As Agriculture Soars, and Food Prices Rise, How Investors Can Benefit

Includes: DBA, DE, MON, MOO, POT, RJA
by: Brian Foglia

It looks like rising food prices have finally started to catch the eye of the financial press. Bloomberg reports that 48 agriculture ministers from around the world met in Berlin to discuss the risks associated with increasing food prices. Just last month, the UN Food and Agriculture Organization announced that global food prices have reached an all-time high since their food price index began in 1990. Governments, especially in low-income countries, are getting nervous about the prospect of food riots. Back in 2008, riots and protests erupted in more than 30 nations because of food price hikes. Amid all the recent ruckus in Tunisia, few seem to have noticed the food riots in Algeria this month.

As usual, speculators are bearing the brunt of the blame. However, in reality, food prices are soaring and becoming more volatile because of supply-side issues (e.g. weather, crop failures, inventory, etc.) combined with the inflationary policies of the world’s largest economies. Food is a necessity. When central bankers decide to expand the money supply, some of this new money will undoubtedly find its way to agricultural commodities markets, pushing up prices in the process. This is why many people are so bullish on the agricultural sector. The rest of this article is devoted to describing some ways personal investors can benefit from this.

As far as ETFs go, MOO is a popular choice for investors looking to take advantage of higher food prices. This fund tracks the DAXglobal Agribusiness Index, which is composed of stocks in agricultural chemicals, agriproduct operations, agricultural equipment, livestock operations and biofuels companies. Big industry names like Potash (NYSE:POT), Monsanto (NYSE:MON) and Deere (NYSE:DE) top the holdings list. Nearly half of the holdings are U.S. stocks but the rest come from all over the world. This regional diversity protects investors from losses resulting from natural disasters.

Another smart choice would be DBA. This ETF trades futures contracts of widely traded agricultural commodities such as corn, wheat, sugar, soybeans, coffee, cattle and cocoa. Corn prices surged 79% in the past year, while wheat has increased 65% and soybeans have risen 50%. Since DBA holds actual futures contracts, this is a pure commodities play. Consequently, the gains may be higher but be prepared for volatility should you choose this route.

A third consideration would be RJA, which is an ETN tied to the agricultural portion of the Rogers International Commodities Index. RJA is different than DBA in several ways. First, it tracks a greater variety of commodities. The index tracks 21 agricultural goods, including all the commodities tracked by DBA plus some others like rice, rapeseed, canola, rubber, lumber, oats, orange juice, etc. The more diversified components make RJA a slightly more conservative play. On the other hand, as an ETN, RJA is subject to the credit risk of the bank that issues it. This also allows investors to avoid the tracking error to which ETFs may be exposed. As always, choose based on your own risk tolerance, and only after you’ve done all your homework.

In summary, the bull run in the agricultural sector looks like it’s here to stay. The strategies outlined above are merely a few of the possibilities available to the 21st century investor. Regardless of which method one chooses, investors should be aware that the global food situation may get worse before it gets better. Expect increasing volatility if that is the case.

Disclosure: I am long MOO.