Back in early September, I mentioned several agriculture related ETFs, including IQ Global Agribusiness Small (CROP), PowerShares Global Agriculture (PAGG), Direxion AGRI Bull 3x (COWL), DB Agriculture Fund (DBA) and Market Vectors Agribusiness ETF (MOO) as ways to consider investing along the growing pain point of rising food prices.
For the record, very low average daily trading volumes had me cast aside the shares of CROP, PAGG and COWL and in the last four moths the shares of my preferred pick MOO have climbed 7%.
Not bad, but the question is whether or not there is more upside to be had in MOO shares? My answer to that is "yes."
One of the reasons I started looking at that larger basket of agricultural ETFs was the harsh weather and subsequent drought that hit the U.S. this past summer. While the impact appears to be not as bad as some have feared, the U.S. Department of Agriculture (USDA) issued a report this week forecasting that global stockpiles of corn will drop 11% to 117.61 million metric tons by Oct. 1. The culprit is three consecutive years of smaller U.S. corn harvests and rising consumption. Remember there is no shortage of uses for corn with ethanol, feed, food and industrial uses.
More recent recent data from National Weather Service's Climate Prediction Center since mid-July, 60-65% of the continental U.S. has been experiencing moderate-to-exceptional drought. That's not good for crop yields and food production.
According to the latest edition of the World Bank Group's quarterly Food Price Watch report prices remained at high levels, about 7% higher than a year ago. Grains, in particular, are expensive as they are 12% higher year over year and are approaching record highs last seen in 2008. In particular, corn is up 17% compared with its October 2011 levels and 10% above the record-high prices of February 2011.
So, back to the question of whether or not there is more upside to be had in MOO. The combination of high food prices and poor weather conditions probably means that farmers will look to whatever they can to ensure as large a crop size as they can. To me that says good things for fertilizer companies like Monsanto (MON), Potash (POT), and Agrium (AGU), which happen to be some of the top holdings for MOO.
Given those prospects, I continue to see more upside in the shares in both the near and longer term. Odds are one year's crop is not going to make a sustained difference in the global food supply or in food prices. Patient investors should use any dips in MOO to add to their holdings. Yes, investors could be buying shares of MON, POT, AGU and others, but in my view when you buy MOO you're buying a premade agricultural basket.
At the time of f publication, the author had no positions in any of the securities mentioned.