How to Trade the “Food Revolution”

12/22/2009 12:01 am EST

Focus: ETFS

I wrote about the coming global food revolution as the “trade of the decade” earlier this week and highlighted some of the top stocks to consider: Archer Daniels Midland (ADM), Monsanto (MON), Potash (POT), Mosaic (MOS), and Deere & Co. (DE). What I forgot to mention was an easy and conservative way to get investment exposure to these names through the MarketVectors Agribusiness ETF (MOO).

These five stocks are in the top seven holdings in MOO and comprise approximately one-third of the ETF’s weight. MOO has rallied 80% since it’s March lows to a 15-month high of $45.57, and it’s up 125% from the $20 level it hit in November 2008. As I noted on Tuesday, ag stocks made significant lows during the height of the credit crisis, but did not make new lows in March, making this a leading industry group along with technology shares.

This ETF stands out among most “commodity” ETFs because it doesn’t use futures contracts or swaps to invest. This avoids the problems we see in ETFs for oil, natural gas, and grains like the USO, UNG, and PowerShares DB Agriculture Fund (DBA). Investors who thought they could capitalize on top commodity investor Jimmy Rogers’ thesis that agriculture has the most attractive fundamentals of any sector have probably bought DBA hoping to ride the wave.

But the truth is that DBA, which recently expanded from investing in corn, wheat, soybeans, and sugar futures to include soft commodities and livestock, has performed terribly relative to MOO, marking less than an 8% return in the past year. This is more proof that before you invest in an ETF, you need to understand what the holdings are and what they are trying to track. A basket of stocks in an industry group or sector might have much more predictable results than one that uses futures contracts and commodity swaps to create returns or track an opaque index.


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Opportunity on the Pullbacks

POT was down 11% last week. MOS was down 5%. MON was down nearly 4%. ADM has been essentially flat since its July highs above $32 and DE is still near its 52-week highs above $55. If you can’t pick which stocks to buy, or don’t have enough capital to place the right risk-appropriate bets, the MOO ETF might be the way to go. It allows you to buy them all and worry less about week-to-week fluctuations in this mega-investment trend that will carry on for years.

Plus, you get exposure to lots of other names besides these five, so you are diversified among many seed, fertilizer, machinery, and food competitors. And the global diversity among the companies means you gain broad expertise across many geographies and economies addressing the challenges of feeding the world. MOO is down about 3% this week, and looks like it should have good support between $40 and $42. Here’s the fund description from the Van Eck Web site:

“The Agribusiness ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal® Agribusiness Index. The Index provides exposure to companies worldwide that derive at least 50% of their revenues from the business of agriculture. As such, the Fund is subject to the risks of investing in this sector.”

By Kevin Cook of ONN.tv

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