With the commodities super cycle hitting a rough patch, the agricultural sector and agribusiness-related exchange traded funds could continue to underperform as farmers try to cut costs.
Over the past three months, the Market Vectors Agribusiness ETF (NYSEArca: MOO) fell 6.2%, PowerShares Global Agriculture Portfolio (NYSEArca: PAGG) declined 8.4%, IQ Global Agribusiness Small Cap ETF (NYSEArca: CROP) dipped 1.5% and iShares MSCI Global Agriculture Producers ETF (NYSEArca: VEGI) decreased 6.5%.
The agribusiness ETFs track global agriculture sector companies, including about a 50% tilt toward the U.S., along with 20% in Europe and 20% in across Asia. The agricultural business provide products like fertilizers, agricultural chemicals, farming machinery, packaged foods and meats.
However, these business have been dragged down in the wake of falling commodities prices. The PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), which holds a basket of agriculture and energy commodities, dropped 15.7% year-to-date. [Commodities Crushed: Investors are Running Away From Commodities ETFs]
A number of global factors are weighing on the commodities market. More recently, the pressure is coming from the emerging markets, notably China, where Professor David Kohl, a US agricultural economist formerly of Virginia Tech argues that agricultural and rural economies are facing a “reset downward,” reports Emiko Terazono for the Financial Times.
For instance, China is seeing growth slow, even after experiencing a series of monetary and fiscal policies failed to significantly bolster the economy. China also revealed unexpectedly weaker trade numbers, which have also weighed on the economy.
While demand has slowed on growth concerns, farmers around the world have increased production, with bumper crop years contributing to price pressures and reduced income for farms.
As farmer incomes decline, spending on agricultural products will also dip, depressing profit margins in other industries, such as the agribusiness sector.