Oil is down, natural gas has done a nosedive – now agriculture could be the next commodity to explode, mostly because of rising food costs and increased demand, giving agriculture-focused exchange traded funds (ETFs) some time to grow.
Lately, have you noticed your grocery bill going way up, even if your cart isn’t way full? In the United States alone, the cost of groceries went up at an annualized rate of 8.4% for July. Even though commodity prices are falling, do not expect the food prices to start lowering, especially because of globalization, there are many more middle class families worldwide to compete with, says Sean Broderick for Money And Markets.
Food is something we will always need, and like energy, we use it up. Here in America, it may feel like we have the security of plentiful, affordable food. But Brodrick points this out: U.S. consumers spend roughly 15% of every dollar on food. In China, 30% of consumer income is spent on food. In India, it’s closer to 35% or even 40%. And these are relatively “rich” countries. When people begin running out of food, where do you think they will travel to?
Surging demand for food is already making waves around the world, and this is a problem that is going to persist and get more intense as time goes on.
Today, the Department of Agriculture cut its forecast for this year’s corn and soybean harvests because of drought. Because corn will be about 12.1 billion bushels (down from the estimated 12.3 billion last month) and soybeans will be at 2.93 billion bushes (down from 2.97 billion last month), the result could be higher commodity prices.
The corn crop will be 8% below last year’s, while the soybean crop would be 13% higher, reports Christopher S. Rugaber for the Associated Press. Even so, this year’s corn crop would be the second largest on record, while the soybean crop would be the fourth largest.
ETFs give two ways for investors to access food prices and the boom in agriculture: by investing in futures, or investing in companies that produce such products.
Among the ETFs available that enable investors to do this include:
- PowerShares DB Agriculture (DBA), down 1.9% year-to-date
- iPath Dow Jones AIG-Agriculture (JJA), down 7.4% year-to-date
- ELEMENTS-Linked to MLCX Grains Index (GRU), down 17.9% since Feb. 15 inception
- Market Vectors Agriculture (MOO), down 26.3% year-to-date
- E-TRACS UBS Bloomberg CMCI Food (FUD), down 6.4% since April 4 inception
They’re down now, but will a reversal in the general markets change that? Stay tuned.