The global price of food continues to increase illustrated by the United Nations Food and Agriculture Organization’s monthly food price index rising to 214.7, the sixth consecutive month that the index has risen as supply and demand imbalances continue to take their toll on food prices.
Demand for food continues to rise as wealth in developing nation like China, India and Brazil has elevated food consumption as consumers in these nations starve of their traditional eating habits and seek more of a Western-style diet. This elevated demand, combined with supply constraints, has provided positive price support to commodities like corn, wheat, coffee and cotton and cooking oils.
Further price support in food based commodities has also been supported by increased investor demand. As the US dollar continues to remain volatile, interest rates low and the potential of further quantitative easing measures to be implemented by the Fed, many investors have turned to these commodities to hedge their bets, diversify their portfolios and seek enhanced returns.
On the supply side, water scarcity, increasing global temperatures and dry weather have been threatening farm production in South America and Russia. A lack of rain in the central parts of Brazil, which is the world’s second largest soybean crop, has hindered output. As for the future of soybean crops in Brazil, a uphill battle is likely to be faced as research indicates that farmers in the region have only planted 16.4 percent of the planned area as compared to 36.8 percent a year ago. To put further strain on food prices, severe weather in Australia has resulted in massive flooding which has crimpled sugar output by nearly 20 percent.
At the end of the day, the world’s appetite for agricultural-based commodities remains insatiable and will continue to grow as emerging markets witness increased purchasing power and populations grow. As for supply, Mother Nature appears to be the primary driver in production and her mood is relatively unpredictable. As long as this supply and demand imbalance remains intact, these commodities are likely to see positive price support.
Some ETFs that are likely to be impacted by increasing food prices include the following:
- Market Vectors Agribusiness ETF (MOO), which is a diversified play on natural resource companies and includes Potash Corporation of Saskatchewan (POT), Deere & Company (DE) and Monsanto Company (MON) in its top holdings.
- UBS E-TRACS CMCI Food TR ETN (FUD), which seeks to replicate the collateralized returns of a basket of 11 futures contracts from the agricultural and livestock sectors. The index allocates 19.24% of its weightings to soybeans, 19.02% to corn, 15.34% to sugar, 12.93% to wheat, 5.68% to cattle, 5.39% to soybean oil and 5.02% to soybean meal.
- iPath DJ-UBS Agriculture TR Sub-Idx ETN (JJA), which seeks to replicate the performance of a basket of futures contracts on physical commodities. JJA allocates 25.17% of its weightings to corn, 24.27% to soybeans, 15.40% to wheat and 9.38% to soybean oil.
- PowerShares DB Agriculture Fund (DBA), which seeks to replicate the performance of a rules-based index, composed of futures contracts on the agricultural sector. DBA gives exposure to cattle, soybeans, sugar, corn, coffee, cocoa, wheat, lean hogs and cotton.
Disclosure: No positions