Playing the Rising Cost of Food with ETFs

The cost of many goods and services have fallen off in this recession, but food prices may wind up being among the first to rebound. As you watch those prices tick up at the grocery store, you can play any potential increases with ETFs, too.

Mitchell Hartmen for Marketplace reports that a steep drop in energy prices and a drop in demand has edged food prices lower over the course of the recession. But if you’ve gotten comfortable, this trend could end as soon as the economy recovers, according to the U.S. Department of Agriculture.

Farmers will be paying more for fertilizer and fuel and it’s predicted that this increased cost will eventually make it onto shelves, taking food prices up 2%-3%. A few commodities that could be impacted include:

• Soybeans. Tight supply of these beans has the prices of futures edging up already, up 2.2%. Lisa Shumaker for Forbes explains that soybean futures rose 23-3/4 cents to close at $11.14-1/4 a bushel Thursday. The new-crop November contract slipped 1/2 cent to settle at $9.96 a bushel. Strength in the cash market sparked the rally in the nearby soybean contract.

• Corn. Corn is in a mixed situation; the supply is high, which has both the supplier and the buyer in a good position. Rick Plumlee for The Chicago Tribune reports that corn prices for December delivery are trading for less than $3.50 a bushel, much less than one year ago.

• Sugar. Mark J. Perry for Seeking Apha reports that sugar may be a great value for the producers, but the consumers may not like the taste of higher prices. As a result of trade restrictions on imported sugar coming into the United States at the world price, the U.S. sugar beet producers are benefiting. In the United States, buyers pay twice the amount, 26.6 cents for domestic sugar from beets vs. 13.1 cents for sugar from cane.

Just a few of your ETF options when it comes to playing the agriculture sector:

• PowerShares DB Agriculture (DBA): down 1.6% year-to-date; holds sugar, corn, soybean and wheat futures

• E-TRACS UBS Bloomberg CMCI Food ETN (FUD): up 6.5% year-to-date

• PowerShares Global Agriculture (PAGG): up 30.5% year-to-date

Comments

[Mad Hedge F...:]

ghj. I drove over the Benicia Bridge yesterday, and saw ships lined up at the silos, sitting high in the water, waiting for transport our record wheat surplus to hungry China. After looking at barge schedules for the Columbia River, weather forecasts for Australia, and planting schedules for Texas and Kansas, I am getting more excited about buying December Wheat (www.madhedgefundtrader...) under $5. The Southern planting schedule starts on September 1, and the financially weakest farmers will have to sell whatever they have in storage to pay for the new season’s seed and chemicals. This will give us the inventory clear out we need to allow prices to work higher by year end. The greatest growing conditions in living memory have driven prices for this basic foodstuff from last year’s spot high of $13 to the current low of $4.90. Philosophically, the cynic in me loves shorting “Perfect,” like the “Perfect” growth in Japanese bank earnings in 1989 (remember Japan as Number One?) and the “Perfect” business models I saw in dotcoms in 2000 (remember the “infinite revenues, zero cost” pitch?). You might get a buck out of wheat by year end, and more if conditions become less than perfect. Aren’t we supposed to see an El Nino winter (click here for details at www.madhedgefundtrader...)? And you never know when the long term food shortage is going to kick in, where the sky will be the limit for prices (click here for details at www.madhedgefundtrader...). View the recent spike in sugar prices as an appetizer, not a dessert. Remember, the Fed can print money, but not calories.

Aug 31 10:08 AM