How Record Corn Prices are Impacting Food-Related ETFs

PowerShares Dynamic Food and Beverage Portfolio (PBJ) gives investors low-risk exposure to restaurant stocks and even has a small dividend yield. As the retail restaurant group has picked up momentum, investors can play on this demand.

“High unemployment and relatively high gas prices have had a negative impact on disposable income,” Darren Tristano, executive VP at Technomic said. Fast-casual “has been successful in taking share from the other segments.”

The so-called fast casual category of eateries has seen an 8% rise in retail sales in 2012. Eateries such as Chipotle, and Panera Bread have led the industry’s rebound over the past few years. Lower and middle income consumers are attracted to an affordable, higher quality eating experience, compared with that of fast food, reports Anna Louis Jackson for Bloomberg BusinessWeek.

The retail restaurant group is up 13% so far in 2012, compared to the S&P 500, which has gained 7.5%, reports Marilyn Much for Investor’s Business Daily. However, menu prices have risen around 2%-3% in response to rising commodity prices. More big price moves in grains will likely have an effect upon food prices, with drought conditions looming.

PBJ ETF is up 6.4% year-to-date and boasts a 1% dividend yield. If the food and beverage industry can keep pace, PBJ will remain appealing due to the defensive nature of the fund.

Meanwhile, corn and wheat prices are up 31% since June 1, while coffee has risen 17%. In turn, pork and beef prices will rise as grain supply is tight. Chicken prices are expected to rise next.

Nevertheless, Q2 earnings have been decent from fast-causal eateries. Chipotle has an estimated 40% jump in 2Q profit, and has been on the rise for 13 quarters, with double-digit sales. Dunkin Donuts is another winner, with a 5% jump in second quarter profit.

The slow-to-recover U.S. economy and commodity price hikes are two obstacles that the restaurant sector are up against.

Commodity ETFs such as PowerShares DB Agriculture Fund (DBA) will likely gain as mother nature runs its course. DBA has gained about 8% over the past three months.

Other commodity funds on a run:

  • Teucrium Corn Fund (CORN) up 32% this quarter
  • iPath Dow Jones UBS Grains Sub-Index Totoal Return SM ETN (JJG) up 32% for the past three months

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