Just as gas prices leveled off, consumers are faced with the threat of rising food costs after the worst drought in over 50 years. Higher prices across the board could be in store on shortages, while global populations continue to rise in secular trends.
“We think it’s going to be a difficult six to nine months,” said Scott Hoyt, senior director of consumer economics for Moody’s Analytics. “If anything, conditions are likely to get worse, particularly at the start of the year.” [ETF Chart of the Day: Agriculture]
Bad weather conditions in the heartland of the U.S. are likely to cause sugar, meat, dairy and oilseed prices to skyrocket on a global level. The drought conditions have wrecked havoc on dairy farmers and livestock breeders, who are passing the costs on down to the consumers, Zacks reports. Furthermore, harvest levels of wheat are down 14%, after one of the worst wheat harvests since the 1980s. [Ag ETNs Fatten Up As Economy Improves]
In another corner of the globe, June and July presented a heatwave in Russia and a major drought in that key grain growing region led to higher prices as well, as 45% of the corn and 35% of the soybean crop was destroyed. [Corn, Ag ETFs Rocket on Supply Concerns, Drought]
“We are starting to see evidence of food prices moving up so that’s definitely going to be a drag on disposable incomes,” said Hoyt of Moody’s Analytics. [Ag ETFs: Farmland Prices Spike]
Investors can hedge this rise in food prices that could ultimately hit everyone’s budget. The E-TRACS UBS Bloomberg CMCI Food ETN (FUD) is a play on agriculture and livestock futures contracts that have maturity rates from 3 months to 1 year. The ETN is up 9% in 2012, and has around $27.9 million in AUM. Another ETN to play rising food costs is the iPath Dow Jones UBS Livestock ETN (COW) with $54.6 million in AUM and a year-to-date return of 6%. The note focuses on futures contracts involved with livestock commodities.
PowerShares DB Agriculture ETF (DBA) is an ETF that invests in futures contracts on some of the most liquid and widely traded agricultural commodities that trade on American markets. With $1.9 billion in assets and 1.01% in fees, the fund is expensive but liquid enough for most investors to safely buy and sell. Top holdings include soybean (14%) and cocoa (13%) while the another three commodities – coffee, wheat and live cattle – make up 12% each as well. The fund is up 0.10% this year. The PowerShares Dynamic Food and Beverage ETF (PBJ) invests in consumer staples and consumer discretionary companies.
The U.S. Department of Agriculture is predicting a 3.5%-4% rise in food prices in 2013, higher than in 2012, reports Edward Krudy for Reuters. Higher food prices are expected to peak in the winter, cutting 0.2% from economic growth in the season.
E-TRACS UBS Bloomberg CMCI Food ETN
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.