By Nick Kalivas, Senior Equity Product Strategist
Global food inflation, as measured by the FAO Food Price Index, hit a 10-month high in March, rising 2.3% month over month, according to the Food and Agriculture Organization of the United Nations. The rise was attributed to unfavorable weather in the U.S. and Brazil, as well as geopolitical tensions between Russia and Ukraine, which is a grain exporter.
We believe further food inflation could be possible. A cold, wet spring could slow crop plantings in the U.S., and the risks of an El Nino have been growing, raising the chance for adverse weather to affect crop development in South America and Asia. Additionally, tensions in Ukraine continue to build.
Two ways to gain exposure
Investors looking to potentially benefit from the trend of rising food prices can consider an equity-based approach or a commodities strategy. For example, PowerShares Global Agriculture Portfolio (NASDAQ:PAGG) invests in the stocks of companies involved in agriculture and farming-related activities. PowerShares DB Agriculture Fund (NYSEARCA:DBA) invests in futures contracts on agricultural commodities.
- PAGG. Historically, there has been a solid relationship between PAGG and raw food prices (see chart below). The strategy rose in 2009 and 2010 as raw food costs increased and has since moved sideways with the price of food. Technically, PAGG has been consolidating since 2011, and some chart watchers may see the consolidation as a pause before a rally higher. A breakout over the $31.50 to $31.75 area would push PAGG over a trend line that extends from the 2011 and 2013 highs.
- DBA. DBA is just above its 2009 lows and is well off the peaks seen in 2011 and 2008. Returns can change quickly in the commodity space depending on supply/demand conditions, and given the potential for food price inflation, we believe agricultural commodities may be shifting toward an "in favor" status after a period of lagging.
Past performance cannot guarantee future results.
The FAO Food Price Index is a measure of the monthly change in international prices of a basket of food commodities. The Producer Price Index (PPI) for unprocessed foodstuffs and feedstuffs measures the change in prices received by producers for domestically produced unprocessed food.
An investment cannot be made in an index.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The fund's return may not match the return of the underlying index.
PAGG risk information
The fund is based on the NASDAQ OMX Global Agriculture IndexSM ND (Index) and will normally invest at least 90% of its total assets in securities that comprise the index and American depositary receipts and global depositary receipts based on the securities in the index. The index is designed to measure the overall performance of the most liquid, globally traded companies involved in agriculture and farming-related activities.
The fund is considered non-diversified and may be subject to greater risks than a diversified fund.
American Depositary Receipts (ADRs) involve many of the same risks as those associated with direct investment in foreign securities. In addition, the underlying issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, are under no obligation to distribute shareholder communications to the holders of such receipts or to pass through to them any voting rights with respect to the deposited securities.
The dollar value of the fund's foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.
Global Depositary Receipts involve the same risks as those associated with ADRs. They are also subject to currency, political, economic and market risks because their values depend on the performance of non-dollar denominated underlying foreign securities.
A natural or other disaster could occur in a geographic region in which the fund invests, which could adversely impact the fund's investments in the affected region.
Investment in securities in emerging market countries involves risks not associated with investments in securities in developed countries.
Foreign securities have additional risks, including exchange-rate changes, decreased market liquidity, political instability and taxation by foreign governments.
Investing in securities of small and medium-sized companies may involve greater risk than is customarily associated with investing in large companies.
Investments focused in a particular industry or sector, such as the agriculture industry are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.
Equity risk is the risk that the value of equity securities, including common stocks, may fall due to both changes in general economic and political conditions that impact the market as a whole, as well as factors that directly relate to a specific company or its industry.
Since publicly traded limited partnerships are a less common form of organizational structure than corporations, limited partnership units may be less liquid than publicly traded common stock.
Tracking stock may decline in value even if the common stock of the larger company increases in value.
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NASDAQ®, OMX™ and NASDAQ OMX Global Agriculture IndexSM are trade/service marks of The NASDAQ OMX Group, Inc. (which with its affiliates is referred to as the "Corporations") and are licensed for use by Invesco PowerShares. The product has not been passed on by the Corporations as to its legality or suitability. The product is not issued, endorsed, sold, or promoted by the Corporations. The Corporations make no warranties and bear no liability with respect to the product.
DBA risk information
Commodities and futures generally are volatile and are not suitable for all investors. Funds focusing on a single sector generally experience greater price volatility. The funds are speculative and involve a high degree of risk. An investor may lose all or substantially all of an investment in the funds.
This material must be accompanied or preceded by a DB prospectus. Please read the DB prospectus carefully before investing. The PowerShares DB Funds are not mutual funds or any other type of Investment Company within the meaning of the Investment Company Act of 1940, as amended, and is not subject to regulation thereunder. To download a copy of each PowerShares DB prospectus please visit this Web page.
Invesco Distributors, Inc. is the distributor of the PowerShares Exchange-Traded Fund Trust II. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC. Invesco PowerShares Capital Management LLC and Invesco Distributors, Inc. are indirect, wholly owned subsidiaries of Invesco Ltd.
Certain marketing services may be provided for the DBA Fund by Invesco Distributors, Inc. or its affiliate, Invesco PowerShares Capital Management LLC. Invesco Distributors, Inc. will be compensated by Deutsche Bank or its affiliates for providing these marketing services. Neither Invesco Distributors, Inc. or Invesco PowerShares Capital Management LLC are affiliated with Deutsche Bank. Invesco PowerShares Capital Management LLC is not a sponsor or promoter of the DBA Fund and is not responsible for the performance of the DBA Fund or the decisions or actions of the managing owner of the Fund, DB Commodity Services LLC.
ALPS Distributors, Inc. is the distributor of the PowerShares DB Funds.
Invesco PowerShares Capital Management LLC is not affiliated with ALPS Distributors, Inc.
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Additional disclosure: The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. The opinions expressed are those of the author(s), are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.