Why Agriculture And Food ETFs Make Sense In This Market

No matter how bad the economy gets, nor how stupid the government’s policies, everyone needs to eat.

Except for air (free, unless the government figures out how to tax it) and fresh water (a separate subject entirely and best suited for another article), there’s no commodity as fundamental as food.

Investing in food and food-related industries isn’t always a sure thing, of course.

There are times when food gets cheaper due to new supplies or routes to market, but with the dollar weakening there’s only one long-term trend for basic commodities and that’s upward.

As you can see from this Bloomberg chart, commodities in general have been rising since March. This is in line with the rest of the market.

At this very moment they’re treading water, but the upward movement should resume as the dollar shows renewed weakness at the 50 day moving average.

In an earlier column, we’d written that the USD was due for a rally and you can see that it did happen - until it hit a wall against that 50 day MA. It wasn’t a rally with legs as it was rejected quite firmly at the 78.5 level.

What’s more, the dollar is likely to do the same thing over the next few days - it will rise strongly, top out around the 50 day moving average, and then resume its bearish trend.

One point to note: if the dollar can hold above the 50 day moving average for awhile and even climb significantly above it to the 79 level, then commodities (and the food ETFs we’re about to discuss) will weaken.

However, any prolonged dollar strength and commodity weakness is unlikely in the face of the problems afflicting the dollar. These problems include massive and ballooning deficits, foreigners declining to buy our debt, and so forth.

That means that going long commodities is a relatively high-percentage bet in the months and years to come. And food is one of the most essential, can’t-do-without commodities out there.

There’s Nothing More Basic Than Food

Therefore, let’s examine agriculture, livestock and related food products from an investment angle.

There are a whole lot of food companies out there, though. Plus a whole lot more companies which support the food industry, such as fertilizer and farming machinery firms.

Combing through those hundreds of companies to pick out a few potential winners is beyond the scope of the column. And why bother when some friendly professional investment fund managers have already done the job for us?

For that reason we’ll compare ETFs (Exchange Traded Funds) focused on food in general, as well as ETFs zeroed in on a specific aspect of the food industry or food chain.

Here’s a comparison chart of 10 of the most popular and well-known Agricultural ETFs:

There are two clear winners on this chart, the Powershares Global Agricultural Portfolio ETF (PAGG) and the Market Vectors Global Agribusiness ETF (MOO) (MOO, a symbol no doubt suggested by the fund manager’s pre-teen daughter who thought it was cute).

As the name suggests, both have a global reach rather than a US-centric approach.

PAGG is based on the NASDAQ OMX Global Agriculture Index, itself designed to measure the performance of globally traded securities of the largest and most liquid agriculture and farming-related companies.

MOO closely tracks the performance of the DAXglobal Agribusiness Index and buys pretty much the same stocks including agriculture chemicals at 34.3% of the index, agriproduct operations (33.5%), agricultural equipment (24.3%), livestock operations (5.6%), and ethanol/biodiesel (2.3%).

The biggest holdings in both funds include Potash Corp (POT) of Saskatchewan …  Syngenta AG (SYT) … Wilmar International Ltd (WIL) … The Mosaic Co (MOS) … Monsanto (MON) … Deere & Co (DE) … Archer-Daniels-Midland Co (ADM) … and Komatsu Ltd, although each one holds 40 stocks.

When a Food Bet Is Also A Dollar Hedge: Gold You Can Eat

Given that all the other funds (primarily US-focused) trail the performance of these two global funds by a wide margin, both PAGG and MOO can be thought of as not only bets on agriculture, but also hedges against the dollar.

With PAGG and MOO, you are effectively going long the Canadian dollar, Japanese Yen, and Euro as well as the companies held in each fund.

Think of them as ‘gold you can eat’. It’s true that no paper currency is quite as good as gold as a store of value, but what these companies are producing is even more fundamental and needed.

So both PAGG and MOO offer a double bet against a deteriorating dollar and as you can see they’ve offered excellent returns in excess of 45% and 50% since February of this year.

However, our research for this column turned up one other interesting find, namely sugar.

A Sweet Investment Or A Cavity In Your Portfolio?

The chart below shows several sector-specific funds based on specific food/agricultural commodities such as cocoa, coffee, cotton, sugar, livestock and “softs” in general (soft commodities are normally coffee, cocoa, sugar, corn, wheat, soybean and fruit).

While “softs” did relatively well as a sector of their own, sugar as a stand-alone is the clear winner in this comparison.

The iPath Dow Jones-UBS Sugar Subindex Total Return ETN (SGG) reflects the return of an unleveraged investment in sugar futures contracts. So by buying this fund, you’re essentially playing the sugar futures market without actually getting involved in futures.

The return is less than in an actual futures contract, but so is the risk. While we wouldn’t like to bet the farm on a single commodity due to the risk, the performance of sugar is quite notable this year.

(Meanwhile, at the other end of the scale, livestock have been a terrible investment as they’ve lost ground even as the dollar has declined.)

Growing sugar cane would seem to be a much better financial prospect than cattle or hogs right now.

One Final Note On Biotechnology

In a previous article, we examined the risks vs. the rewards of biotechnology companies.

Biotech is quite risky since promising drugs or treatments can fail to get government approval and thus the associated large research & development budget is wasted. However, there’s another factor at work in whether a given biotechnology company succeeds or fails, and that’s that the people running these companies tend to be experts in non-business fields such as their (frequently) hyper-specialized scientific disciplines.

This multiplies the risk, because people who understand the subtle complexities of (say) gene recombination don’t always understand finance or good practices to the same degree.

The result? These companies can burn through money at an astonishing pace while making promises they can’t deliver. This can inflict ebola-scale plagues on the stock price.

We were asked to take a quick look at two companies including Biodelivery Sciences International (BDSI) and Hopkins Capital in light of these observations.

BDSI is working primarily on drug delivery technologies including BEMA and Bioral. The company’s stock price has more or less kept pace with the industry standard Biotechnology Index (BTK) despite a heart-stopping burn rate on its cash and cash equivalents (from $13,797,093 in 2007 to a mere $905,720 in 2008 as of the most recent annual report). This is what passes for ‘acceptable’ in development-stage biotech companies.

Hopkins, on the other hand, invests in a portfolio of such companies including Biodelivery itself. This spreads around the risk (something we highly recommend in a field as volatile as biotechnology), although Hopkins itself does not trade publicly.

Because there’s no chart for Hopkins, we can only show BDSI as well as two other key Hopkins holdings, Accentia Biopharma (ABPIQ in the pink sheets now) and Biovest International (BVTI).

Both ABPIQ’s and BVTI’s chart histories indicate why betting big on any one biotech firm is likely to reduce your heart and mind to such a state that you’re in dire need of the advanced medical technology produced by such firms.

For example, ABPIQ’s most recent press release is titled: “Accentia Biopharmaceuticals Announces Reorganization Plan to Maximize Long-Term Shareholder Value, Fully Pay All Creditors and Continue Operations to Commercialize Its Drug Portfolio”. (That would probably explain why the share price is level from February despite some encouraging action earlier in the year.)

Biovest is a subsidiary of ABPIQ itself, and has been an even wilder ride than ABPIQ - although still a very profitable one so far if you bought in February.

However, the bottom line is that such companies are very speculative and must always be treated as such. They burn enormous amounts of cash in pursuit of scientific greatness which may or may not materialize. They may end up flaming out completely despite their noble intentions to make the world a better place, so plan your “investment” accordingly.

Diversify your biotech risk, because there are far more losers than winners and far too many companies run out of hard cash before they run out of great ideas.

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