate play for rising grain prices. The 130-year-old company is in the rendering business - which means it renders down animals into oils and proteins used by agricultural, leather and chemical firms.

What also strengthens Darling’s position:

  • It recycles cooking oils and baking waste used by commercial businesses into high-energy animal feed parts and commercial oils.

  • Darling International is the largest - and only - publicly traded rendering company.

  • The company placed itself in a strong position in the bio-fuel industry as an alternative to vegetable oils.

Although it hasn’t really worked out too well yet, it’s still a solid long-term play.

However, there may be some other ways to play the drought, because it appears its effects are far from over.

What’s Happening to Crops This Year

Remember how I mentioned a perfect storm from last year? Well here’s what specifically happened…

The Midwest Corn Belt had to deal with awful heat conditions, while the Rocky Mountains went through one of their lightest snow packs in recent history.

Because of Mother Nature, if you had any exposure to the U.S. grains market in 2012, you did pretty well. And according to a great deal of scientists and the Federal government, 2013 is shaping up to look a lot like last year. The prediction is hot and dry.

Roger Pulwarty, a director with the National Oceanic and Atmospheric Administration (NOAA) who specializes in drought, told the Senate Agriculture Committee, "The continuing conditions really look like they're setting up for a very similar level of drought in the Midwest and West." The findings say that right now, the snow pack in the Rockies is less than normal, falling somewhere near 79%.

Let’s look at the Midwest. There’s a lot of research that demonstrates this problem will linger for a while:

  • The U.S. Drought Monitor showed much of northwestern Iowa still feels the effects of extreme drought.

  • A recent USDA survey of Iowa soils showed that, even after it does rain, 90% of Iowa's farmland is moisture-deficient. It’s very difficult for dry and cracked soil to absorb new precipitation without extreme runoff. Soil apparently takes a while to recover from such conditions.

  • And it gets worse. Randall Miles, associate professor of soil science at the University of Missouri’s School of Natural Resources, found that soil in the Midwest is dry as far as five feet down. This is the depth where crop roots get their moisture and nutrients from. He doesn’t think there will be a full recovery of soil moisture any time soon. Extra precipitation this spring would not change the outlook because of the time needed for moisture to travel that far down into the soil, where the driest conditions exist.

Grain Prices Are Likely to Rise This Summer

A drought on any level this summer will cause grain prices to rise, just as we saw in the summer of 2012. Because of last year’s effects, in no way should you expect this year’s grain crop to produce normal yields. The research shows the soil has not had the proper time, or sufficient moisture, to make a full recovery.

What is definite is the demand for grains will continue to increase globally as a food source and for biofuels - but the supply for grain is not meeting demand. I’ve already made the case for Darling International.

But how else can you take advantage of the heat and lack of precipitation?

I’m not going to tell you to dabble in the futures market. However, a safer approach to gain exposure to the U.S. grains market may be by using a grain-based ETF.

A couple different plays are the Teucrium Corn Fund (NYSE: CORN) and the iPath Grains ETN (NYSE: JJG). A broader base commodities play with a solid concentration in grains is the PowerShares DB Agricultural (NYSE: DBA).

These ETFs skyrocketed last summer and have slowly given up much of the gains since. If the effects of the drought truly do continue into this summer, these shares could see another jump.

Good Investing,

Jason

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