Agriculture prices have surged this year as demand for grains, dairy, meats and cooking oils have elevated in emerging markets and supply has remained constrained enabling the Market Vectors Agribusiness ETF (MOO), UBS E-TRACS CMCI Food TR ETN (FUD), iPath DJ-UBS Agriculture TR Sub-Idx ETN (JJA) and the PowerShares DB Agriculture Fund (DBA) to reap the benefits. 

On the demand side, increased wealth in nations like China, India and Brazil has elevated food consumption as consumers in these nations starve of their traditional eating habits and seek more of a Western-style diet.  This elevated demand, combined with supply constraints, has already driven up the prices in commodities like corn, wheat, coffee and cotton and now is aiming to hit cooking oils.

According to Claire Leow of Bloomberg, stockpiles of cooking oils are expected to be cut by the most in 17 years as consumption increases in Asia by the double digits.  Furthermore, the US Department of Agriculture expects inventories of palm oil and soybean oil, the two most used oils, to fall by nearly 12 percent from a year ago, marking the largest percentage drop since 1993.

Prices in agricultural commodities have also been supported by elevated investor demand.  As the US dollar continues to remain fragile, interest rates low and the potential of further quantitative easing measures to be implemented by the Fed, many investors have turned to these commodities to hedge their bets, diversify their portfolios and seek enhanced returns.

On the supply side, water scarcity, increasing global temperatures and dry weather have been threatening farm production.  A lack of rain in the central parts of Brazil, which is the world’s second largest soybean crop, has hindered output.  Furthermore, research indicates that farmers in the region have only planted 16.4 percent of the planned area as compared to 36.8 percent a year ago. 

At the end of the day, the world’s appetite for agricultural-based commodities remains insatiable and will continue to grow as emerging markets witness increased purchasing power and populations grow.  As for supply, Mother Nature appears to be the primary driver in production and her mood is relatively unpredictable.  As long as this supply and demand imbalance remains intact, these commodities are likely to see positive price support.

As mentioned earlier, some ways to play these commodities include:

  • Market Vectors Agribusiness ETF (MOO), which is a diversified play on natural resource companies and includes Potash Corporation of Saskatchewan (POT), Deere & Company (DER) and Monsanto Company (MON) in its top holdings.
  • UBS E-TRACS CMCI Food TR ETN (FUD), which seeks to replicate the collateralized returns of a basket of 11 futures contracts from the agricultural and livestock sectors.  The index allocates 19.24% of its weightings to soybeans, 19.02% to corn, 15.34% to sugar, 12.93% to wheat, 5.68% to cattle, 5.39% to soybean oil and 5.02% to soybean meal.
  • iPath DJ-UBS Agriculture TR Sub-Idx ETN (JJA), which seeks to replicate the performance of  a basket of futures contracts on physical commodities.  JJA allocates 25.17% of its weightings to corn, 24.27% to soybeans, 15.40% to wheat and 9.38% to soybean oil.
  • PowerShares DB Agriculture Fund (DBA), which seeks to replicate the performance of a rules-based index, composed of futures contracts on the agricultural sector.  DBA gives exposure to cattle, soybeans, sugar, corn, coffee, cocoa, wheat, lean hogs and cotton.

Disclosure: No Positions

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