DB Agriculture Fund a Blunt Instrument

The Powershares DB Agriculture Fund (DBA) is quite the imperfect instrument; it holds sugar, corn, wheat, soybeans. The problem is when some things go up, others go down... and this is one of those times. While corn is going up [Apr 3: Corn Jumps to $6 - Start Stocking up on Soda Pop], wheat and to some extent soybeans are going down. So net net, you are stuck with a mish mash.

For much of the last year, corn was doing ok but the wheat/soybeans combo was driving this ETF. In the US, we don't have single commodity ETFs but strangely in London it is available - even though the US is the breadbasket of the world. Why we don't have them available for individual investors is beyond me. Either way, we are stuck with a blunt instrument instead of being able to pick and choose.

While I believe all crops will go up over time, since the crop report [Mar 31: USDA Crop Report] we've seen divergence among the names (which I outlined above). So the ETF has been stalled. While I am unclear on the usefulness of technical moving averages on an ETF made up of 4 commodities (as opposed to an individual stock), I am clear that many speculators have entered the crop market of late and they come from the world of stocks. So they could be using technical indicators... as their influence increases in the commodity market, I'll give more credence to the fact that technical indicators might be of use. And if that is true, this is a chart that has weakened the past few days, and broke below a key support level.

So I'll play it safe and I'm cutting 75% of my position, down from 850 shares to 200 shares, selling in the low $38s. This takes the name from a 2.8% stake to 0.7% stake.The ETF has been hanging around its 50 day moving average most of the past month, creating a lot of headfakes on both the up and downside. Every time it looks ready to make a substantial move, it sells off.

We could just be basing for the next leg up, but that base could take months to build for all I know. For those who think this is the beginning of a larger move downward, we now have the Agriculture Double Short ETN (AGA) [Apr 17: Four New Agriculture ETNs]. Again, I want to stress, I do not know how effective technical analysis is on this ETF, but for now I am going to treat it as a stock and take my position down. If we see any prolonged weakness in crop prices that could be the catalyst to cause fear and selloff in the fertilizer stocks... we shall see.

Disclosure: Long Powershares DB Agriculture Fund in fund; no personal position

       

Comments

[Jake2]

Elevated prices for food in the world, and even food riots here and there. Meanwhile DBA and RJA are down. Seems irrational, doesn't it? And when stocks (and or funds) begin to act irrationally it's time to get out. Kiss 'em goodbye.

[AAI]

Ok, cut your positions in the ag commodity funds. New acreage is creeping into the market, the dollar rout may be subsiding, and global economies are slowing. But don't give up yet on the high intellectual-property ag-driven equities, such as Monsanto and Syngenta.
And next time around when you're looking at ag commodity funds, note that several SeekingAlpha stories say is far more tax-efficient to own ETNs (such as JJA).

[Panskeptic]

To understand this price behavior, it's good to poke around on the ag websites farmers and commodity traders use.

Looking at DBA not as a single stock but as a bunch of futures contracts, you'll find that many consider ag prices to be weather-driven for the next few months at least. This is a new story for a lot of us, but old hat for folks more who trade the individual commodities.

Those London-based individual ETFs won't be coming over here any time soon for regulatory reasons. But many US brokers now routinely buy and sell on overseas exchanges, so just ask.

The larger worldwide food thesis remains unchanged. Millions of people won't magically lose their hunger because of price movements in DBA.