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Why Invest in an Agriculture ETF?

By Edited Apr 26, 2015 1 0

Using a Agriculture ETF to harness the coming bull market


It is obvious that the people that will make the most money buying an agricultural ETF investment will be the ones positioned the earliest. What is so compelling about owning a piece of the agriculture pie? Read on, what is developing could be a perfect storm for this asset class. 


A very hungry planet


To put it simply, people have to eat! The global population continues to rise, it just past 7 billion people. The eastern diet is shifting to include a more meat based diet. This in turn is putting pressure on grains to feed various animals for consumption. This trend is very likely to increase as societies become wealthier they tend to eat more meat.


There are other major factors at play in the global food agriculture picture. The continued depletion of  global fisheries is causing people to shift their diets also. On top of that there is a decrease in the amount of arable land due to soil erosion and mass urbanization. All of these factors point towards a long and sustained bull market in food. The ideal portfolio position would be long agricultural ETFs or a similar product to take advantage of these evolving fundamentals.



Peak oil and its potential impact on the agricultural ETF


Price increases in feedstock for petro chemicals used in farming are an obvious effect of peak oil. This will have a large impact on the cost of all agricultural products from coffee to corn to sugar. Fossil fuels are used in every step of the food supply chain.


Petro chemical based fertilizers and pesticides are utilized right from the get go. Don’t forget that all the mechanized farming equipment needs diesel fuel to operate. Once the agricultural product has been harvested it is transported to a facility for processing. The last leg of the journey from there can be thousands of miles to the supermarket and eventually the end consumer. Every single step along the way consumes vast amounts of energy.



Food in the gas tank


The increased use of corn based ethanol will only exacerbate the coming food shortage. There are other agricultural products used for ethanol also such as sugar. Brazil produces a lot of sugar based ethanol and, this is unlikely to change as they have a large infrastructure for this type of fuel. The continued and increased use of crop based ethanol is very likely considering environmental concerns. Many governments have legislation advocating increased ethanol production with tax incentives to boost.



How to choose the right agriculture ETF


There is a number of agriculture ETFs available on the market. The hard part is deciding on what commodity you think has the most upside potential. Pure corn or wheat ETFs are probably solid bets. If you can’t narrow it down to one or two types there are products that have a basket of agricultural products such as; sugar, corn, wheat, coffee etc.


Once you have decided on a specific fund review the prospectus. Looks for a proven track record with the management and, make sure their fees aren’t out of line with the industry peers. Remember you are trying to build your wealth not the fund managers. Also be aware that investing in commodities can be a bumpy ride. Things like currency valuations and weather can have a drastic impact on the price for all commodities. A bumper crop can cause significant price drops. That being said look  at the long term picture not day to day volatility.

Regardless of which fund you decide on always make sure and thoroughly research a prospective agriculture ETF before taking any position in it.

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