How to invest in agriculture and profit from rising food prices

1) Buy directly into the futures

The most direct way to profit from rising food prices is to buy futures (wheat, corn, soybeans, etc).

2) Buy ETFs that give exposure to agriculture futures.

Here is a Seeking Alpha article about Which of the 6 Agriculture ETFs is Best.

To play the agricultural boom, investors could either buy directly into the futures or turn to a handful of ETFs that are now on the market. There are 6 ETFs that will give investors exposure to the agriculture futures.

PowerShares DB Agriculture ETF (DBA) — The ETF has been around a little over one year, the most of any of the ETFs on this list. Four equally weighted commodities make up the base allocation for DBA: corn, soybeans, sugar, and wheat. The expense ratio for all ETFs on the list is 0.75%. DBA is the most liquid of the ETFs by far, but the concentration in only 4 commodities does put the risk at above average.

iPath Dow Jones AIG-Agriculture ETN (JJA) — The ETN is a little more diverse than DBA, with 7 commodities. The largest allocation is in soybeans (31%), followed by wheat (20%), and corn (16%). Since it began trading in October 2007 the ETN is up 28% versus a gain of 36% for DBA. The liquidity is more than enough for investors and the only issue is 1/3 of the ETN in one commodity, soybeans.

ELEMENTS Linked to the Rogers International Commodity Index — Agriculture ETN (RJA) — For starters, do you think they could have come up with a longer name for their ETN? Second, keep in mind this is an exchange-traded note [ETN], versus and ETF. Most investors will never know the difference and I will not go into the intricacies in this article. RJA is the most diverse of the group, with 20 different agriculture commodities represented. The top holdings include: wheat (20%), corn (14%), cotton (12%), and soybeans (9%). With more diversity among commodities, the upside potential will be less than the previous two ETFs, but the downside will also be less. For example, the ETF is up only 20% in the same time frame as the other two above, thus lagging. During the one-week pullback in mid January of the agriculture ETFs, DBA lost 9%, JJA 7%, and RJA was only down 5%. This ETF is perfect for the more conservative commodity investor.

iPath Dow Jones AIG-Grains ETN (JJG) — The grains are considered a sub-sector to the agriculture and consequently there are not nearly as many to choose from when building a grains ETN. JJG is composed of only 3 commodities: soybeans (46%), Wheat (30%), and corn (24%). Recently it has been okay to be concentrated on three very hot commodities; since late October the ETN is up 31%. The two problems with JJG are the low average daily volume resulting in large spreads and the risk of being over concentrated.

ELEMENTS Linked to the MLCX Grains Index ETF (GRU) — The newly introduced ETN from the company that brought you RJA began trading this week and has yet to bring in the volume needed to get rolling. That being said, it is an alternative to JJG because it offers a similar strategy. The major difference is where the money is allocated. The top holdings are: wheat (47%), corn (36%), soy meal (10%), and soy beans (8%). If wheat is your game, go with GRU. If soybeans get you more excited, JJG is there for you.

ELEMENTS Linked to the MLCX Biofuels Index ETF (FUE) — This ETN may not sound like it should be included in this list, but after I share with you the allocation you will understand. The top holdings are: soybeans (32%), sugar (25%), corn (21%), and soy bean oil (13%). FUE is very new as well and has yet to attract the volume and therefore spreads could be an issue. Other than that, the one issue I have with FUE is the absence of wheat. Because wheat is not considered to be used in biofuels it is not included. I want to have exposure to wheat, therefore choose one of the other five candidates.

3) Buy an ETF that tracks agriculture stocks

Here is one such ETF:

Symbol: MOO
The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal Agribusiness index. The fund normally invests at least 80% of total assets in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture, which derive at least 50% of their total revenues from agribusiness. Such companies may include small- and medium-capitalization companies.

4) Buy directly into stocks involved with agriculture

I personally believe the best way to invest right now is to buy stocks directly, while staying away from ETFs and futures. With this in mind, here are six agriculture stocks that look like attractive investments.

Symbol: SYT
Syngenta AG (Syngenta) is an agribusiness that is involved in the discovery, development, manufacture and marketing of a range of products designed to improve crop yields and food quality. Syngenta is also engaged in the development of products for markets, such as seed care, lawn and garden, professional pest management, vector control and public health. The Company operates in three business segments: Crop Protection, Seeds and Business Development. Crop Protection chemicals include herbicides, insecticides and fungicides to control weeds, insect pests and diseases in crops. The Seeds business operates in two commercial sectors: seeds for field crops, including corn, oilseeds, cereals and sugar beet, and vegetable and flower seeds. Through its Business Development research, Syngenta is applying biotechnology to areas, including biofuels and animal feed. In November 2008, Syngenta announced that it has closed an agreement to acquire SPS Argentina SA.

Symbol: MOS
The Mosaic Company (Mosaic) is a producer of phosphate and potash crop nutrients for the agricultural industry. The Company operates its business through three business segments: phosphates, potash and offshore. The Phosphates segment produce phosphate fertilizer and feed phosphate which are used in crop nutrients and animal feed ingredients, respectively. The principal inputs used in crop nutrients production are phosphate rock, sulfur and ammonia. The Potash segment mines ad processes potash in Canada and the United States and sells potash in North America and internationally. The Offshore segment produces and markets fertilizer products and provides other ancillary services to wholesalers, cooperatives, independent retailers, and farmers in South America and the Asia-Pacific regions. As of May 31, 2008, Cargill, Incorporated owned approximately 64.4% of the Company' s interest. As of May 31, 2008, the Company had a 50% interest in Saskferco Products Inc.

Symbol: POT
Potash Corporation of Saskatchewan Inc. is an integrated fertilizer and related industrial and feed products company. The Company' s potash is produced from six mines in Saskatchewan and one mine in New Brunswick. Of these mines, it owns and operates five in Saskatchewan and the one in New Brunswick. Its nitrogen operations involve the production of nitrogen fertilizers and nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate and nitric acid. It has nitrogen facilities in Georgia, Louisiana, Ohio and Trinidad. The Company' s phosphate operations include the manufacture and sale of solid and liquid phosphate fertilizers, animal feed supplements and industrial acid, which is used in food products and industrial processes. It indirectly holds all outstanding interests in PCS Joint Venture, Ltd., which formerly manufactured, processed and distributed fertilizer and other agricultural supplies from plants located in Florida and Georgia.

Symbol: MON
Monsanto Company (Monsanto) along with its subsidiaries, is a global provider of agricultural products for farmers. The Company' s seeds, biotechnology trait products, and herbicides provide farmers with solutions to produce foods for consumers and feed for animals. It has two segments: Seeds and Genomics, and Agricultural Productivity. In October 2008, the Company consummated the sale of its dairy business. In September 2007, Monsanto acquired Agroeste Sementes, a Brazilian corn seed company. Agroeste focuses on hybrid corn seed production and serves farmers throughout Brazil. In June 2008, it acquired De Ruiter and a related company. De Ruiter is a protected-culture vegetable seeds company based in the Netherlands with operations worldwide. In July 2008, the Company acquired Marmot, S.A., which operates Cristiani, a seed company. In December 2008, Monsanto acquired Aly Participacoes Ltda., which operates the sugarcane breeding and technology companies, CanaVialis S.A. and Alellyx S.A.

Symbol: DE
Deere & Company (John Deere), through its subsidiaries, operates in four business segments. The agricultural equipment segment manufactures and distributes a full line of farm equipment and related service parts. The commercial and consumer equipment segment manufactures and distributes equipment, products and service parts for commercial and residential uses. The construction and forestry segment manufactures, distributes to dealers and sells at retail a range of machines and service parts used in construction, earthmoving, material handling and timber harvesting. The credit segment primarily finances sales and leases by John Deere dealers of new and used agricultural, commercial and consumer, and construction and forestry equipment. In May 2008, the Company acquired T-Systems International, Inc. In June 2008, it acquired a 50 % equity investment in Xuzhou Xuwa Excavator Machinery Co., Ltd.

Symbol: BG
Bunge Limited (Bunge) is an agribusiness and food company operating in the farm-to-consumer food chain. The Company conducts its operations through three divisions: agribusiness, fertilizer and food products. These divisions include four segments: agribusiness, fertilizer, edible oil products and milling products. The agribusiness division is involved in the purchase, storage, transport, processing and sale of agricultural commodities and commodity products. The fertilizer division provides farmers with a range of products and services, including crop nutrients, and sells raw materials to other fertilizer manufacturers and animal nutrients to livestock producers. The food products division consists of two business segments: edible oil products, such as edible oils, shortenings, margarines and mayonnaise, and milling products, such as wheat flours and corn products. In September 2008, Bunge acquired a 60% interest in Monteverde Agroenergetica SA.

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12 Responses to How to invest in agriculture and profit from rising food prices

  1. Anonymous says:

    Eric - thank for the advice. Seems wise to follow this up.

  2. Mac says:

    Great post. Found a couple of new ETF's I haven't done research on yet!

    I currently have a position in MOO. This is a fantastic stock for exposure to 'hard asset' producers that bring food to market.

    Another ETF to look into if you want to leverage 200% vs the DJ AIG Commodities Index is Powershares UCD. One drawback if you want to invest in food exclusively is that this ETF holds some precious metals and non-agriculture commodities. The benefit, however, is that you get exposure to 25 different commodities, encompassing wheat, corn, soy, grains, plus livestock. And, it is an Ultra Long, so if commodities go up, you stand to gain a little extra because of the leverage.

    Mac

  3. Robert says:

    Eric-
    Sorry to see you recommend Monsanto and Sygenta. Doesn't your ethical outlook and outrage (i.e.- your anger about rigged markets) extend to the business practices of the companies whose equities you advise purchasing?
    GE foods are proven in many scientific studies to be a disaster for human health and overall ecosystem health. http://www.organicconsumers.org/articles/article_15588.cfm
    They also would not have the market share they do without market rigging by corrupt government-corporate collusion.
    Why not research a way for people to invest in small scale local farming efforts that empower communities, not just corporate boardrooms.
    thanks-

  4. Anonymous says:

    Robert - in an other post someone mentioned comunity. 100 people together to farm - is what you are looking for I guess. Also The COOP market chain in Switzerland is great - that is what we need in the US.

  5. Anonymous says:

    Eric -

    Been following your articles of late; they seem fairly common sense. I'm curious though - why do you 'personally believe' that ag stocks are better than futures or ETFs? I remember hearing Jim Rogers say in an interview that the best play typically is to invest in the commodities themselves, and I'm curious to hear your reasoning on taking a different position.

    Perhaps the best play is to bet on commodities, and then buy stock once it starts to become clear which ag corporations will and will not end up dominating in a post-supply destruction environment.

  6. stibot says:

    It is about safety.

    I rather do not believe in futures at these days. I am a bit frightened 'they' can just decide some day that new order has to be established and all futures/options will be cancelled in prospect of that. Futures are (or can be) manipulated also.

    So, there are some indexes aranged by the banks, but can you be sure they will survive? (And anyway, they usually stick to futures.)

    So owning part of the company seems to be the most safe.

  7. Robert said...
    Eric-
    Sorry to see you recommend Monsanto and Sygenta. Doesn't your ethical outlook and outrage (i.e.- your anger about rigged markets) extend to the business practices of the companies whose equities you advise purchasing?

    Sorry, but I don't have the time to fully vet each stock I recommend for its "ethical acceptability". This blog is aimed at helping investors preserve their wealth. Once the financial/economic outlook has stabilized, I will devote more time to ethical concerns.

    Besides, their is so much ethically wrong with our economy and government right now (bailouts, short sale bans, madoff, wal-mart, etc...) that I wouldn't know where to start.

    ---------

    Anonymous said...
    Eric -

    I'm curious though - why do you 'personally believe' that ag stocks are better than futures or ETFs?

    1) I don't trust the futures market:

    Price fluctuations hurting confidence in futures market
    COMEX Futures Losing Relevance As Global Benchmarks

    2) I don't trust commodity ETFs:

    A) Most use futures (and I don't trust futures)
    B) Most ETF aren't redeemable for the physical commodity. If the the financial system goes down, you could be left with an IOU, need litigate, etc...

    I remember hearing Jim Rogers say in an interview that the best play typically is to invest in the commodities themselves, and I'm curious to hear your reasoning on taking a different position.

    Not really, I also believe that "the best play typically is to invest in the commodities themselves". However, futures are NOT the "commodities themselves". They are IOUs from possibly insolvent investors/institutions. If prices skyrocket, there is no guarantee that the party on the short side of the contract will be able to deliver. In fact, if commodity prices soar fast enough, you could see widespread defaults across all futures contracts.

    For the record, I see defaults in commodity futures other than gold and silver as less likely. However, the risks remain, which is why I advise staying away from them and buying stocks instead.

  8. Ari says:

    Robert I applaud you bringing Monsanto's horrific ethics into play. As a investor, I choose not to fund a "Al Qaeda" like outfit. They are basically going to ruin my future and everyone's through their practices. Money is like a voting ballot, use your money wisely. Yes you can benefit in the short term from your hedge/bet with them, you are providing them leverage to continue the corruption in govt and their ethics.. Did you know they purchased all the original seeds that a bulk of our food comes from, from all the seed banks. They are also trying to control all those seeds by only selling their genetically modified seeds, so when a farmer needs to grow the vegetable again, they must purchase the seeds from Monsanto. As you know before humans a plant produces a seed that is able to replicate that plant over and over... Their seeds will not allow that, it will not grow true to form or will not grow at all. They are securing their financial future by ruining the normal process of plants producing seeds that will produce plant offspring. Its not about money at first, its about power and control. Once you have power and control, then you will control the money... Please understand this and vote with you money. As a investor, its important to look at these things b/c it might not benefit you in the short term but in the long term you will reap the rewards of ethically intelligent investing. You can still make money while keeping your ethics in check!

  9. kristian says:

    `..profit from rising food prices`

    that ounds just plain fucking evil.

    and then all those propositions to invest in monsanto alike businesses??

    invest in rooftop farming. lots of that going on in NY and other big cities. Its an an investment with a heart. its a booming business so very profitable. go local.

    • Phil says:

      Well its either get rich from the stocks or get poor because of the impending rise in the price of food. What do you want? Id rather get rich or at least be able to afford food. I would not be surprised to see food prices double in the next five years due to all the money printing.

  10. red says:

    i prefer to open a farm than investing in stock. I will get the real return from the farm.

  11. sharonsj says:

    Monsanto is an horrific company and their GMOs will eventually kill you. There have been plenty of long-term studies outside the U.S. to show that, but you'll never hear about it on TV.

    In any case, speculation in the commodity market produces starvation and farmer suicides--but, hey, anything for a profit, right?

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