Agribusiness ETFs And The Drought Of 2012 (Podcast)

Includes: CROP, DBA, JJG, MOO
by: Gary Gordon

According to the U.S. Census Bureau and a variety of institutions that study human population growth, the world will need to feed roughly 70 million new mouths every year. That is the current ”net” projection when births are offset by deaths.

Pundits from Marc Faber to Jim Rogers have talked about the demographic changes. Their solution? Invest in agriculture. Faber tends to talk more about investing directly in farmland as a hedge against social unrest. Rogers tends to discuss the benefits of owning all commodities, though often raises awareness about the benefits of farmland and the agricultural grains produced there.

Yet prior to this year’s epic summer drought, agricultural commodities had not been kind to exchange-traded enthusiasts. In fact, owning PowerShares DB Agriculture (NYSEARCA:DBA) seemed like an exercise in futility.

Click to enlarge

DBA 18 months

There have been scores of reasons provided for the investing losses, including the recession in Europe and the slowdown in China. Many more folks point to the fact that commodities are priced in U.S. dollars and that the dollar’s strength has added to commodity price depreciation.

On the other hand, with extreme heat and limited rainfall since June 2012, agriculture commodity ETFs have pole vaulted over key trendlines. The current price of DBA is well above a 50-day and 200-day moving average.

Click to enlarge

DBA 50 200

The question that ETF investors need to ask themselves at this point is whether or not the bad news on crop output has been accounted for in the current prices. Exchange-traded notes and funds for soybeans, wheat and corn have been on a remarkable upswing, yet it is rare of any investment to be 33% above a 200-day trendline. Indeed, iPath DJ Grains (NYSEARCA:JJG) currently sits 33% above its 200-day.

On the other hand, regardless of agriculture commodity price appreciation, or even the possibility of a pullback, the corporations that are involved in helping farmers may be poised to pop. There will be greater demand for fertilizer, seeds and equipment. In fact, one could see a sustainable recovery for agribusiness stocks like Monsanto (NYSE:MON) and Deere (NYSE:DE).

Enter the Agribusiness ETFs. Market Vectors Agribusiness (NYSEARCA:MOO) as well as IndexIQ Small Cap Agribusiness (NYSEARCA:CROP) both have an opportunity to do well in the current environment.

I might stick with the more liquid and better-known vehicle with the ticker MOO. Moreover, the current price is above the 200-day moving average. And, the 50-day slope is positive, signalling an uptrend.

Fears of global contraction in economic activity notwithstanding, MOO is certainly volatile. It is important to consider how and when to take profits as well as incorporate hedges.

Latest podcast can be found here.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.