Commodity prices are in the midst of a bull run these days, and agriculture is at the forefront. This activity has put agriculture exchange traded funds (ETFs) in the spotlight as investors look for ways to get exposure.
The Short-Term Case
Agriculture prices are rising, and analysts say that the fundamentals for more gains are in place over both the long- and short-term.
Grain prices in particular have surged on a host of factors. The U.S. Department of Agriculture slashed its forecast for global wheat production in 2010-2011. Production has been hampered by severe drought in Russia, which caused the country to ban exports of the crop, hot weather in Iowa and the EPA’s recent decision to raise the ethanol blend rate.
The U.S. Department of Agriculture also cut its harvest projections for corn, soybeans and wheat, adding fuel to the commodity-rally fire. Meanwhile, further concerns about a food shortage are becoming a reality.
Economists expect farmers to respond to high grain prices by planting millions more acres of corn and wheat, which could benefit sellers of seed and the companies that manufacture chemicals to grow agricultural commodities.
The Long-Term Case
Wheat, corn, cotton, sugar and coffee are hot commodities now, and those who know such things about the agriculture sector say we’re only at the beginning of a bull that has the potential to last decades. The United Nations Food and Agriculture Organization has even held an emergency to discuss whether we’re in the early stages of a global food crisis.
A few signs that we could see price appreciation over the long-term include:
- Agricultural land with water is becoming a hot commodity in its own right. Some predict that such land may be very valuable in the future, fueling a rush to invest in farmland. Commodity guru Jim Rogers has predicted that agriculture will be one of the greatest industries over the next 20 years.
- The world’s population is quickly expanding; it’s projected to surge up to 9.1 billion by 2050 and the United Nations’ Food and Agriculture Organization expects the growing middle class to consume a more diverse variety of foods. World food producers would have to increase production by almost 70% to meet that increasing demand. Annual grain demand is will likely increase as demand for food and livestock feed meet that 2050 population projection.
- Agriculture economists at the U.S. Department of Agriculture expects that the consumer price index for food will increase 2% to 3% from 2010 to 2011, with retail food prices rising faster than overall inflation through 2012.
Agriculture ETFs
With ETFs, there’s more than one way to give your clients exposure to agriculture. There are two main options when doing so:
- Equity ETFs, which hold the stock of companies involved in the production of agricultural commodities. Such ETFs work just as other equity ETFs do in that they passively track an index. Some examples include Market Vectors Agribusiness (NYSEArca: MOO) and PowerShares Global Agriculture Portfolio (NYSEArca: PAGG).
- Futures-based ETFs, which hold a basket of futures. Before investing, futures ETFs need a little more understanding and research because things like contango (when the spot price is lower than the futures price) and have a negative impact on returns. Some commodity ETFs (such as PowerShares‘ Optimum Yield strategies) seek to mitigate this effect by creating different strategies for rolling contracts forward. Examples include PowerShares DB Agriculture (NYSEArca: DBA) and United States Commodity Index Fund (NYSEArca: USCI), which includes wheat, corn, soybean, sugar and coffee futures.
You can find all commodity ETFs in the ETF Analyzer and research any of them further in the ETF Resume. As a pro member, don’t forget that you have access to powerful tools, including ETF Alerts and the ETF Dashboard!