Ultimate Guide To Agricultural ETFs: Agriculture ETF Investing 101

by on January 14, 2010 | Updated November 20, 2012 | ETFs Mentioned:

Following the massive injections into capital markets in recent years, inflation has become a major concern of many investors, and the quest to uncover assets that offer portfolio protection against a potential uptick in the CPI has taken on many forms. While inflation-protected bonds are the instrument of choice for some, others have turned their attention to commodities, hoping that the addition of hard assets to a portfolio will reduce overall volatility and provide a hedge against inflation [see Free Report: Everything You Need To Know About Commodity ETFs].

Most investors seeking exposure to commodities as protection against inflation focus on gold and oil, two resources that have historically increased in value as inflation rises. But in recent years agricultural commodities have become increasingly popular choices, as increases in population and the scarcity of land create a compelling case for investment. Moreover, because these resources account for a significant portion of most household budgets, investments in agriculture hedge exposure to an unexpected jump in prices. When inflation kicks in, food prices are often among the first to rise, making an investment in agriculture attractive to those worried that a wave of significant inflation is inevitable [see Commodity Guru ETFdb Portfolio].

Price Drivers

The prices of agricultural commodities are often viable, and can be impacted by a number of factors:

  • Global Population Growth: As the world’s population continues to grow and farm land becomes more valuable, demand for agricultural commodities is expected to continue to rise slowly. Major demographic shifts could have a large impact on prices of certain commodities.
  • Technological Developments: The rise of the ethanol industry highlights the impact that technological advances can have on commodity prices. As biofuel production ramped up, demand for corn skyrocketed, sending the prices of many agriculture prices higher. To the extent that new technologies compete for resources with traditional buyers (such as consumers), agricultural commodity prices could be impacted.
  • Weather Anomalies: Severe weather conditions, including hurricanes/tsunamis and droughts, can have a major impact on short-term agricultural commodity prices. Since production of certain commodities tends to be relatively concentrated (i.e., wheat and corn in the midwest, cattle in Texas and Oklahoma), the impact of severe weather patterns can be particularly disruptive.

Broad-Based Agriculture ETPs

Agriculture ETF Exposure
Commodity DBA JJA UAG FUD AGF TAGS DIRT USAG RGRA
Cattle 12.5% 0.0% 0.0% 7.5% 0.0% 0.0% 0.0% 13.8% 6.3%
Cocoa 11.1% 0.0% 2.9% 2.7% 0.0% 0.0% 0.0% 4.3% 4.1%
Coffee 11.1% 6.3% 4.6% 4.2% 0.0% 0.0% 3.2% 6.6% 6.9%
Corn 12.5% 20.8% 18.1% 16.7% 29.5% 25% 22.3% 14.6% 22.5%
Cotton 2.8% 4.8% 5.6% 0.0% 0.0% 0.0% 2.3% 3.9% 4.8%
Lean Hogs 8.3% 0.0% 0.0% 5.3% 0.0% 0.0% 0.0% 7.6% 4.7%
Soybeans 12.5% 27.0% 24.6% 22.7% 24.3% 25% 43.9% 23.7% 11.9%
Soybean Oil 0.0% 11.2% 5.5% 5.1% 0.0% 0.0% 7.7% 2.0% 4.5%
Sugar 12.5% 10.8% 26.1% 24.1% 26.5% 25% 7.2% 7.3% 7.5%
Wheat 6.3% 19.2% 12.8% 11.8% 24.4% 25% 12.7% 16.1% 16.5%
Source: Issuer web sites.
*As of 11/20/12

For those who prefer a broad based approach to agriculture investing, there are a number of ETPs that offer exposure to a variety of resources, including sugar, wheat, soybeans and corn. Among the diversified agricultural products are:

  • PowerShares DB Agriculture Fund (DBA)
  • iPath Dow Jones-UBS Agriculture Subindex Total Return ETN (JJA)
  • E-TRACS UBS Bloomberg CMCI Agriculture ETN (UAG)
  • E-TRACS UBS Bloomberg CMCI Food ETN (FUD)
  • PowerShares DB Agriculture Long (AGF)
  • Teucrium Agricultural Fund (TAGS)
  • iPath Pure Beta Agriculture (DIRT)
  • United States Agriculture Index Fund (USAG)
  • RBS Rogers Enhanced Agriculture ETN (RGRA)

As shown in the adjacent table, the composition of these diversified agriculture funds varies significantly. It should be noted that TAGS is structured as a fund-of-funds which employs a unique rolling methodology to help it minimize the impacts of contango; DIRT also strives to combat contango by undertaking a creative allocation methodology. Lastly, USAG is unique because it makes adjustments to its holdings on a monthly basis depending on current market conditions; also this ETF makes a minimal allocation canola futures, which are not included in any of the other broad ETPs [see also In Search Of The Best Commodity ETP].

Livestock ETFs

Livestock ETFs
Commodity COW UBC LSTK
Lean Hogs 39.6% 41.7% 38.3%
Cattle 60.4% 58.3% 61.7%

For investors looking to gain more targeted exposure to agricultural commodities, there are also several funds focusing exclusively on livestock:

  • iPath Dow-Jones UBS Livestock Subindex Total Return ETN (COW)
  • E-TRACS UBS Bloomberg CMCI Livestock ETN (UBC)
  • iPath Pure Beta Livestock ETN (LSTK)
It should be noted that LSTK employs a unique methodology in the rolling process, which should help it to minimize the impacts of contango.

Grain ETFs

Grains ETFs
Commodity JJG GRU WEET
Corn 31.0% 26.5% 25.6%
Wheat 28.7% 45.6% 15.2%
Soybeans/Soybean Oil

40.3%

27.9% 59.2%

There are also ETFs that target exclusively grain commodities, including corn, wheat, and soybeans. These products include:

  • iPath Dow Jones-UBS Grains Subindex Total Return ETN (JJG)
  • ELEMENTS MLCX Grains Index ETN (GRU)
  • iPath Pure Beta Grains (WEET)

WEET belongs to the “Pure Beta” family of products, and as such, this ETN undertakes a creative allocation methodology designed to minimize the impact of certain distortions in the commodity futures market.

Agribusiness ETFs

Agribusiness ETFs
Ticker Name Expense Ratio
MOO Market Vectors Agribusiness ETF 0.59%
PAGG PowerShares Global Agriculture Portfolio 0.75%
CROP IQ Global Agribusiness Small Cap ETF 0.75%
VEGI MSCI Global Agriculture Producers Fund 0.39%

While the aforementioned products offer direct exposure to agricultural commodities, some investors prefer to invest in agricultural commodities indirectly, through holdings in agribusiness stocks. Currently, there are several ETFs focused on providing exposure to companies engaged in agriculture and farming-related activities.

Because there is generally a positive correlation between the profitability of agribusiness companies and the market prices for their products, these funds offer indirect exposure to rising prices, although they obviously introduce equity market risk as well.

Spot Vs. Futures

It should be noted that exchange-traded products offering exposure to agricultural commodities don’t actually buy and store the underlying commodities, as such a strategy would be impractical and prohibitively expensive. Rather, most of the ETFs in the Agricultural Commodities ETFdb Category employ a futures-based strategy to achieve their investment objectives.

While returns to a futures-based strategy generally exhibit a strong correlation to movements in spot prices, the relationship is often far from perfect. In order to avoid taking physical possession of the underlying commodities, these funds (or the related indexes) generally “roll” their holdings each month, selling any contracts that are approaching expiration and using the proceeds to buy longer-dated contracts. When the prices of these contracts vary (i.e., markets are either in contango or backwardation), the slope of the futures curve can have a meaningful impact on returns. See What’s Wrong With UNG? for a look at how contango has impacted natural gas ETFs.

It should also be noted that a number of the products highlighted above are exchange-traded notes, meaning that they are essentially senior unsecured debt instruments that are linked to the return on a hypothetical portfolio comprised of futures contracts. While the ETN structure can reduce tracking error, it also introduces investors to credit risk. Additionally, this product structure does provide a number of tax advantages that make ETNs the preferred vehicles for certain investors looking to access the agricultural space.

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Disclosure: No positions at time of writing.