There are a lot of things to distract the investor in today’s climate of news driven swings on the stock market. Clearly progress on a rescue package for the country’s financial services sector is dominating proceedings at the moment. Supply of capital and credit are of major concern. However, supply destruction as well as the insatiable and refined appetite of the developing world are at the root of a crisis of a different kind.
In this case, we are referring to agriculture. Feeding an ever larger and more affluent world population is putting a strain on supply which in turn is driving up prices. In addition, the rise of the biofuel industry is adding to the robust demand side story. Yet weather, access to fresh water and diminishing areas of arable land are among the factors hampering the supply response. Add to this our bearish view of the US dollar and an anticipated shift in government spending priority and the outlook for higher food prices is compelling in our opinion.
Today investors can gain exposure to this outlook much easier than in the past. Previously, we recommended the PowerShares DB Agriculture Fund (AMEX, DBA) as just such an avenue.
As a reminder, DBA is an exchange traded fund (ETF) which offers equal exposure (25 percent each) to four staple soft commodities - corn, wheat, soybeans and sugar.
The ETF is based on an index called the 'Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture' (DBLCI-OY Agriculture). The index is meant to perform in line with the agriculture sector. Conveniently, DBA is traded on the AMEX in the same way as an ordinary stock.
This provides advantages such as no storage, transportation or insurance fees and a management fee of 0.75 percent makes it an attractive way to gain exposure to the price moves of soft commodities.
A protracted increase in the stock price has been a direct reflection of the widening chasm between supply and demand of the respective commodities. Although having cooled since hitting record levels earlier this year, Soybeans, Corn and co remain in great shape, in our opinion.
It is no secret that inflation in America has been on the rise. A primary component of this (don’t tell the government as they exclude these non-necessities of everyday life) has been the rise in energy and food prices.
So as the price of our monthly shopping creeps up, how can the investor benefit? We believe that the PowerShares DB Agriculture Fund answers the call.
The US is the world’s biggest producer of two commodities which account for 50 percent of the ETF. In the case of corn, the country accounts for approximately 70 percent of global exports and approximately 40 percent for soybeans. In our view, as we will see, both commodities are set for an increase in price.
This month, the US Department of Agriculture (USDA) warned of a lower than previously expected corn harvest courtesy of an arid August. In addition, the USDA commented that harvests for corn will produce 1.8 percent less corn than forecast last month, while the soybean harvest will drop 1.3 percent.
While US harvests yield less and less, the US dollar is set to purchase less and less.
