Make a buck off winter's weird weather

By Tim Middleton

This winter's weird weather is playing right into the hands of financial speculators.

How weird has it been? In Colorado, cars have been swept off the roads by record snows. In New York, daffodils bloomed in January. And in California, a billion dollars' worth of oranges have been frozen on the trees, and as much as 70% of the state's crop could be lost. Last Wednesday alone, the price of March futures contracts for frozen concentrated orange juice leaped 3%.

So how can regular investors make a buck off of the concentration of frozen oranges? Short answer: Not very easily. Long answer: There are some new ways to make money off this country's huge agriculture industry, even if you can't squeeze oranges into your portfolio. And just like with California's citrus crops, strange weather patterns can drive up the prices of grains like corn and wheat when the harvests fall short of expectations.

Few fund investors have futures accounts that allow them to focus on an individual commodity such as oranges, and the fund world offers no way to play that the orange crop, which is tiny in relation to other agricultural products. Mutual funds and exchange-traded funds have to scrounge for opportunities to invest in the commodities farmers produce.

A new agriculture fund

But things are starting to change. Little more than two weeks ago PowerShares DB Agriculture Fund (DBA, news, msgs) was introduced, with 25% of its weight in corn, and the market cheered. Closing the first day at $25.02 a share and trading only 27,800 shares, within seven trading days the price had spurted to $26 and the volume to 1.7 million shares as frozen oranges suddenly put agricultural commodities on Page 1.

DB Agriculture has filled a significant hole for fund investors. Traditional commodities' indices put at least half their weight into energy-related commodities such as oil and natural gas, which have been in a nosedive. iPath Dow Jones-AIG Commodity Index Total Return (DJP, news, msgs), which has a relatively high 39% in agriculture, has fallen in price as DB Agriculture has jumped.

Like other ETFs, DB Agriculture follows an index. This one was not created for economists or farmers, however. It is designed strictly for investors. It seeks to pinpoint the highest possible returns across a vast spectrum of futures contracts for corn, wheat, soybeans and sugar, which are held in equal weight within the index and were chosen because they are the most important products and trade the most abundantly.

"We're trying to put investors into the most optimal version (of competing futures contracts) for the long term," says Kevin Rich, chief executive of DB Commodities Services, a unit of Deutsche Bank. "We try to use very liquid contracts, so when investment dollars come in, we can actually put those to work in the market."

The role of corn

The commodity most likely to benefit American farmers in coming years is corn, which is used in the manufacture of ethanol. The governors of 37 states have proposed raising the federal pledge of 7.5 billion gallons of ethanol produced by 2012 to 12 billion gallons by 2010.

Their proposal says ethanol could displace as much as a quarter of the nation's gasoline consumption by 2025.

An independent group called Earth Policy Institute predicts the nation's ethanol distilleries, many only now being built, will consume 139 million metric tons of corn from next year's harvest, more than twice the Department of Agriculture estimate.

Already, prices of corn are rising. On Jan. 12 the most-active futures contract, for March delivery, leaped 20 cents a bushel, the maximum daily limit at the Chicago Board of Trade, to $3.96. Previously J.P. Morgan had estimated the price of a bushel of corn will spurt to an average of $4.03 this year, up more than 60% from last year's price of $2.51.

On the Board of Trade, wheat and soy complex rose in sympathy with corn, further supporting DB Agriculture Fund.

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