HardAssetsInvestor

Written by Brad Zigler  |

April 07, 2011

What’s Up With Agribusiness?

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Real-time Monetary Inflation (last 365 days): 2.4%

With all the hoopla about metals—the hardest of hard assets—the "softer" commodities often seem to fly under investors' radar. That's too bad. Agricultural commodities—a big chunk of broad-based commodity indexes—have fared well over the past 12 months. The CRB Continuous Commodity Index—an equal-weighted and broad-based futures benchmark—has gained nearly 39 percent, while the agriculture subset of the Deutsche Bank Liquid Commodity Index has risen almost 41 percent.

Investors unfriendly to commodity futures have gotten a nearly 26 percent return out of an investment in the Market Vectors Agribusiness ETF (NYSE Arca: MOO) in the past year. The MOO portfolio tracks an index of companies in the business of producing or processing agricultural commodities, including agrichemicals and farm equipment.

The disparity in ag stock performance and futures shouldn't be a surprise to readers of this column. We've been looking at the relative strength of equities vs. futures for some time now (see "With Ags, It's All Relative").

Futures notwithstanding, ag stocks are approaching a critical resistance level. Momentum has slowed as MOO rebounds from recent lows below the $50 level. The fund ended yesterday at $57.24, less than 70 cents below its February high.

Market Vectors Agribusiness (MOO)

Traders are pondering if the mid-March lows represent a true pivot point or a launching pad for an ultimate failure. If February's highs are taken out, there's upside room to the $65-66 level, effectively retracing all of MOO's 2008 nose dive. If sellers repel the advance, however, the fund's share price could slide to the $48-49 level before finding purchase.

At times like this, it's useful to peer into the option pits to see what those guys are up to. Options are great barometers of fear. You can gauge the fear in the ag market by tracking the cost of protective puts—options that grant their owners the right to sell MOO shares at a fixed price. These slightly out-of-the-money puts are insurance against dramatic declines in share value. Their premiums inflate along with investors' risk perceptions.

Put prices have been ticking up recently, but by no means to the degree their costs spiked ahead of the March swoon.

Agribusiness Put Index

The fact that price insurance isn't being sought by MOO holders bespeaks a more bullish market disposition.

Of course, the proof's in the pudding. That ought to be set very shortly.