Going for the Grains

12/16/2009 12:00 pm EST

Focus: ETFS

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says some soft commodities have lagged, but he thinks they’re about to catch up and recommends an ETN to play them.

I’m probably more bullish now on soft commodities than at any time since 2002. And despite big gains over the last 12 months for many agricultural commodities—sugar, cocoa, soybeans, and cotton—many others are either down or unchanged over the last 12 months. Things like wheat, corn, live cattle, lean hogs, barley, and soybean oil are all down year over year or barely up at all.

So how do you buy things like soybean oil, soybean meal, and cotton?

All along I’ve believed the best way to ride the agricultural sector is to buy an exchange traded fund that invests in futures contracts tied to things like corn, soybeans, wheat, and other edibles.

And ETFs are great for commodities futures, because the investor doesn’t have any liability beyond his initial investment. In other words, you won’t get a call from a broker telling you that a margin call has been triggered. With ETFs, you can’t lose more than you’ve invested.

What you’re left with is the futures market. Enter Jim Rogers and the ELEMENTS Rogers International Commodity Index Agriculture Total Return ETN (NYSEArca: RJA).

In 1998, Rogers created his own commodity indices because he believed existing benchmarks were flawed and not adequately positioned to maximize the big moves he believed lay ahead for raw materials. Boy, was he right!

What’s truly unique about RJA is the fantastic diversification across all major soft commodities, including the cheap grains and related oilseed products (58%) but also peripheral foods like livestock (8.6%), coffee (5.7%), and even lumber (2.9%).

But make no mistake about it; the reason why I love this product is because when you buy this [exchange traded note], you’re getting a big chunk of exactly what we’re bullish on: It’s the only agriculturally focused index that provides investors with an overweight in the grains and oilseeds. The only other competitors—iPath Dow Jones-UBS Agriculture Subindex Total Return ETN (NYSEArca: JJA) and iPath Dow Jones-UBS Grains Subindex Total Return ETN (NYSEArca: JJG)—provide poor daily liquidity and don’t diversify the same way, especially into edible oils.

Over the last five years the Rogers Agriculture Total Return Index has posted an average annual loss of 0.3% per annum compared to big gains for crude oil, base metals, and precious metals. These guys have been left out in the cold. That won’t last.

The trend is turning for the grains, oilseeds, and eventually other edibles like livestock and the Breakfast Club—things like sugar, orange juice, coffee, and cocoa.

The world will remain hostage to unpredictable harvests, weather patterns, and the long-term problem posed by global population growth at the expense of arable land. This is a time-bomb waiting to happen.

From its all-time high in 2008, RJA is down [nearly 40%]. (It closed below $8 Tuesday—Editor.)

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