Topic: ETFs
Agriculture ETFs: What you need to know about these investments
Investing in agriculture ETFs could be a smart move if you choose the right investments for the right reasons
An ETF investment can be a great low-fee way to hold shares in multiple companies with a single investment.
There are even ETFs that are involved in the many aspects of agriculture. We discuss these below.
What is an agriculture ETF?
An agriculture ETF is an exchange-traded fund that invests in companies involved in the agricultural sector, including farming, equipment manufacturing, seed and fertilizer production, food processing, and distribution, allowing investors to gain diversified exposure to the agriculture industry through a single security that trades on stock exchanges like a regular stock.
What you need to know about agriculture and agriculture ETFs
One of the main reasons why prices of many agricultural commodities have risen, aside from the impact of the pandemic, Russia’s invasion of Ukraine and inflation, is that consumers in developing countries are eating more and higher-quality food.
For example, rising meat consumption (especially pork) in developing nations puts pressure on grain prices through the use of grain for animal feed; it takes an average of five kilograms of grain to produce one kilogram of meat.
As they grow wealthier, developing-world consumers also buy more processed foods, and this too requires meat and dairy inputs.
What are the benefits of investing in agriculture ETFs?
Investing in agriculture ETFs offers several benefits including diversification across the agricultural sector without purchasing individual stocks, portfolio protection against inflation as food prices typically rise with inflation, exposure to global food demand growth driven by population increases, lower costs compared to buying individual stocks or agricultural commodities directly, high liquidity allowing easy buying and selling on exchanges, and potential income through dividends paid by agricultural companies in the fund.
What are the risks of investing in agriculture ETFs?
Investing in agriculture ETFs involves several significant risks including exposure to unpredictable weather patterns and natural disasters that can devastate crop yields, vulnerability to commodity price volatility that can dramatically affect agricultural company profits, susceptibility to geopolitical tensions and trade disputes that disrupt global food markets, exposure to regulatory changes affecting farming practices or food safety standards, potential negative impacts from shifting consumer food preferences, and vulnerability to broader macroeconomic factors like interest rates and currency fluctuations that can affect agricultural business operations and profitability.
How do agriculture ETFs fit into a diversified portfolio?
Agriculture ETFs serve several important functions in a diversified portfolio:
- Alternative asset exposure: Agriculture ETFs provide exposure to commodities and the agricultural sector that often move differently from traditional stocks and bonds, helping reduce overall portfolio volatility.
- Inflation hedge: Agricultural commodities tend to rise with inflation, offering protection against purchasing power erosion during inflationary periods.
- Portfolio stabilization: The essential nature of food production makes agricultural investments potentially more stable during economic downturns compared to more discretionary sectors.
- Global diversification: Many agriculture ETFs offer exposure to international markets and emerging economies with strong agricultural sectors.
- Risk allocation: We typically recommend limiting agriculture ETF exposure to, say, 5% to 10% of a portfolio, using them as a strategic component rather than a core holding.
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Ethanol pushes up the prices of corn and other crops
Another factor putting upward pressure on food prices is rising ethanol production. Ethanol production has generally risen in the U.S. since the late 2000s, largely due to heavy government subsidies.
As a result of the jump in ethanol production, less corn is available for food or livestock feed. The resulting higher corn prices prompt farmers to plant less wheat and other crops in favour of corn. That drives up prices of other crops, as well.
Meanwhile, the World Bank has called for an end to ethanol subsidies. In June 2011, the U.S. Senate voted overwhelmingly to eliminate billions of dollars in support for the U.S. ethanol industry.
Industrialization absorbs farmland & spurs food demand
Industrialization moves more agricultural land around cities out of production. It also consumes scarce water resources that could be used for irrigation. That generally leads to a decrease in food production.
At the same time, rapid industrialization is also usually accompanied by rising incomes and increased demand for more and better-quality food.
Profit from expanding agriculture with the right agriculture ETFs
It’s likely that crop prices will continue to fluctuate—both from year to year, due to unpredictable factors, such as weather, pests, disease, war, or even speculative trading, or in the long term, due to swings in supply and demand.
Food prices seem poised to continue rising past the pandemic, and it’s a safe bet that overall food production and consumption will continue to increase.
That’s why we think the best way to profit is through shares of well-established companies with a broad base of operations that can offset the wide fluctuations of commodity prices, or in exchange-traded funds (ETFs) that hold those companies.
Below is an example of an agriculture ETF.
The VanEck Vectors Agribusiness ETF, symbol MOO on New York, aims to track the MVIS Global Agribusiness Index, after trust expenses. The index includes agricultural companies from around the world.
The index is intended to track the overall performance of companies involved in: (i) agri-chemicals, animal health and fertilizers, seeds and traits, (ii) farm/irrigation equipment and farm machinery and/or (iii) agricultural products (including grain, tobacco, meat, poultry, and sugar), aquaculture and fishing, livestock plantations, and trading of agricultural products.
Two other agriculture ETFs
Invesco DB Agriculture Fund ETF, symbol DBA on New York, is based on an index made up of futures contracts on some of the most liquid and widely traded agricultural commodities, such as corn, soybeans, wheat, cattle and hogs.
iShares Global Agriculture Index ETF, symbol COW on Toronto, aims to track the performance of the Manulife Asset Management Global Agriculture Index.
Agriculture ETFs: Many ETFs hold some agriculture stocks
iShares Canadian Select Dividend Index ETF (Toronto symbol XDV) holds high-yielding Canadian stocks. Its selections are based on dividend growth, yield and payout ratio.
This ETF holds Ag Growth International Inc.
Ag Growth International (symbol AFN on Toronto) is a leading maker of portable and stationary grain-handling, storage and conditioning equipment. The company is based in Winnipeg.
Ag Growth sells its products through dealers and distributors in Canada and the U.S., as well as in Russia, Ukraine and elsewhere overseas.
The company started out as an income trust. It first sold units to the public at $10 each and began trading on Toronto in May 2004. In June 2009, it converted to a corporation and changed its name from Ag Growth Income Fund to Ag Growth International.
The company’s main brands include: Batco (crop conveyor belts), Wheatheart Manufacturing (grain-handling equipment), Westfield Industries (portable augers to transfer grain), Grain Guard and Keho (aeration and grain-drying equipment), Twister (grain bins), and Mepu (grain-drying systems).
Do you have an interest in agriculture ETFs? Are you already holding ETFs with agriculture companies in them? Share your story with us in the comments.
This post was originally published in 2015 and is updated regularly.
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