Sunday, November 04, 2007

Food Inflation will continue and accelerate

I have written several times about my belief in a movement towards higher food prices in the future, perhaps much higher than in the past. Some commodity experts like the renowned Jim Rogers have stated this belief too.
While I normally enjoy helping investors think about long-term trends that'll help fatten their portfolios, because of the implication this trend has for people everywhere, especially poor people, this posting gives me absolutely no joy.

Nevertheless, here's several ways to invest in what I believe is a long-term trend towards higher food prices:

Van Eck Global's fifth ETF, Market Vectors Agribusiness (AMEX:MOO), which recently debuted and is already up nearly 20% since then. The ETF includes subsectors of the agriculture, such as agricultural 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 40 companies from 13 countries in the index must have a market cap of at least $150 million and a monthly trading volume of 250,000 shares. These companies are primarily engaged in the business of agriculture, and must derive at least 50% of their total revenues from agribusiness. According to information on the fund sponors site (Van Eck), as of Sept 2007, the fund had a PE of ~27, a PB of ~3.5, and a dividend yield of 1.06%.

There are also several ways to invest more directly in the foodstuffs, either through ETFs or ETNs. Two recent products from Barclays (ipathetn) are as follows:

"JJA" tracks the Dow Jones–AIG Agriculture Total Return Sub-Index. The Index is currently composed of seven futures contracts on agricultural commodities traded on U.S. exchanges. The weightings are currently as follows: Coffee 8.0%; Sugar 7.0%; Soybeans 28.0%; Wheat 23.6%; Soybean Oil 9.9%; Cotton 9.3%; Corn 14.3%. According to the information provided by the sponsor, the annual return from the index looks like this: 1yr = 44%; 3yr = 12%; 5 yrs = 6.2%; 10 yrs = -(minus)1.7%.

As you can see, owning the index constituents would have been very good during the past year, and very lousy over the past 10 years.

"JJG" tracks the Dow Jones–AIG Grains Total Return Sub-Index, which has an underlying composition of three futures contracts on grains traded on U.S. exchanges. They are weighted as follows: Soybeans 42.6%; Corn 21.6%; Wheat 35.8%. According to the information provided by the sponsor, the annual return from the index looks like this: 1yr = 64%; 3yr = 14.9%; 5 yr = 6.4%; 10yr = -(minus)1.4%.

Judging by the return differences between the two products over the past year, it appears that the Grains component of the "JJA" ETN (which is 66% of that ETN) has provided almost all of the 44% annual return; in fact, my calculation shows that it's responsible for 41 points of the 44% return.

PowerShares also offers a foodstuff type ETN, DB Agriculture; "DBA".

It tracks the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture Excess Return. The index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities – corn, wheat, soy beans and sugar, in equal weightings (i.e. 25% each). However, the weightings in the fund are only periodically rebalanced, and as of October 25 2007, the weightings had changed to as low as 17% for sugar and as much as 31% for soybeans. Index return history as of September 28 2007; 1Yr = 36%; 3yrs = 15%; 5yrs = 11% and 10yrs = 1.6%.

This ETF started trading in January 2007 at $25 and closed at $29.28 on October 26 2007, providing a 17% return since that date.

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Finally, according to recent press releases and web-articles, ProShares is going to be offering a leveraged ETF tracking the Dow Jones-AIG Agricultural Index. When they start trading, this will offer the opporunity to track the index, but on a double-leveraged basis. The release date of the ETF isn't known at this time. Expect a one to four month delay as typically seen.
I have written previously about the food inflation issue, and it's worth re-visiting two of my postings, here and here for more background.


The Confused Capitalist


Deborah said...

I think food inflation has already been enormous in the past few years. In the summer I can spend more on fruit that lasts only 3 days than what I used to spend on my entire weekly grocery bill in the 1980s.

LadyRed said...

Invest in food inflation. What a great concept. Except for the mom that has to pay over $4.00 for a jug of milk.

Jay Walker said...
This comment has been removed by the author.
Jay Walker said...


You're right - it feels immoral sort of - except that the inflation is going to happen anyway. However, the more people who invest in it, direct more resources towards it, provide more potential to partly solve or ameriolate the problem.

Another way to look at it is also like this - suppose you agree that food inflation will continue and accelate - one way to protect yourself is to invest in a vehicle like this. As your food bill goes up, so does your investment, allowing you the opportunity to draw down on it, to pay your food bill. Hedging if you will.

Of course everyone can become a vegan, have their own high yield "sqaure foot" garden, and do something about it on their own ground too.

Jay Walker
The Confused Capitalist

LadyRed said...

I already invested in five kids.

But, on the subject of food inflation...make note I'm from Louisiana, so feeding the family is close to a religious event.) That said, I don't think the more aware people out here in the middle class are going to invest. We're going to get lean and we're going to get mean.
We are smart enough to realize that the middle man is pumping up food prices. So, we're going to get back to the basics. Less processed foods...less meat. We'll probably learn from the greens and vegetarians, too.
But, then again, we can be happy with cornbread, pinto beans and greens.