The relatively peaceful revolution that has played out in Egypt over the last several weeks has come across to the developed world as a push for democracy in a country that has floundered under nearly three decades of long rule under a president determined to hold on to power. While frustration with what was effectively a dictatorship came across as the primary issue, a closer look at the seeds of the revolution reminds us that there were other factors that led Egyptian youths to take to the streets in the first place. The escalation of hostility toward Mubarak was due in part to extreme food shortages, which arose out of supply pressures created by natural weather phenomenons as well as man-made corruption and bureaucratic inefficiencies. “While commentators focus on the corruption of the dictatorship, or the viral effects of the Tunisian moment or something akin to an Arab political awakening, the inability of the Egyptian regime to insure a steady flow of food staples should be viewed as a critical factor driving this seemingly spontaneous movement for freedom,” writes Billy Wharton.
The unrest in Egypt has weighed on global equity markets in recent weeks. Although the Egyptian economy is relatively small, the impact of the protests was felt in commodity and equity markets around the globe. And a number of institutions are warning that current market conditions are creating the possibility of additional food shortages in the emerging world this year, highlighting a new risk factor that isn’t even on the radar of many investors. World Bank president Robert Zoellick recently told reporters that food prices are at “dangerous levels” and noted that the unrest that has occurred in Egypt and Tunisia could spread elsewhere. “I’m concerned that higher food prices add to stress points and could add to the fragility that is already there anytime you have revolutions and transitions,” Zoellick said.
In addition to a host of poor African countries, governments in Indonesia, Brazil and the Philippines have all warned about food shortages over the last year. The potential crisis is the result of a myriad of factors, including supply shortages related to extreme weather conditions, shifting demographics (i.e., an increase in demand for certain food commodities), and arguably, monetary policies implemented by central banks in the developed world. Food prices remain below peaks touched during a 2008 crisis, but concerns about the global impact of food shortages in the developing world are intensifying.
Food ETFs: Hedge Against Uncertainty
Most investors turn to Treasuries, precious metals or even the U.S. dollar as “safe haven” assets that tend to perform relatively well during periods of global uncertainty. But given the potential drivers of uncertainty in the current environment, there may be opportunities to utilize other asset classes as hedges against equity market volatility. If further increases in food prices have the potential to spark riots and revolutions in emerging markets, an investment in the underlying commodities might make sense as part of a strategy for protecting a portfolio. Below, we highlight three ETFs that should perform well if food prices continue to climb.
UBS E-TRACS CMCI Food Total Return ETN (FUD)
The cleverly-named FUD is linked to a benchmark that measures collateralized returns from a basket of 11 futures contracts from the agricultural and livestock sectors, diversified across three maturities ranging from three months to one year. The underlying commodities include wheat, corn, soybeans, sugar and cocoa, as well as live cattle and live hogs. FUD has already gained more than 40% over the last year, and could be an interesting option thanks to backwardation in various futures curves.
Market Vectors Agribusiness ETF (MOO)
Another fund with a funny name, MOO takes a different approach to offering exposure to agribusiness. Whereas FUD invests in futures contracts, the underlying holdings of MOO are stocks of global agribusiness companies, including agricultural chemicals, agriproduct operations, livestock operations and agricultural equipment. Higher food prices generally lead to increased spending on products and services that can maximize crop yields, as farmers make efforts to maximize their output and profitability when prices are favorable.
PowerShares Global Agricultural Portfolio (PAGG)
PAGG offers another option for exposure to the global agribusiness sector; this fund seeks to replicate the NASDAQ OMX Global Agriculture Index. Compared to MOO this PowerShares fund has a greater focus on international equities, as U.S.-listed companies make up only about 30% of assets.
Disclosure: No positions at time of writing.
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