As Russia appears in no mood to end its military move or support to pro-Russian separatists in eastern Ukraine, the situation turned even worse with the U.S. and European Union imposing harsher sanctions against the country. The U.S. and the European Union (EU) had already imposed minor bans on some Russian diplomats at the beginning of the year in response to Russia’s Crimea annexation.
This time, the U.S. aimed at Russia’s all-important energy, banking and defense sectors with European Union and Canada also introducing similar types of sanctions. However, the EU sanctions were not as sweeping as the ones enforced by the U.S. and were basically moderate in nature (read: After Crimea, Where Do Russia ETFs Go Now?).
All these sanctions led to intensified tensions between Russia and the West. As a result, almost after six months of animosity, Russia counteracted by imposing restrictions on a good number of food imports from the West on August 7. While this has raised the possibility of Russia being trapped in recession this year and facing a serious food crisis, the move will likely hurt the agricultural sector of North America, Europe and Australia.
How Costly is the Move?
As per the Associated Press, a one-year restriction has been imposed on all imports of meat, fish, fruits, vegetables, milk and milk products from the U.S., the European Union, Australia, Canada and Norway. Switzerland was off the hook as the country did not join the bandwagon of Western nations planning to cut economic ties with Russia.
Associated Press indicated that Russia’s big cities count heavily on foods that are mainly sourced from Europe. Foreign-grown foods satisfy 60% to 70% of total demand in the big cities. In 2013, the EU sold agricultural goods worth 11.8 billion euros ($15.8 billion) to Russia, while the U.S. exported $1.3 billion in food items.
While the step will do no good to Russia as this will only aggravate inflation (as feared by some analysts) – an economic drag the nation is already grappling with – Moscow seems less bothered about this likely pitfall and is busy turning the tables on the West instead.
Are Agricultural Products at Risk?
While this escalating geopolitical tension could be a bane for many investing avenues, as of now, agricultural products look to be hit. Following the news of the ban, most of the agricultural exchange traded products traded in the red on August 7 (read: 3 Commodity ETFs Surging on Russia Sanctions).
In any case, trading in most agricultural products has been sluggish lately due to supply glut concerns. We have highlighted a few agriculture-related ETF/ETNs that investors need to watch carefully in the coming days, given the food ban from Russia (read: Beyond Russia: How are Eastern Europe ETFs Performing?).
PowerShares DB Agriculture ETF (DBA)
DBA uses futures contracts on some of the widely traded agricultural commodities. This fund has $1.23 billion in AUM and charges 1.01% in expenses.
Top futures holdings in the index are live cattle, soybeans and sugar—with a respective 14.1%, 10.9% and 10.7% weight. DBA has lost only about 1.45% following the ban announcement. DBA currently has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.
iPath DJ-UBS Agriculture TR Sub-Index ETN (JJA)
The ETN looks to follow the Dow Jones-UBS Agriculture Subindex Total Return. The index looks to provide the returns that are available through an investment in the futures contracts on the agriculture sector of the commodity world.
Top constituents currently include corn, soybeans, sugar, coffee and wheat. The product charges 75 bps in fees. The product retreated 1.30% in the key trading session. JJA currently has a Zacks ETF Rank #5 (Strong Sell) with a Medium risk outlook.
iPath Dow Jones-UBS Livestock Subindex Total Return ETN (COW)
This note tracks the Dow Jones-UBS Livestock Subindex Total Return, which delivers returns through futures contracts on livestock commodities. The benchmark provides 60% exposure to live cattle and the remainder to lean hogs (read: Beef Up Your Portfolio with These Livestock ETFs).
The product charges 75 bps in fees per year and has amassed $46.8 million in its asset base. It trades in an average volume of about 30,000 shares a day, suggesting additional cost in the form of a wide bid/ask spread. The ETN has lost about 2.17% on August 7. COW currently has a Zacks ETF Rank #5 with a Medium risk outlook.
Dow Jones-UBS Softs Total Return Sub-Index ETN (JJS)
The note looks to track the Dow Jones-UBS Softs Subindex Total Return. This index looks to provide returns that are available through an investment in the futures contracts on the soft commodity sector.
Top components currently include sugar, coffee and cotton. This unpopular product charges 75 bps in fees. JJS was down 2.33% in the key trading session. JJS currently has a Zacks ETF Rank #5 with a Medium risk outlook.
To conclude, we would like to note that U.S. exports to Russia account for less than one percent of entire agricultural exports (per an assistant professor of agricultural economics at Colorado State University). This meager number suggests less turbulence in the horizon for agricultural ETFs though they should still be monitored if tensions continue to rise in this key region of the world.
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