As detailed in previous articles, the exchange traded funds for natural gas, United States Natural Gas (NYSEARCA: UNG), and corn, Teucrium Corn (NYSEARCA: CORN), rose together in an unlikely correlation due to the Midwest farm drought. The record heat sent both the UNG and CORN higher based on fundamental supply and demand issues. The same factors are bringing the share prices back down in recent market action. That should intensify in autumn trading.
For the last month of trading, the UNG is down by 5.90%. Over the last quarter, it had climbed by 11.90%. Down the last week in market action and basically flat for the most recent month, the CORN is up more than 40% for the last three months.
The UNG rose as the heat resulted in more businesses and offices cranking up the air conditioning. The CORN rose as the United States produces about 40% of the world’s corn and the crop this year was the worst since 1995, according to the United States Department of Agriculture.
In addition to the basic supply and demand forces at play for both the UNG and the CORN, speculators piled aboard to drive the prices up far more than the supply imbalance warranted in relation to the prevailing demand. Hopes for QE3 spent prices higher, too.
Both the UNG and the CORN should be expected to fall in autumn trading. It looks to be another warm winter, particularly in the heavily populated eastern seaboard of the United States. In addition, a recent court ruling in the United States has made coal more attractive as the fuel for utility plants rather than a switch to natural gas.
For each exchange traded fund, a major short position is developing. While a short position of 5% is considered to be troubling, there is a short position of 38.52% for the UNG. The CORN is very close to its 52-week high. As the chart below demonstrates, there have been many pullbacks for both of the exchange traded funds in market action this year. Expect one to develop into a rout very soon for both the UNG and the CORN.