Ways to Trade the Ag Space

A reader asked in an email, "if one wanted to invest in Grains, what symbols [do] you recommend?"

I don't know if I would necessarily recommend any symbol. The two stocks that I am most familiar with in this arena are the Rogers Agricultural Index (RJA) and the PowerShares DB Agriculture Fund (DBA). I once owned RJA so let's start with that one first.

RJA is an ETN designed to track the (Jim) Rogers Agricultural Index, which itself is a blend of a whole slew of soft commodities in various weights. You can get more information from its prospectus. The important item to note on RJA is that it is basically a promissory note, not an ETF, and does not hold any actual commodities or contracts. It is a liability of the bank or organization that sponsors it. In light of the financial crisis, this is an important consideration. Also, while RJA promises exposure to a wide range of commodities, the weighting may dampen any price run-up. For instance, when rice made its huge run, RJA barely moved as rice was less than 5% of the index at the time.

DBA is an actual ETF that is basically equal-weighted in four commodities: wheat, corn, soybeans and sugar. Obviously, this leaves investors out in the cold if rice or orange juice makes a big run but conversely, sugar is on a tear and the 25% (actually 31% according to ETFConnect) weighting gives investors better exposure to price moves. I would advise interested readers to read the prospectus to find out more about how the fund buys its contracts and how that might affect investor returns.

My inclination at this point would be to play the ag space via companies in the supply chain which can range from equipment suppliers like Caterpillar (CAT) to fertilizer producers like Mosaic (MOS) to seed companies like Monsanto. I feel more comfortable making buy/sell decisions on companies, where I can estimate intrinsic values, than with commodities where I have less of a base to judge fundamental value.

Keep in mind that each investor should determine the appropriate strategy for his own portfolio. What works for me may not be right for you and vice versa.

Disclosure: none

Comments

[User 327005:]

Crop growers can repair their gear and still bring record crops to market.

"Playing" as you describe it, sounds about right.

If you want to earn cash-on-cash return, instead of "playing", far better ways exist.

Unless Monsanto or Mosaic are paying dividends, you're not investing, you're "playing", hoping that a greater fool shall come and offer more for your buy long position.

Sep 06 02:33 PM

[LKofEnglish:]

well, you could buy a farm and maybe be something other than useless.

Sep 07 12:13 AM

[Mad Hedge F...:]

tyio. 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 under $5 (click here for more background). 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)? 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). View the recent spike in sugar prices as an appetizer, not a dessert. Remember, the Fed can print money, but not calories.

Sep 08 10:50 AM

[manuel:]

well on Fertilizers it seems that fools are those watching(so many are watching Fertilizers, few are buying), may be you are one of them that will turn into the greater if there ever will be one in such a Solid and long term "Investment"......


On Sep 06 02:33 PM User 327005 wrote:

> Crop growers can repair their gear and still bring record crops to
> market.
>
> "Playing" as you describe it, sounds about right.
>
> If you want to earn cash-on-cash return, instead of "playing", far
> better ways exist.
>
> Unless Monsanto or Mosaic are paying dividends, you're not investing,
> you're "playing", hoping that a greater fool shall come and offer
> more for your buy long position.

Oct 14 01:43 PM