Agricultural commodity prices are moving into the 2022 crop year in the Northern Hemisphere at near all-time highs. Grain, oilseed, and many other agricultural products are at the highest prices in years. Input costs have skyrocketed, and geopolitical events are causing shortages. Meanwhile, shares of companies in the agribusinesses have been soaring.
The VanEck Vectors Agribusiness ETF (NYSEARCA:MOO) holds shares in companies involved in agrichemicals, animal health and fertilizers, seeds, and traits, from farming/irrigation equipment and farm machinery, agriculture and fishing, livestock, cultivation, and plantations (including grain, oil palms, sugarcane, tobacco leaves, grapevines, and others) and the trading of agricultural products. The MOO ETF has moved appreciably higher in 2022, and more gains are on the horizon, given the trends in the agricultural markets.
The March consumer price index rose by 8.5%, with core inflation excluding food and energy up 6.5%, the highest level in over four decades. The producer price index was up an incredible 11.2%. Meanwhile, the Fed Funds Rate was sitting in a range from 25-50-basis points. While some FOMC members are talking about a 50 or 75-basis point rate hike at the upcoming meeting, the central bank remains far behind the inflationary curve. The Fed faces two problems when it comes to raising rates aggressively. Midterm elections later this year mean it is not a good time for a sharp stock market correction.
Moreover, a very aggressive and hawkish central bank could trigger a recession and stagflation. Secondly, each 25-basis point hike will cost $75 billion more to service the current $30 trillion debt. Based on the 6.5% core inflation reading, which is probably too low, a move to a 6.5% Fed Funds rate would cost $1.95 trillion in debt service each year, a staggering amount.
The bottom line is that the central bank waited far too long to reach an epiphany and address inflation, which has spiraled out of control. The cost of all goods and services has been dramatically rising, and a trip to the supermarket gets more expensive each week.
When it rains, it pours, and the Fed and consumers face the fallout from the first major war in Europe since WWII, with inflation at the highest levels since the early 1980s.
The war in Ukraine and sanctions on Russia have turbocharged price increases in energy and agricultural products. When it comes to the commodities that feed the world, soybean, corn, and wheat prices have risen to the highest levels since 2008 and 2012, when a drought pushed prices to record highs.
CBOT wheat already traded to a record high in March.
The yearly CBOT wheat chart shows the price rose to a record $14.2525 per bushel in March 2022. At over the $10.50 level at the end of last week, wheat corrected but remains at the highest price since 2012.
The chart shows that nearby soybean prices at just below the $17.20 level on April 22 were threatening to challenge the 2012 $17.9475 high.
Corn futures near the $8 per bushel level are close to the 2012 $8.4375 record peak.
While inflation has caused prices to rise, the war in Ukraine has poured fuel on the bullish fire. Russia and Ukraine export one-third of the world’s annual wheat requirements. Ukraine is a leading corn producer and exporter. Fertile soil in Ukraine is now mine and battlefields. The Black Sea ports, a critical logistical hub, are a war zone.
In the US, prices are rising to record highs, and in other countries, availabilities are likely to become a severe problem, causing shortages and famine. Feeding people is crucial for governments that wish to remain in power, and food shortages tend to lead to civil unrest and government changes. In 2010, the Arab Spring, which swept political change across North Africa and the Middle East, began as bread riots in Tunisia and Egypt because of record high wheat prices and shortages in 2008. The war in Ukraine and current price levels threaten food supplies and global stability over the coming months and years.
While the US and other producing countries are scrambling to ramp up grain and oilseed production, they face another significant problem. Russia, a leading fertilizer producer, and exporter, has “temporarily” banned fertilizer exports to “unfriendly” countries sanctioning Moscow. A fertilizer shortage and increasing labor, seed, farm equipment, financing, and other input costs not only underpin agricultural product prices but also limit production.
Ukraine and Russia are Europe’s breadbasket, and the US is the world’s leading producer and exporter of corn and soybeans. The US also exports wheat, but it will be challenging if not impossible to fill the supply void created by the war.
As of April 22, stocks and bonds have moved lower. The leading indices have posted significant declines compared to the December 31, 2021, closing prices:
Meanwhile, energy and agricultural investments have soared:
Equities and fixed-income investments have been losers in 2022, while food and traditional energy have led the market with substantial inflation-fueled gains.
The VanEck Vectors Agribusiness ETF product is a pick-and-shovel play on the agricultural sector. The fund summary states:
MOO’s top holdings include:
At $102.52 per share, MOO had over $1.943 billion in assets under management. The ETF trades an average of 378,200 shares each day and charges a 0.55% management fee.
The chart shows the MOO ETF has risen from $95.42 at the end of 2021 to the $102.52 level on April 22, a 7.44% increase. The trend in the ETF remains higher as MOO reached a new all-time high at $109.19 on April 21.
As the world scrambles to feed the nearly eight billion people inhabiting our planet, MOO is a pick-and-shovel agricultural ETF that will likely rise to higher highs.
The Hecht Commodity Report is one of the most comprehensive commodities reports available today from a top-ranked author in commodities, forex, and precious metals. My weekly report covers the market movements of over 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders.
This article was written by
Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.Over the past two decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.