According to a recent report from the Union Nations “world grain reserves are so dangerously low that severe weather in the U.S. or other food-exporting countries could trigger a major hunger crisis next year”.
With food consumption exceeding the amount grown for six of the last 11 years, countries have run down reserves from an average of 107 days of consumption 10 years ago to under 74 days recently.
Looking at the longer-term--global population will grow from 7 billion to almost 9 billion by 2040 and the number of middle-class consumers will increase by 3 billion over the next 20 years, per U.N. estimates.
As a result, the world will need 50% more food for the booming population. Further most of the growth in population will be in less developed countries. There is not much room for expansion of arable lands in these countries. Thus most of the required increase will have to be met by increasing crop yield.
The use of agricultural commodities for production of biofuels will also continue to increase. According to FAO, agricultural production has to increase by 70% globally by 2050 and by almost 100% in developing countries, in order to meet food demand alone.
The companies in the agribusiness industries such as manufactures of seeds and fertilizers, and farm-machineries will benefit from this booming demand.
Additionally, growing middle class in the emerging countries now demand and are willing to pay for better quality food and thus the food prices are expected to remain high.
Agricultural commodities like other “hard asserts” also act as inflation hedge. As the major central banks all over the world continue to increase money supply, the investment case for hard assets becomes stronger.
The investors seeking to profit from the insatiable demand for food have the option of investing either in the ETFs that hold agribusiness stocks (like MOO and PAGG) or the ETFs that bet directly on the agricultural commodity prices using futures (like DBA).
The second group is more volatile and more suitable for betting on the shorter-term movements in the prices of agricultural commodities. On the other hand, the first group of ETFs is suitable for investors who seek to benefit from the longer-term growth in demand for food. We may add that the short-term performance of the ETFs in this group may vary from the trends in commodity prices.
Market Vectors Agribusiness ETF (MOO)
MOO seeks to track the performance of the DAXglobal Agribusiness Index, which provides exposure to companies that derive at least 50% of their revenues from agricultural business.
This ETF was introduced in August 2007 and has proved to be extremely popular choice for investors in this space, attracting more than $5.6 billion in assets till date. It has returned 9.8% year-to-date.
The ETF currently holds 53 securities, most of which are large cap (84%) companies. Monsanto, Potash Corp. of Saskatchewan and Deere are the top three holdings for the fund. The fund is top-heavy with top ten holdings accounting for 57% of the assets.
In terms of country exposure, U.S. (37%), Canada (14%) and Singapore (9%) occupy the top spots. The fund charges an expense ratio of 0.56% annually, making it one of the cheapest choices in this space.
PowerShares Global Agriculture Fund (PAGG)
PAGG, the closest alternative to MOO, is much smaller with AUM of 106 million and is also more expensive with an expense ratio of 0.75%.
The fund has highest exposure to the U.S. (38%), followed by Canada (14%) and Switzerland (9%). Syngenta (9%), Monsanto (8%) and Archer-Daniels-Midland (8%) are the top three holdings.
The ETF has returned 12.5% year-to-date.
PowerShares DB Agriculture ETF (DBA)
DBA uses futures contracts on some of widely traded agricultural commodities. This fund has $1.8 billion in AUM and charges 0.75% in expenses.
Top futures holdings in the index are corn, soybeans, sugar and live cattle—each with a 12.5% weight. The fund has amassed close to $1.9 billion in AUM and trades in volume of over one million shares a day.
DBA is slightly expensive with 1.01% in annual fees and has gained only 0.14% so far this year.
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