Ag Stocks MOOving Higher?

By Brad Zigler

Real-time Monetary Inflation (per annum): 4.4%*

With all the talk of hard assets ‘round here, it's easy to forget some of the softer commodities. Oil and gold are certainly dramatic markets, but agriculture really is the backbone of the commodities market. Ags provide some of the most interesting seasonal opportunities as well.

Grain prices, for example, tend to be lowest near harvest when supply abounds. At planting time, when old crop supplies have been drawn down, new crop prices tend to be highest. And so the cycle unfolds, year by year.

It should come as no surprise to investors, then, to see seasonal wobbles in their broad-based commodity funds now. Funds with larger ag exposure are likely to experience greater price volatility this summer as grains ripen. The GreenHaven Continuous Commodity Index Fund (NYSE Arca: GCC), which devotes 47% of its portfolio space to grains and soft commodities, is more sensitive to this seasonal swoon than the PowerShares DB Commodity Index Tracking Fund (NYSE Arca: DBC), which invests only 23% of its capital in ag futures.

There's another influence affecting the ag sector: a resurgent equity market. Gains in agribusiness stock returns have trumped commodity returns by a wide margin this year. Take a look at the price ratio of the Market Vectors Agribusiness ETF (NYSE Arca: MOO) to the PowerShares DB Agriculture Fund (NYSE Arca: DBA). This year, MOO's advanced 35.2%. The DBA portfolio, in contrast, has slid 6.4%.

DBC, made up of corn, sugar, soybeans and Chicago wheat, was in fact above water until July. All told, the net seasonality of the four portfolio commodities is down in summer. Meantime, agribusiness firms like Monsanto Co. (NYSE: MON) and Mosaic Co. (NYSE: MOS) seem to be chugging uphill nicely after showing some toppiness in June.

Ag Stocks (MOO) Over Ag Futures (DBA)

The prospects for ag stocks will remain positive as long as investors maintain an upbeat disposition toward equities in general. MOO still has some work ahead of it to reclaim the $38.72 high attained in June (at last look, the ETF was changing hands at $37.15). Though there are some signs that MOO may be overbought in the short term, the fund has the potential to climb to the $45.80 level if it can punch through last month's price zenith.

Note: To provide a longer-term perspective, we've pushed back the base for our real-time monetary inflation indicator to May 2006. The base previously was January 2008. The indicator represents the average annual rate of monetary inflation over the period. The current 12-month inflation rate is -2.4%.

Comments

[Mad Hedge F...:]

great long term sector. Fortune magazine ran an excellent article about the flood ofinstitutional money pouring into agricultural land, a sector I havebeen harping on for some time (see earlier piece).The amount of arable land per person has fallen precipitously since1960, from 1.1 acres to 0.6 acres, and that could halve again by 2050.Water is about to become even more scarce than land. Productivity gainsfrom new seed types are hitting a wall. Rising incomes in emergingmarkets is producing more meat eaters, another huge call on grain andwater supplies. To produce one pound of beef, you need 16 pounds ofgrain and over 2,000 gallons of water. China, especially, is in apickle because it has 20% of the world’s population, but only 7% of thearable land, and it has committed $5 billion to agricultural land inAfrica. Similarly, South Korea has leased half the arable land inMadagascar to insure their food supplies. George Soros has snatched up650,000 acres of land in Argentina and Brazil on the cheap, an areahalf the size of Rhode Island, and has become the largest shareholderin Potash (POT). Even hedge funds are getting into the game, quietlybuilding portfolios of farms in the Midwest and the South. Time totake another look at Agrium (AGU), Monsanto (MON), and the ag ETF(MOO).

Jul 29 12:43 PM