As with many sectors, global agriculture can offer investors everything from a risky ride in pure plays that pin all hopes on a single crop or country, or a broader strategy that depends on multiple factors.
Recent headlines have borne out just a few of the risks inherent in the sector: China only just reopened its live poultry markets at the beginning of May after a three-month shutdown because of fears of the spread of avian flu. Livestock and meat prices have soared, influenced in part by a virus deadly to pigs that has shut down imports of U.S. pork products to countries from Mexico to France to Uzbekistan and in part by a global shortage of beef. Dairy prices, too, are on the rise around the world, and futures for global cattle and dairy products have hit records as demand outstrips supply.
Prices for commodities including sugar and soybeans are increasing, while wheat—first affected by fears of scarcity because of the turmoil in Ukraine, and now expected to give strong yields thanks to favorable weather reports—has seesawed. The price of coffee, beset by drought and disease in Brazil and Central America, has taken off, while cocoa beans in Ivory Coast and Ghana, which have already seen demand surpass supply in the chocolate industry, are under threat—not so much from weather conditions or pests, but from gold mining that threatens the very farmland on which they’re grown.
Then there are the predictions about El Niño and its potential effects this year on everything from cocoa beans in Africa to sugar in India, rice in Asia and wheat in Australia. What’s an investor to do?
Options available for those looking for sector exposure globally can take a number of different directions. There are global ETFs that have a broader focus than just crops—offering, for instance, exposure to chemical and farm implement companies, seed companies, food processors and/or large-cap firms that are involved in multiple areas within the sector. Several ETFs fit that category, such as iShares’ VEGI and COW, PowerShares’ PAGG or Van Eck’s MOO.
Then there’s the opposite approach taken by some ETFs and ETNs, which seek out pure-play investments or futures contracts in such things as coffee (iPath’s CAFE) or cocoa beans (iPath’s NIB or CHOC), sugar (iPath’s SGG or SGAR, Teucrium’s CANE), or livestock (UBS E-Tracs’ UBC, iPath’s LSTK).
Further there’s the middle-ground approach to the agribusiness sector taken by IndexIQ’s CROP, which narrows the focus a bit and predominantly seeks out smaller companies that concentrate on crops and/or farmland.
According to Adam Patti, IndexIQ’s CEO, CROP’s “construction is very simple. We look at the bottom 10% of market cap globally in SIC codes that tie directly to agribusiness, and we weed out those companies that are too small or don’t trade a lot. We end up with a portfolio of about 50 or so firms that are interesting companies in agribusiness.”