Commodities That Could Heat Up in 2011

Agri-commodities

Agri-commodities have been the strongest performers in the last six months with the DJ-UBS Sector Index up nearly 40% this year. Weather disruptions to supply and higher global demand have fueled the prices of cotton, wheat, coffee, corn and soybean.

As China battles food inflation, agri-commodities are seen as a natural hedge. However, after a tearing run, the rally might be a little more selective in the year ahead.

Corn and soybean are emerging as favorites for 2011. "U.S. corn supplies have tightened materially on lowered yields, while stocks remain very tight and ethanol production has set multiple record highs. Concerns have surfaced about the effect of La Nina on Southern Hemisphere crops, while China has stayed a net importer of corn in the past five months," Barclays Capital wrote in a commodity outlook.

Darin Newsom, senior commodities analyst at DTN Securities says he likes soybean and that the crop should benefit from strong demand from China. An acreage battle could emerge in the U.S. as farmers cater to rising demand for corn and soybean and a tight supply situation could emerge.

Newsom tends to favor agri-commodities that are benefiting from strengthening demand trends rather than short supply situations as a harvest can quickly change the supply outlook.

Cotton, which remains 2010's top performing commodity with its nearly 90% rise in prices, is currently facing a tight supply situation so prices could remain strong in the first half of 2011. But Newsom expects that the supply situation will probably be rectified in subsequent harvests as farmers in India grow more cotton to benefit from prices.

How to Trade: ETFs might present the best way to trade agri-commodities as agri stocks tend to be ruled by multiple factors besides commodity prices. There are several broad-based ETFs that provide exposure to a range of agri-commodities. The PowerShares DB Agriculture Fund (DBA) is one fund that offers broad exposure to a range of commodities. Dailey of Team Asset Management recommends the Elements Rogers Commodity Index (RJA).

The iPath Dow Jones UBS Agriculture ETF (JJA) offers exposure to seven commodities including soybean, corn, wheat, soybean oil, coffee, cotton and sugar.

There is also a single corn-based ETF, the Teucrium Corn Fund which invests in corn future swaps.

Investors looking for indirect exposure may consider fertilizer stocks like Potash (POT) or the Market Vectors Agribusiness ETF (MOO) as rising farmer incomes is likely to benefit companies in the agri business.

-- Written by Shanthi Bharatwaj in New York



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