When it comes to the inflation (commodity) trade, one usually hears about the same sectors to invest in over and over again. Time and time again the experts will tell investors to be invested in precious metals (gold/silver), energy (oil/gas), basic materials (iron/copper/woods), and finally comes the mention of the agricultural component. Now all these trades have worked quite well in this current environment where we find ourselves. Gold and silver prices have appreciated to extreme levels as overall fear in the market place still remains high. Energy also remains a top pick as oil remains near $100 a barrel. Basic material, while not doing quite as well as the others, has held its own. But it is the last one, the agricultural component, which is most unique and intriguing.
The question is, what sets the agricultural commodity trade apart from the other three? The answer to that is what drives the inflationary catalyst. The gold and silver trades are driven by wealth preservation. Take away the fear of a falling US dollar, get the federal debt under control and the economy jumping again and watch this trade diminish along with the price per ounce. Energy, as well as the basic materials, can fall victim to demand destruction as their prices just become too much to bear. Also, specific to energy, comes the increasing forms of competition from solar, wind, and nuclear power. To add to that there is also the desire for ever better technologies to ween us off or conserve fosil fuels. The higher the prices the faster the competition makes its presence felt.
Now consider the agricultural trade. What sets it apart from the others and what is its driving catalyst? One answer is actually found in an United Nations study on world population trends. Projections issued by the United Nations suggest that world population by 2050 could reach 8.9 billion, but in alternative scenarios could be as high as 10.6 billion. World population is projected to grow from 6.1 billion in 2000 to 8.9 billion in 2050, increasing therefore by 47 per cent. Unlike the other catalysts, this truth seems unshakable as the population grows. Barring any unforeseen natural catastrophes or war, the human race is set to grow by leaps and bounds for the foreseeable future. Regardless of what energy source we use or how the US handles their debt issue, this wholesale increase in the world’s population is very likely to occur. Now to this also add the quality of the demand which is shifting because people are demanding more meat and dairy products. The energy market also may come back into play here as the demand for biofuels can easily pickup as fossil fuels become harder to find.
Now that the trend is seems to be undeniable, the question comes into how to make money. The agricultural sectors are very big places to invest with a large variety of choices. For the average retail investor the best places to begin would be in the EFT/ETN side of the house as it would give you maximum exposure to the sector. To try and cover as much of the sector as possible, here are 7 investments to consider. Obviously there will be some overlap in holdings and exposure so one will have to complete more analysis to determine what is proper for their portfolio.
Market Vectors Agribusiness ETF (MOO):
This is a very popular holding, and it is one of the best for the sector. This ETF seeks to replicate as closely as possible the performance of the DAXglobal Agribusiness Index. The Index provides exposure to companies worldwide that derive at least 50% of their revenues from the business of agriculture. The sector breakdown for the company is roughly 46% chemicals, 28% agriproducts, and 16% agricultural equipment. Over 47% of the investments are made in the US, with another 10% made in both Canada and Singapore. Basically this is where one would get the exposure to such companies as Monsanto (MON
), Deere (DE
), and Mosaic (MOS
Global X Farming ETF (BARN):
On June 1, 2011 Global X launched their new ETF that seeks to provide investment results that correspond to the price and yield performance of the Solactive Global Farming Index. Basically the EFT is comprised of common stocks and ADRs selected global companies that are primarily engaged in agriproduct, livestock operations, or in the manufacture, sale or distribution of farming products. The BARN fund is actually very similar to the MOO fund mentioned above. It is doubtful that one would want to invest in both as it would be considered a redundant holding. There are some differences though in that BARN’s country holdings focus a bit more on the emerging economies and Asia than does MOO. The US is the top holding at 31%, followed by Singapore at 15%, Malaysia at 12%, and China at 7%.
PowerShares DB Agriculture Fund (DBA):
This is another popular fund. It is based on the DBIQ Diversified Agriculture Index Excess Return. This Index is composed of futures contracts on some of the most liquid and widely traded agricultural commodities. The Index is intended to reflect the performance of the agricultural sector. So where MOO gets us exposure to the agricultural companies, DBA gets us into the actual agricultural commodities. Here is the most current breakout.
iPath Dow Jones AIG-Agriculture ETN (JJA):
This ETN is very much like DBA above except that is does not contain any cattle or hogs in the mix. This might even give the ETN an advantage over DBA as the cattle can sometimes work against a portfolio as one of the largest expenses in raisinglivestock can be the grain fee. Soybean and soybean oil are the largest focus being more than 34% of the entire portfolio. Corn is the 2nd largest concentration at 25% followed by wheat at 14%. Holding both JJA and DBA within the same portfolio could be too much duplication.
iPath Dow Jones AIG-Grains ETN (JJG):
This ETN is a more focused investment upon the grains (soybeans/ corn/wheat)within the agricultural sector. Being much more focused does bring more risk and volatility to the table though. Currently the sector weighting is corn 41%, wheat 22% and soybeans 37%. Basically what one has here is an investment that really tries to target the grain side of agricultural world. Great care and analysis should the completed before investing in this one.
Global X Fertilizers/Potash ETF (SOIL):
This new ETF is one of my favorite investments in the space. Fertilizer stocks have been on fire the last couple of year and now we have a new ETF to try to get the maximum exposure. The fund was started on May 26, 2011. The ETF seeks to provide investment results that correspond to the price and yield performance of the Solactive Global Fertilizers/Potash Index. This index tracks the performance of the largest and most liquid listed companies globally that are active in some aspect of the fertilizer industry. The country breakdown is US 21%, Israel 14%, Canada 12% and Australia 9%. Being concentrated in this specific niche of agriculture though will increase the volatility and risk.
iPath DJ-UBS Livestock TR Sub-Idx ETN (COW):
This ETN is made to give investors exposure to both live cattle and lean hog futures. The current breakout is cattle 60% while the hogs make up 40%. Much like SOIL, this ETN is a subsector that has a really narrow focus. While I mention the ETN here because it is part of the agriculture complex and part of the complete picture, it is not one of my favorite choices. Cattle and livestock are in part dependant on the grain side of the house for feed. Spikes in grain prices, being good for the above mentioned ETN’s, will have a negative effect on meat prices. Also unlike other crops, the meat is more subject to demand destruction as prices move beyond what people are willing to pay. Still COW can be a great investment in the global demand for meat as the emerging economies of the world become more industrial giving way to the rise of the new middle class.
In conclusion, barring any unforeseen issues, an investment in the agricultural sectors of the world’s economy should be successful. Unlike the other catalysts that drive inflation, the human population growth will continue at a rapid rate regardless of global financial policies. It basically comes down to the fact that people have to eat. To this, add the fact with a couple billion more people are on the way and one can see that an investment in agriculture should be a winning match in the long run. Chart Disclaimers:
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