Agriculture ETFs: Stocks or Futures?
July 27th 2012 at 4:15pm by Tom Lydon
The record heatwave has decimated crops across the U.S., and investors seeking to take advantage of rising grains prices may consider futures-based or equities-based exchange traded funds.
Agriculture meteorologists expect the summer heat to keep pressuring crops in the southern and central Corn Belt as the U.S. crop growers suffer from the worst drought in 50 years, reports Christine Stebbins and Sam Nelson for Reuters. [Will Rain Help Agriculture ETFs?]
“There’s no big huge relief seen,” John Dee, an agricultural meteorologist for Global Weather Monitoring, said in the article.
“Crops will continue to deteriorate. The corn crop is already gone and in the north and east, beans will improve some but not in the southwest,” Don Keeney, meteorologist for MDA EarthSat Weather, said.
Investors seeking to directly capitalize on the higher prices in agricultural commodities may consider futures-based ETFs, like the PowerShares DB Agriculture Fund (NYSEArca: DBA). DBA holds a basket of commodities futures contracts, including cattle, cocoa, coffee, corn, cotton, lean hogs, soybeans, sugar and wheat.
However, for those who want a more focused exposure, the Teucrium Corn Fund (NYSEArca: CORN) provides exposure to the daily changes in settlement prices on three futures contracts for corn traded on the CBOT – the multiple contracts help spread the risk and diminish the risk of contango in the futures market. [Corn Prices Lead Agriculture ETFs on Drought Forecast]
When the price of a back-month contract exceeds that of the front-month contract, also known as the state contango, a fund loses money each time it rolls its futures contracts – ETFs roll contracts to prevent physical delivery of the actual commodity. If a market is in contango, the fund may experience losses, even if the commodity’s prices increase.
For those wary of the futures market, investors may take a look at agribusiness sector ETFs, such as the Market Vectors Agribusines ETF (NYSEArca: MOO) or the IndexIQ Agribusiness Small-Cap ETF (NYSEArca: CROP).
Potash Corp. (NYSE: POT), the world’s largest fertilizer producer, believes the fertilizer business could see a jump in demand as a result of the drought.
“[The drought] reinforces the importance of farmers focusing on the things that can be controlled,” Potash chief executive officer Bill Doyle said, reports Ora Morison for The Globe and Mail. “Soil fertility is at the top of that list.”
For more information on agriculture, visit our agriculture category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.