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.”
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Max Chen contributed to this article.