By Stoyan Bojinov
Investors can’t seem to catch a break from volatile trading on Wall Street as financial woes in Europe and the debt ceiling drama at home are putting significant pressure on equity markets across the globe. Politicians in Washington, D.C., have been struggling to compromise on a viable plan for modifying the debt-ceiling as well as outlining a plan to reduce the towering deficit and only recently, in the 11th-hour, did they finally reach an agreement. Likewise, investors have been flocking to “safer” corners of the market since the gloomy outlook for the U.S. and much of the eurozone has prompted growing fears of inflation and general uncertainty. Many have turned away from traditional fixed income holdings, instead opting for commodity exposure, in an effort to protect their portfolios against volatility and defend against inflation.
Most investors seeking exposure to commodities as protection against inflation typically focus on gold and oil. But in recent years, agricultural commodities have become increasingly popular choices, as increases in population and the scarcity of land create a compelling case for investment. As the world’s population continues to grow and farm land becomes more valuable, demand for agricultural commodities is expected to continue to rise, inevitably pushing food prices higher.
Food Crisis Ahead?
Beyond strong demographic trends, many investors are also looking to surging economies in the developing world as another reason to be bullish on food. Growth in the middle class of emerging markets is accompanied by an increase in discretionary spending, and demand for higher quality foods. With urbanization expected to continue in China, India and other emerging markets for decades to come, demand for food resources should accelerate for the foreseeable future. That creates opportunities for both local food providers and international companies to grow revenues as their base of potential customers expands.
The price of corn alone is expected to jump nearly 10% next year, driven by strong livestock demand and from ethanol producers across both developed and emerging markets. Wheat and soy will likely appreciate in price as well given their use in livestock feed, ultimately impacting the cost of meat, milk and eggs. Furthermore, these trends will also likely impact developed markets as well as the U.S. is expected to see the Consumer Price Index for all food increase 3% to 4% in 2011.
Investors should also consider the notion that many agencies have issued dire predictions for extreme food shortages in coming decades as ongoing climate change and demographic shifts put a strain on existing supplies. Growing global demand and tightened supply conditions are all factors that will likely contribute to higher food prices, making investments in the food and agriculture industry very lucrative given the potential upside to food prices and inflation as a whole.
Investors seeking to profit from a broad increase in food prices could consider investing in certain agribusiness and consumer staples ETFs as a means of gaining both indirect and direct exposure to the vital food industry. Direct exposure to commodity futures is without a doubt the “purest” way to gain exposure to food price increases. However, many investors prefer indirect exposure by holding companies involved in the food industry, because there is generally a positive correlation between the profitability of agribusiness companies and the market prices for their products.
Below we highlight five ETFs that could offer investors quality exposure to the industry and could be poised to surge if these bullish trends in this corner of the market continue.
UBS E-TRACS CMCI Food Total Return ETN (FUD)
FUD is linked to an investable commodity index 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 5% year-to-date, and this ETF could be an interesting option thanks to backwardation in various futures curves.
Market Vectors Agribusiness ETF (MOO)
This fund is by far the most popular in the agribusiness space with just over $6 billion in assets and close to two million in average daily volume. While 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 increase their output and profitability when prices are moving to the upside. One potential drawback of MOO is that the fund is very top-heavy, allocating over two-thirds of total assets in the top 10 holdings alone.
PowerShares Dynamic Food & Beverage (PBJ)
PBJ tracks the Dynamic Food & Beverage Intellidex Index, which is comprised exclusively of U.S. food and beverage companies. The underlying index is designed to provide capital appreciation by evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors. PBJ currently holds just over 30 securities and is well-diversified across market capitalization levels, providing nearly equal allocations to large-, mid- and small-cap companies. Its top five holdings include household names such as Starbucks (SBUX) (5.1%), PepsiCo (PEP) (5%), Mead Johnson Nutrition Company (MJN) (5%), Yum! Brands (YUM) (5%) and McDonald’s (MCD) (5%).
Global X Food ETF (EATX)
EATX tracks the Solactive Global Food Index which is designed to provide exposure to the performance of the food industry. This ETF is comprised of selected companies globally that are primarily engaged in the agriproduct or livestock operations or in the manufacture, sale or distribution of food products, agriproducts and products related to the development of new food technologies. EATX has 50 holdings in total and approximately half are U.S. equities, with the remainder spread across China, Switzerland, Japan, Brazil and others. Also, Global X will donate any profit it earns from EATX to Action Against Hunger/ACF International, a global humanitarian organization that works to save the lives of malnourished children while providing communities with sustainable access to safe water and long-term solutions to hunger.
Global X Fishing Industry ETF (FISN)
FISN is a unique product that offers exclusive exposure to the global fishing industry. The fund is designed to track the Solactive Global Fishing Index, which is a benchmark that includes companies globally that are engaged in commercial fishing, fish farming, fish processing or the marketing and sale of fish and fish products. FISN has a total of about 20 companies listed in eight different countries, including both developed and emerging markets. The largest individual holdings in the index include aquaculture industry leader Cermaq ASA (11%), farmed salmon producer Marine Harvest (11%), and Japanese firm Toyo Suisan Kaisha (10%). FISN is currently the only ETF offering “pure play” exposure to this unique corner of the food market.
Disclosure: No positions at time of writing.
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