The trend in rising food prices has hit the wallets of those home and abroad, and given the geopolitical implications, speculation indicates that the pattern is not due for a change. Are exchange traded funds (ETFs) one of the best ways to play this trend? [Agriculture ETFs Soar As Food Prices Hit Record.]
Abraham Ballin for Mornignstar reports fundamental drivers of the rise in agriculture products and food prices are due to adverse weather conditions on the supply side of the market in areas such as Russia and Australia. Wheat, corn, and soybean price run ups have trickled into the meats such as cattle and hogs, which have seen inflation adjusted price increases of 34.3% and 40.4% over the past two years, respectively. [The Biggest Moving Agriculture ETFs.]
Investors can look to hedge food prices with agriculture-related ETFs including:
- Market Vectors Agribusiness (NYSEArca: MOO) The index is composed of 47 firms involved in agriproducts and livestock operations, agrichemicals, and production or transport of agricultural equipment and biofuels. MOO exposes investors to non-commodity-related, equity-specific price pressures and risks.
- Tecurium Corn (NYSEArca: CORN) The fund procures its exposure through the use of futures contracts. Liquidity and the absence of carrying costs can make futures a a convenient way to gain exposure than through direct physical ownership. The catch is that the futures curve–the prices of contracts at progressively distant expiration dates–can take an upward slope (known as contango) or downward slope (known as backwardation). That slope can cause futures and spot returns to decouple, also known as basis risk.
- IQ Global Agribusiness Small Cap ETF (NYSEArca: CROP) This new ETF represents the smaller companies involved in agribusiness.
- PowerShares DB Agriculture (NYSEArca: DBA) Using futures contracts, this fund provides exposure to corn, soybeans, sugar, live cattle, cocoa, coffee, hogs, wheat and cotton. This ETF uses optimal yield rolls to mitigate the contango affect.
- iPath Dow Jones UBS Livestock Sub Index Total Return ETN (NYSEArca: COW) This ETN delivers futures-based exposure, highly focused on two of the most prominent meat contracts: live cattle and lean hogs. ETNs provide perfect tracking, and investors pay capital gains taxes only on sale of the position.
For full disclosure, Tom Lydon’s clients own MOO and CROP.
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.