Agricultural commodities have had a bumpy ride over the past month. At the end of January, we started following two agricultural securities: the iPath Dow Jones UBS Grains ETN (JJG:NYSE) and the PowerShares DB Agriculture ETF (DBA:NYSE).

If you recall, I introduced these two exchange-traded assets by noting two technical formations — a broadening descending wedge and a gap-up.

I told you that gap-ups can sometimes be filled, and we waited to jump into JJG and DBA to see if we had more upside movement.

We did, but over the past few days, JJG has since dropped back to fill its gap.

Now that the gap is filled, that level becomes a support point. For JJG, we see that this has happened. On Feb. 23, JJG bounced from an opening price of $ 51.44 and climbed more than 2 dollars to close at $ 53.49.

JJG has since moved higher.

But why this sudden change in prices? Is it just a technical formation, or has something changed fundamentally for agricultural commodities?
Agricultural Commodities Supply and Demand

The USDA announced again that increased corn acreage would lift inventories by the end of the season, and that recent data suggests a continued decrease in soybean meal. Wheat prices have whipsawed this past week due to the continued unrest in the Middle East and North Africa and rebounding demand, according to Lee Gaus from IFG Futures.

From many analysts, though, the correction in grains prices is a bullish correction. Across the board — corn, wheat, soybeans — the Commodity Research Bureau thinks this pullback is temporary.

If we combine that with the bounce we’ve seen in JJG’s chart, we have a convincing argument for more upside potential in agricultural commodities securities like JJG and DBA.

Now that JJG has found support from filling in that gap from January, we can now use that level as a static stop-loss point… meaning if JJG dips and closes below $ 51.24, you should exit your position. That price, $ 51.24, is the closing price from Jan. 11, 2011, the day before the gap up.

There is a chance for a move lower from current prices. High commodity prices could confuse demand, and some stocks of grains are higher than average.

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But if prices do move lower, the larger consensus points to support within the bullish uptrend. For JJG, $ 51.24 is also the lowest price at which it could trade and remain in its bullish uptrend.
What About the PowerShares DB Agriculture Fund?

Let’s take a look at PowerShares DB Agriculture Fund, though, because it’s trading just a little differently than JJG.

PowerShares DB Agriculture Fund’s holdings are mostly in what’s known as “softs.” Things like coffee, sugar and cocoa. And these commodities have been soaring.

Cocoa is at a 32-year high… Coffee prices climbed to a 13 3/4-year high… And sugar is experiencing a bullish correction from a 30-year high. The outlook for all three of these softs is bullish. Tight supply of both coffee and cocoa is exacerbated by strong demand.

The Commodity Research Bureau says that demand for cocoa is up 4%. The bureau also notes that coffee production is off 4.5%.

That’s one of the reasons why PowerShares DB Agriculture Fund found support before filling its gap up from late January.

The difference between JJG and DBA price movements is mainly due to the differences in supply and demand for their holdings.

It’s clear that DBA’s coffee, sugar, and cocoa holdings have tighter supplies with growing demand — at least for this season. JJG’s grains have a bit more supply, and that means the high prices that have stunted demand combined with greater inventories have caused JJG’s price to drop more significantly.
What Should Investors Do?

If you’re already positioned in JJG or DBA, consider holding for a push higher.

DBA needs to push past $ 35 to spark another significant climb, but with the supply-and-demand projections expected to be very tight this season (Brazilian Arabica production could be off as much as 13%), such momentum is possible.

JJG will have to climb above $ 56 — which could be a bit of a stickler — for upward momentum to continue. Remember to employ a static stop-loss at $ 51.24 to limit downside risk. Prices for grains held in JJG are still high relative to supplies, though increased demand from places like China could be enough to keep commodity prices moving higher.

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