ETF Spotlight: Agribusiness
November 27th, 2012 at 11:55am by Tom Lydon
The drought conditions that plagued the U.S. this summer have spread to the related exchange traded fund Market Vectors Agribusiness (NYSEArca: MOO). Some of the agricultural companies that the ETF holds have been hit hard on their profit, resulting in a performance that lags the S&P 500, but analysts argue that fundamentals look ripe for the picking.
“Farmers won’t be going into 2013 broke from this year’s fallow fields. Not all farmers have crop insurance, and the insurance payouts aren’t always as good as if the farmer had sold actual crops, but for the most part, farmers will be flush for next year, especially those whose insurance is based on current crop prices, which are near record highs,” Jacob Roche wrote for The Motley Fool. [Agribusiness ETF For Rising Global Food Prices]
Agriculture is still a profitable investment as sales declines are not a sound reason to sell the stocks. Corn supplies are at the lowest levels seen in 17 years, similar to other crops and there is much fertilizer, tools and tractors needed to get acres of farmland restored to harvesting levels, reports Roche. Contrarian investors can benefit from this outlook and consider that MOO is undervalued with shares available at bargain prices. [Agriculture ETFs: Stocks or Futures?]
“Unfortunately for companies that sell fertilizer, tractors, and the like, farmers this year had little incentive to invest in a crop that was likely to fail. When farmers give up on or don’t even bother to plant a crop because of poor weather conditions, it’s referred to as abandoned acres. According to the USDA, farmers abandoned the most acres this year since 1993,” Roche reported.
Fundamentals for investing in MOO are compelling due to the long term economic picture. It is estimated that agricultural output will need to double by 2050 in order to meet global demand. Farmers will have to improve crop yields as demographic shifts will help support this need, reports Alex Bryan for Morningstar. [Why Grain Investors Should Look at Agribusiness ETFs]
Grain prices and the size of the harvest both impact the performance of the sector, and the performance of the ETF. MOO derives 50% of its profit from the actual agriculture sector, while the rest comes from farm machinery, supplies such as seeds and fertilizer, livestock, chemicals and biofuels, reports Commodity HQ. For a pure agriculture play, the PowerShares DB Agriculture Fund (NYSEArca: DBA) is an option. The IQ Global Agribusiness Small Cap ETF (NYSEArca: CROP) invests in agribusiness companies similar to MOO, but focuses in on smaller companies. MOO is up 10% year-to-date, while CROP is up 9%. DBA is up 0.6% for the year.
Market Vectors Agribusiness
Tisha Guerrero 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.