A Complete Guide to Agriculture ETFs 23 comments
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All those guys on Wall Street or in the city of London driving Maseratis need to learn how to drive a tractor.
So says legendary investor Jim Rogers, whose friendly advice to the investment banking community reveals his belief that agriculture will be the next great bull market.
For many decades, agriculture has been a declining sector as productivity advances led to falling real prices and low margins for farmers and the firms that supply them. But in 2007-2008, agriculture prices suddenly spiked higher, led by an ethanol fueled near-trebling of corn (maize) from $2.00 a bushel to a peak of $5.50 and a similar supply-driven increase in the price of wheat and rice.
Since last summer prices have fallen back down to earth, with corn currently trading around $4.00, but prices for all crops have still barely outpaced inflation over the past 15 years.
The question today is whether this run-up was simply a short-term speculative bubble, or the beginning of a long-term bull market temporarily interrupted by the global financial crisis. There are good reasons to believe that the former is true and that higher agriculture prices are coming, but the reasons may be surprising.
Malthusian Cassandras are fond of invoking the "population bomb" as an explanation for rising agricultural prices. But although world population growth is still positive, it has slowed considerably in the past few decades and some big countries like Germany and Japan are actually shrinking. The global average fertility rate in the 1970's was 4.5, meaning the average woman had more than 4 children in her lifetime. In 2007 that same number was 2.6, rapidly closing in on the 2.1 that would replace the current population, but not grow it.
Emerging Asian nations are near that rate already, and the only region of the world that still has high population growth rates is Africa, whose consumers are for the most part excluded from global agriculture markets.
Population growth will undoubtedly increase demand for food over the coming decades, but not nearly as much as some expect. The main driver of agricultural demand, thus, isn't more people, but dietary change in the richer bits of the developing world. Producing meat takes up to four times as many resources as producing equally nutritious plant-based foods. Increased consumption of meat, dairy and other land intensive products in places like China, India, Latin America, and the Middle East will increase the demand for animal feedstocks like corn and soy, and compete for scarce land, water, and capital with other staple crops.
While demand is rising, supply will struggle to keep pace. In the short term, the credit crunch has restricted the ability of farmers to find financing. This underinvestment is bound to eventually cause a supply-driven rise similar to the one crude has just endured.
In the longer term, the constraints of land and water will begin to bite. Agricultural yields have been largely flat since the "Green Revolution" plateaued in the 1990's. Although the world has a good deal of arable farmland still uncultivated, much of it is in environmentally protected areas of Brazil. Meanwhile the water supplies of existing farms are increasingly menaced by climate change.
Wheat and rice yields in Australia have fallen by over a third in the last five years because of a long period of drought most experts agree is largely due to the effects of global warming. Increased dryness is also predicted to hit China, India, the United States, and Latin America, threatening to decrease global agricultural productivity by up to 30%. These changes are more or less baked in, and will occur with or without reductions in greenhouse emissions.
Ironically, efforts to improve the environment will also hurt agricultural supplies. The trend towards foodstuffs grown without pesticides (marketed as "organic") reduces agricultural yields and thus devours more of mother nature's land. And wasteful subsidies for corn-derived ethanol biofuel in Europe and America distorts the prices of all grains upwards, without doing a thing for the environment. New biofuels that don't use or compete with food crops are in development, but may not be ready for years and even then may not be able to compete with subsidized corn.
Finally, agriculture supply will also be hit by a shortage of labor. Not so long ago most people, even in developed countries, had some agricultural experience. Today nearly no one knows how to farm, as young people have exited the business for better opportunities. Which is why Jim Rogers' advice is broadly correct: labor costs in finance are bound to fall, and those in farming are destined to rise.
Overall, the case for a new bull market in agriculture is quite strong. Only a "second green revolution" in agricultural productivity, perhaps through better GMOs, could lower prices in the long term. And such a revolution would likely occur after a bull run-up in prices, not before. This guide will help you thrive in the new agricultural economy by surveying the 3 US listed ETFs that focus on agriculture equities and futures.
Broad Equity
Market Vectors Agribusiness (MOO) +19.82% ytd and 1.14 vol US 45% | Singapore 11% | Canada 10% | Japan 9%| Switzerland 8%
Increasing food prices will lead farms to increase yields through better equipment, materials, and services. The MOO is one of two ETFs that invest in firms who supply such things to agricultural producers. Its 44 names include pesticide and seed giant Monsanto (MON), fertilizer king Potash Corp. (POT), and agricultural machinery maker Deere and Co. (DE). It's a mix of large and medium caps, and is broadly diversified across chemical, equipment, and agricultural operations names such as Archer Daniels Midland (ADM). Although its 45% geographic concentration in United States is a little high, most of those American companies are global multinationals with global revenue streams.
PowerShares Global Agriculture Portfolio (PAGG) +13.05% ytd and .04 vol US 29% | Canada 11% | Singapore 11% | Switzerland 8%| Malaysia 8%
PAGG invests in most of the same names as the MOO, with a more dispersed weighting formula that favors the international players. The fund is lighter on the equipment and machinery names, and heavier on fertilizer and chemical companies. This underweighting of manufacturing explains its relative outperformance year-on-year. However, the PAGG's higher expense ratio (.75% to .59%) and low volume mean that the MOO is a clearly better option.
Commodity
PowerShares DB Agriculture Fund (DBA) -0.46% ytd and 2.39 vol Corn 25% | Wheat 25% | Soybeans 25% | Sugar 25%
The DBA is an innovative fund that invests equally in the four most widely traded agricultural commodity futures. It automatically re-balances each holding every quarter back up or down to 25% each. It is the oldest and most widely traded US agriculture ETF, and should benefit handsomely from the rise in agricultural prices. Caution should be urged, however, with all ETFs that invest in futures as all such funds have difficulty tracking the spot price of the underlying commodity over time.
Foreign Listed
The most exciting action in agriculture ETFs is overseas, particularly in Britain. Locally based firm ETF Securities offers an ETF for nearly any commodity on the London exchange, so you can buy or short corn, wheat, cotton, sugar, cocoa, etc through a convenient exchange traded fund.
Disclosure: None
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This article has 23 comments:
On Jun 24 11:12 AM pjjjm wrote:
> Look for the ETF GCC for equal weighted index of 17 commodities that
> are averaged across the futures curve six months out. (www.greenhavenfunds.com/)
or do both by switching to an aston martin, where the db code refers to david brown a brit tractor maker (sold to case, now cnh) who went sporty
Completely different from ETFs.
On Jun 24 01:28 PM Ron Rowland wrote:
> Your complete list might be missing a few (I found 14 others), including
> Jimmy Rogers' fund (seekingalpha.com/symbo...). Others
> for consideration include: FUE, GRU, UAG, FUD, UBC, JJA, NIB, JO,
> JJG, COW, JJS, SGG, BAL
www.porkmag.com/upload...
1.bp.blogspot.com/_xlG...
The reasons for the price spike are hotly debated, and while fear over a shortage of supply certainly fueled the run-up in prices, it was the sharp increase in demand -- fueled by ethanol subsidies and mandates in the United States, and subsidized biodiesel in Europe -- that was the more fundamental factor.
This article is not telling us anything that anybody even remotely clued into what is happening in agriculture have known for at least a decade: that it is the composition of demand that is the bigger driver than an increase in the numbers of mouths that must be fed. It has also been clear for some time that water (exacerbated by climatic changes) is a limiting factor.
The author of this article is too dismissive of organic agriculture, however. Organic agriculture, as marketed to relatively wealthy consumers in the west, accounts for a tiny fraction of the land undercultivation. Virtually no feed corn is grown organically. The crops that are under organic cultivation tend to be those for which the switch to organic methods is easiest and most profitable. Many crops (especially spices in the tropics) were already being grown without purchased chemicals in any case. The world need not fear organic agriculture. It will increase, for sure, but only where farmers see it pay-off: through improvement in their own bottom line, and through the advantages they see in longer-term soil fertility and yields.
Finally, the authors of this article should know better than to blame environmentalists for the corn-ethanol debacle. That bandwagon got rolling in the late 1970s, pushed by Big Ag (mainly ADM) and powerful corn-state senators. Environmentalists briefly embraced the product (from about 2003-2006), but as soon as they saw its dark side they abandoned it wholesale. Nowadays, corn-ethanol's fiercest and most effective critics come from the environmental community.
This article is actually written for people who don't follow the agricultural markets - not even remotely. Just meant to inform average investors looking for a good new ideas for portfolio building. If they want to know more in depth, there are plenty of links to more detailed info. And if they're already experts, then they should be trading the futures market themselves.
Organic agriculture is contraversial, but you cannot dispute the fact that no pesticides equal lower yields. It may be a niche product now, but it is growing rapidly. And it depends on the product. Grass fed beef is absolutely wonderful for the environment because it doesn't use feedstock. But growing wheat organically, for instance, it just a waste of resources.
I don't blame environmentalists for the ethanol debacle. They did bail on corn early on, and don't even like sugar too much. Its all about 2ed gen and 3ed gen fuels for them. Its the fault of the corn lobby and politicians, but they do brand it as "saving the environment", and many people still think corn ethanol does just that. Just trying to disabuse them of that notion.
Cheers mate
On Jun 25 01:52 AM SubsidyEye wrote:
> Corn prices did not peak at $5.50 per bushel in 2008, unless one
> is talking about average monthly prices received by producers. For
> consumers what matters was the price in the cash market (over $7.00)
> and on the CBOT (over $7.50)
>
> www.porkmag.com/upload...
>
> 1.bp.blogspot.com/_xlG...
>
>
> The reasons for the price spike are hotly debated, and while fear
> over a shortage of supply certainly fueled the run-up in prices,
> it was the sharp increase in demand -- fueled by ethanol subsidies
> and mandates in the United States, and subsidized biodiesel in Europe
> -- that was the more fundamental factor.
>
> This article is not telling us anything that anybody even remotely
> clued into what is happening in agriculture have known for at least
> a decade: that it is the composition of demand that is the bigger
> driver than an increase in the numbers of mouths that must be fed.
> It has also been clear for some time that water (exacerbated by climatic
> changes) is a limiting factor.
>
> The author of this article is too dismissive of organic agriculture,
> however. Organic agriculture, as marketed to relatively wealthy consumers
> in the west, accounts for a tiny fraction of the land undercultivation.
> Virtually no feed corn is grown organically. The crops that are under
> organic cultivation tend to be those for which the switch to organic
> methods is easiest and most profitable. Many crops (especially spices
> in the tropics) were already being grown without purchased chemicals
> in any case. The world need not fear organic agriculture. It will
> increase, for sure, but only where farmers see it pay-off: through
> improvement in their own bottom line, and through the advantages
> they see in longer-term soil fertility and yields.
>
> Finally, the authors of this article should know better than to blame
> environmentalists for the corn-ethanol debacle. That bandwagon got
> rolling in the late 1970s, pushed by Big Ag (mainly ADM) and powerful
> corn-state senators. Environmentalists briefly embraced the product
> (from about 2003-2006), but as soon as they saw its dark side they
> abandoned it wholesale. Nowadays, corn-ethanol's fiercest and most
> effective critics come from the environmental community.
On Jun 25 08:57 AM Mad Hedge Fund Trader wrote:
> Get to know these well. The world population has doubled from 3.5
> to 7 billion since then, eating up surpluses, and is expected to
> rise to 9 billion by 2050.
Agcapita Partners
Agcapita focuses on Canadian farmland investment.
Is growing wheat organically "just a waste of resources"? Plant breeders are working on developing varieties that are more naturally resistant to diseases like dwarf bunt, and the yields are not always lower:
organic.tfrec.wsu.edu/...
And at least farmers who grow organic wheat are producing for a market that pays a premium for their product (unlike producers who are producing for a fabricated market, such as for biofuels).
On Jun 25 09:08 AM megiddo666 wrote:
> Might add the ETF - DAG to the list as well.
Its real. Sun spots affect climate, but not nearly enough to explain the rise in global temperatures over the past decades.
And as far as "how can global warming be happening when its still cold at night in Iowa", well I hope no one is persuaded by that specious reasoning.
However, using individual ETFs like the DBA, GLD, SLV, DBB or USL you can construct your own commodities portfolio, weighting each commodity according to your personal outlook for each.
But it is simpler, and perhaps safer to stick with something like a DBC or GCC.
On Jun 25 03:33 PM speeddaimon wrote:
> ETF Grind. Nice article, excellent thesis, one which I totally agree
> with. However, can you (or anyone feeling like typing) tell me why
> I should focus on the Ag side of commodities instead of trying to
> use a basket of both Ag, Metals, and fuel? I ask because I bought
> DBC a while back, its done very well, but if there is a good reason,
> I would switch out for something with a better overall long term
> outlook.
If you have to ask which commodities to concentrate on then you should stay diversified across the entire ag sector.
Personally, I own three (ag, oil and precious metals) and am looking to add base metals once I believe the global recover has staying power... not there yet, in my opinion.