How To Invest In Agricultural Commodities

Agricultural commodities are hot. Who would have thought we’d be hearing about the price of wheat or soybeans nearly every day?

Many investors are now interested in investing in them. Unfortunately, it’s not an easy area to invest in. You can’t just buy some wheat and store it in a safety deposit box like you can with gold or silver.

Two new ETFs recently launched with the goal of tapping into this sector. However, they are very different in investing approach.

Van Eck’s Agribusiness ETF: MOO

A few weeks ago Van Eck launched its first agricultural ETF under the ticker, MOO. This ETF invests in 40 global companies involved in the agriculture business. The companies must have a market cap of at least $150 million, a monthly trading volume of 250,000 shares over the last six months, trade on a global exchange, and have a worldwide daily average trading volume of at least $1 million during the past six months.

The top ten holdings as of August 31, 2007 sports some familiar names:

Potash Corp. (PCO): 8.88%
Deere Co. (DCO): 8.69%
Komatsu Ltd. (KOM1): 8.48%
Monasanto Co. (MON): 8.35%
Archer-Daniel-Midland (ADM): 7.58%
Bunge Ltd. (BU3): 4.82%
The Mosaic Co. (FBO): 4.72%
Syngenta (SUJA): 4.36%
CNH Global (NHL): 4.35%
Assoc. Br. Foods LS (AFO1): 4.07%

Net Expense ratio for the ETF is 0.65%.
Gross Expense ratio is 1.07%.

This ETF will track well as long as the world’s stock markets are doing well as, obviously, it is based on the underlying businesses. But what if you want to invest in the wheat and corn itself?

Powershares DB Agriculture Fund: DBA

The Powershares fund is an index of futures contracts on wheat, soybeans, corn and sugar based on the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture. The index has a base weight of the following:

Corn: 25%
Wheat: 25%
Soybeans: 25%
Sugar: 25%

The fund’s weight depends on the current weights in the index. As of October 1, 2007, they were:

Corn: 22.62%
Wheat: 30.60%
Soybeans: 30.89%
Sugar: 15.89%

These percentages are determined by when the futures contracts expires. Due to the nature of buying futures contracts, the fund also invests in US treasuries. The fund prospectus explains:

The fund collateralizes its futures contracts primarily with United States 3-month treasury bills and earns interest on these securities. The interest accrues to the benefit of investors.

Management fee: 0.75%
Estimated Future Brokerage Expenses: 0.16%

The Powershares DBA is much more of a direct investment in the actual commodities than the Van Eck MOO ETF. If you want to invest as closely into the direct commodities themselves, then the Powershares ETF is the investment for you.

Should you be investing in agricultural commodities?

As I said, they are “hot” right now. But for how long? The stocks in the Van Eck MOO have gone up quite considerably in recent months. The P/E ratio on that ETF is not “cheap”- with it over 20. Wheat has been at or near record highs for several weeks now. Have you missed the boat on wheat?

Jim Rogers, who co-founded the Quantum hedge fund with George Soros in the 1970s and who has written several investment books, stated in 1999 that there would be a bull market in commodities. He has since stated that he believes it will last until at least 2022 because of the lack of infrastructure. He also runs his own commodities index fund. Recently, he was interviewed by Bloomberg:

The Federal Reserve’s interest rate cut was a mistake that will prompt “skyrocketing” agricultural prices worldwide, exacerbate a decline in the dollar and quicken inflation, investor Jim Rogers said.

On July 2, Rogers said agricultural commodities were “the place to be,” and that investors should buy them over stocks and bonds. Today, he advised against buying wheat, which has become the most expensive ever relative to corn, soybeans and cotton.

“I wouldn’t buy it now,” Rogers said. “If you’re going to buy something, buy coffee or cotton or sugar. Wheat has been going straight up for about a year. I don’t like to jump on a moving bus.”

Prices will fall 30 percent to $6 a bushel within a year, said James Gutman at Goldman Sachs Group Inc. in London and Pierre Martin, manager of a $490 million commodity fund at DWS Investment GmbH. Chicago futures markets show a similar drop.

Rogers has stated in the past that he is the “worst market timer” and that he never gets short term swings correct. But his call on a long-term bull in commodities has been on the money so far.

Agricultural commodities are certainly an interesting investment area. These ETFs give you some investment options (other than trading in future contracts yourself on one of the mercantile exchanges.) Neither is perfect but they are way to get a toe into agriculture.