Agricultural Commodity ETFs In Focus Amid Wheat Shortage

by on December 7, 2010 | ETFs Mentioned:

Commodities have been in the limelight for much of 2010, as prices have surged all across the board. Perhaps the most notable commodity movement is that of gold, which is currently trading near the $1,400/ounce mark, as the yellow metal broke all-time highs while skyrocketing in the latter half of the year. But aside from gold’s historic run, agricultural commodities have also been in focus as of late, as inclement weather across the world has slaughtered crop yields in many of the globe’s most important wheat producing nations. China’s heavy rains have sent cotton to historic highs and now, rough weather in Australia has put another commodity in focus, as supplies begin to bottleneck in comparison to robust global demand [see also What Cotton’s Surge Means For ETF Investors].

Australia is the world’s seventh largest producer of wheat, and the fourth largest exporter. In fact, the nation exports nearly 75% of its annual production, making it a major mover of the commodity. Unfortunately, recent weeks have been unkind to Australian farmers, as heavy rains have battered crop fields all across the country. Horrific rains have sent Aussie wheat prices to a two-year high, as “snowballing supply concerns” are increasing amid “worsening quality issues” said Luke Mathews at the Commonwealth Bank of Australia. Not only are supply outputs a major concern, but now a significant portion of the Australian crop may be downgraded from food to feed quality, potentially more than 40% of the crop according to a source close to the matter. Typically, the nation only produces minimal amounts of feed quality wheat, as the majority of the yields are fit for consumption by the general public and thus carry a significant premium over the lower quality feed product.

With Australian farmers potentially five weeks behind with the harvest, prices have surged, but news from other parts of the world continues to feed the growing prices of wheat. Cold weather in Russia has many concerned over the output that the nation will be able to produce in the coming months, as the globe’s largest country– which has traditionally been a major exporter of the crop– also had drought-issues earlier in the year. Moving to North America, Canada has run into a production snag, as a large amount of their wheat output will also be classified as feed grade, though it was initially expected to be food quality as well. With all of these factors combining, this means the global feed-grade wheat supplies will be the highest in several years, but there will be a shortage of food supplies, as global demand remains unmet. Recent news from the UK only further increased the supply/demand imbalance, as the nation seems likely to make the switch from being a net exporter to a major importer of wheat in 2011, further pinching already short supplies [see also Inflation-Fighting ETFs Back In Focus].

Topping off a one-two punch for the important staple crop, Egypt, one of the world’s top wheat importers, announced that they would be buying their next contract strictly from U.S. suppliers. This suggests that the quality and quantity from the rest of the world is severely lacking, as Egypt has not only placed a large order, but by placing it in only one country, it alludes to a major problem for wheat yields around the world. One would assume that if wheat supplies were more robust multiple bids would have been entered for the Egyptian contract so the fact that only American suppliers met the specifications is extremely bullish news for wheat heading into 2011 [see also ETFS Debuts Physically-Backed White Metal ETF (WITE)].

This perfect storm of factors has boosted demand and crushed supply across the globe which has translated into surging wheat prices as of late. In June of this year, wheat was priced at just under $160 per U.S. metric tonne, but October saw prices top the $270/tonne mark, a gain of approximately 68% in just a few months. As wheat has continued to surge, so too have the ETFs that track the agricultural commodity. Below, we outline three ETFs that offer investors significant exposure to the important crop and that investors need to watch as the global wheat crisis continues [see also ETF Alternatives To The World’s Largest Mutual Funds].

iPath DJ-UBS Grains Total Return Sub-IndexSM ETN (JJG)

This Barclays iPath fund is currently composed of three futures contracts on grains traded on U.S. exchanges. Wheat accounts for over 25% of the fund, while soybeans and corn each make up approximately 37% of the ETN. JJG has surged over 50% from its levels 6 months ago, the exact time that wheat prices saw their low points for 2010. As the wheat shortage and quality issues play out around the world, this fund will be important to watch as it stands to be one of the biggest movers as the outlook of the crop changes.

PowerShares Global Agriculture Portfolio (PAGG)

This fund tracks the NASDAQ OMX Global Agriculture Index, which is designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in agriculture and farming-related activities. PAGG’s top holdings include the Mosaic Company (8.7%), Monsanto (7.6%), and Wilmar International (7.4%). Nearly three quarters of this ETF’s assets are dedicated to foreign countries like Canada, China, and Australia, while the rest lie in domestic securities [see all of PAGG's holdings here]. This fund has gained roughly 15% on the year with a dividend yield of 1.4%. PAGG will be important to watch in the coming months, as a continued crisis in wheat supplies is likely to boost demand for a variety of agribusiness products, potentially boosting stock prices across this industry [see Three ETFs To Invest Like George Soros].

ELEMENTS Rogers International Commodity Agricultural ETN (RJA)

This commodity fund, offered by ELEMENTS, measures an index that represents the value of a basket of 20 agricultural commodity futures contracts. Wheat is the top holding of the ETN, making up 17% of the fund, along with various other commodities such as corn, cotton, and soybeans. RJA has seen strong gains of 25% on the year, likely due to the heavy allocations to both wheat and cotton. Though this fund is well-diversified outside of wheat, it will still be important to watch as the next few months play out.

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Disclosure: No positions at time of writing.