Grain Rallies Offer Portfolio Diversification

The Spanish economy is failing, stocks are down and banks are being downgraded. Is there any silver lining on today’s economic times? Well, yes, but it is coming from an unexpected source.

Corn, soybeans and wheat have staged a remarkable rally over the last two days, with some delivery months rising their maximum allowable amount (called a “limit up” move). These gains can be primarily attributed to the recent weather in the Midwest, as high temperatures and dry conditions weaken crops. In what was a potential record-breaking grain yield year, U.S. farmers are now facing a potential shortfall in yield, which should cause prices to rise if demand stays constant.

This reminds us of Markowitz’ principles of diversification—spreading investments throughout a variety of assets to reduce risk. Although most investors cannot gain access to agricultural markets as easily as they can equities or fixed income, there are some alternatives. Managed futures mutual funds, for example, allow advisors to add a non-correlating investment to a traditional portfolio. Such funds performed well during last month’s stock deluge and are holding up so far in June.

Grain prices are expecting to increase, as continued drought and heat is probable throughout the Midwest for the next month.

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