By Christian Magoon
CEO, Magoon Capital
Beside air conditioning bills, Americans are going to pay another price for the scorching 2012 summer: higher grocery bills. The U.S. is in the midst of a poor crop season of which the country has not seen since the late 1980s.
According to Bloomberg, "Crops on July 1 were in the worst condition since 1988, and a Midwest heat wave last week set or tied 1,067 temperature records, government data show."
Because of this many agricultural commodities like corn and wheat are in diminished supply. This is poor timing as the world continues to grow its population and standard of living. These trends ensure increased consumption of food and a growing demand for proteins, like chicken and beef, that are less efficient uses of grain. Thus grocery bills should began a steady rise as supply and demand collide.
For ETF investors, there are several ways to hedge against the coming increase. Let's review four different ETF options.
Several ETFs provide exposure to a basket of agriculture commodities. These ETFs own futures contracts in areas like: corn, sugar, wheat, soybeans, cattle, hogs, coffee and cocoa. This approach seeks to minimize single commodity risk while generating less volatile returns. The largest diversified agriculture ETF is DBA, the PowerShares DB Agriculture Fund. It owns a broad mix of about 10 agricultural commodities, as shown below in the index graphic from the DBA website.
A more focused option is the Teucrium Agriculture Fund (TAGS) which provides investors with exposure to four core agricultural commodities: sugar, corn, wheat and soybeans. The ETF is equal dollar weighted between the four commodities as a diversification tactic. TAGS is an ETF of ETFs as it invests in the four underlying Teucrium ETFs that represent corn (CORN), wheat (WEAT), soybeans (SOYB) and sugar (CANE).
Here's a recent performance comparison of the more concentrated TAGS versus the more diversified DBA. Note that TAGS launched March 28, 2012.
A third ETF option is to bypass futures and instead invest in the stocks of companies who receive 50% or more of their revenue from the business of agriculture. This is what the Market Vectors Agribusiness ETF (MOO) seeks to do. MOO owns about 50 stocks spread out across over 10 different countries. Companies in the U.S. and Canada make up over 50% of its holdings however. Here's a list of MOO's top 10 holdings as of May 31st. This is from the fund's fact card.
While there is no perfect way to offset higher food prices, each of the three ETFs listed above should provide varying degrees of protection. DBA and MOO are popular ETF options to position against rising grocery prices as their breadth, asset size and expense ratios stand out. For those with more focused convictions however, concentrated ETFs like CORN and WEAT may be attractive alternatives to opening up a futures account. Whatever the case, be prepared to protect and even profit from the searing summer of 2012.