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A Crop of ETFs for Growing Appetites

The global demand for food is rising and companies that help farmers improve crop yields could continue to see strong growth

Alex Bryan 5 November, 2012 | 6:00AM Hortense Bioy, CFA

There is no question about it: global food consumption is growing. By 2050 the world's population is projected to reach 9 billion, up from 7 billion today. The world will need to figure out a way to feed these new mouths. On top of that, diets are improving and an increasing portion of the harvest will be converted into biofuels, which means agricultural output will likely need to double by 2050 in order to meet demand.

Farmers will need to improve crop yields to meet demand because most of the world's arable land is already in use. While advances in technology will likely make this challenge more manageable, companies on the cutting edge of the agriculture industry, such as Monsanto (MON), Potash Corporation of Saskatchewan (POT), and Deere (DE), already provide solutions to help farmers improve their yields.

Commodity Prices and Weather Worries

Agricultural commodity prices have a significant impact on the performance of most agri-businesses because their customers' income and demand for inputs, such as tractors, fertiliser and seeds, are often dictated by these  prices. Yet, commodity prices do not tell the whole story.

For instance, a drought can increase the price of corn but decrease the size of the harvest, which may reduce farmers' incomes and their demand for equipment and chemicals. Consequently, the performance of agriculture companies may diverge from agricultural prices.

Although the weather can have an unpredictable impact on the supply and price of agricultural commodities in the short-run, the long-run economics of the agriculture industry are compelling. Most of the population growth over the next few decades will come from emerging markets, where incomes are rising. As emerging-market populations become wealthier, they are projected to increase their consumption of meat, which will have a disproportionate impact on the demand for grain because corn and soy are common ingredients in livestock feeds. It requires an estimated 4.5 to 6.0 pounds of grain, such as corn, to raise a pound of beef. Therefore, small changes in livestock consumption can have significant impact on demand for grains. In the absence of advances in productivity and improvements in crop yield, these trends will push agriculture commodity prices higher.

However, rising demand is not synonymous with rising grain prices because advances in technology can improve crop yields. Fortunately, many companies in the agriculture industry provide solutions to help farmers improve their yields. This actually distinguishes funds tracking agriculture companies from pure commodities offerings and makes it a better access vehicle for investors who want to capture the benefits of demand growth.

In Europe, there is a handful of ETFs offering exposure to agri-businesses, which can be seen in the chart below:

ETFs Offering Agri-Business Exposure 

These agriculture-focused funds are suitable satellite holdings for investors who want to profit from growth in global food consumption and are willing to ride out wild fluctuations in commodity prices that can erase value with little warning. The performance of agriculture funds can indeed be volatile and susceptible to adverse weather conditions. Operating leverage magnifies the impact of fluctuating grain prices on the performance of these fund's constituents. As a result, over the past three years, these funds experienced standard deviations of around 25%, while the S&P 500's was 15%.

Agriculture Alternatives

For investors looking for direct exposure to agriculture commodity prices, there is a wide range of products available in Europe. Amongst this extensive crop of ETPs, we think that long-term investors should benefit from a focus on vehicles that implement dynamic rolling methodologies. These methodologies seek to minimise the adverse effects of contango and maximise the positive effects of backwardation in futures markets. Examples of these include the db Agriculture Booster ETC (XCT6), the iShares S&P GSCI Dynamic Roll Agriculture Swap (SDRA), and the RBS RICI Enhanced Agriculture Index ETF (9J6J).

For more information on these ETPs, read Are Agriculture ETFs Ripe for the Picking?

This article was written with the help of Morningstar ETF analyst, Hortense Bioy. The original version of this article was published on Morningstar.com, a sister site to Morningstar.co.uk.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
EasyETF BNP Paribas Global Agribusiness EUR41.49 EUR0.75
ETFX S-Net ITG Global Agriculture53.92 USD0.19
iShares Agribusiness UCITS ETF29.26 USD0.46-
PowerShares Global Agriculture Fund12.10 USD-1.79
About Author

Alex Bryan  is an ETF analyst with Morningstar.