HardAssetsInvestor

Written by Amine Bouchentouf  |

January 17, 2012

The Commodity Investor: Ag ETFs Need Liquidity To Grow Into Mainstream Investments

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Nascent crop of agricultural exchange-traded funds lack depth and liquidity to become alternative to futures market, but they do offer easier access to investors.

Agriculture is becoming an increasingly important sector in the global commodities industrial complex. Sure, the energy sector still has the most liquidity and energy commodities such as crude oil and natural gas, which are written about on a daily basis. And the metals sector is closely followed by many mainstream participants, with many news outlets now dedicating key segments to discussing the daily gold price fluctuations.

But agriculture is becoming more mainstream as the sector gains the attention of sophisticated and regular investors alike. In late 2011, the United Nations officially declared that the human population crossed the 7 billion mark, which may have been the most important story of this century. The implications for countries, economies, people and investors around the world are truly staggering.

Agriculture Grabs The Spotlight

This population explosion is creating massive stress points between countries by creating large demands for basic commodities, particularly food items. That has increased attention and demand for agricultural commodities such as corn, wheat, soybeans and sugar.

When I wrote the latest edition of my book “Commodities For Dummies” in 2011, I drastically expanded the section on agriculture. In fact, I included a picture of a field of wheat on the cover, recognizing the increasing importance of the sector. By contrast, the cover of the first edition of “Commodities For Dummies” in 2007 was an offshore oil platform.

A few years ago, investing and trading agricultural products was reserved for a very small number of individuals. Unless you were a farmer in Iowa, Texas, Brazil or Ukraine, it was very difficult to get direct exposure to agricultural investments. The other direct way to acquire exposure was through futures contracts, but that entails a high degree of risk because of the leverage and volatility involved.

For many years, agriculture was the red-headed stepchild in the commodities family. Mainstream investors never gave it serious thought because of liquidity, volatility and other concerns. However, expanding populations keep demand for basic food staples such as corn, wheat and soybeans skyrocketing. Throw in technological developments and industrial consolidation, and agriculture investing is becoming more appealing to mainstream investors.

What’s On The Menu?

As a result of investor demand, both from a portfolio diversification standpoint as well as a pure alpha-strategy perspective, a large amount of products offering exposure to ags have hit the market recently. Average investors now have a plethora of exchange-traded funds (ETFs), exchange-traded notes (ETNs) and exchange-traded products (ETPs) to choose from.

If you’re looking for broad exposure to the agricultural sector, then take a look at the PowerShares DB Agriculture ETF (NYSE Arca: DBA). This ETF, sponsored by Deutsche Bank, offers you exposure to key grains such as corn, soybeans, wheat, sugar, coffee and cocoa; in addition, you also get exposure to livestock through live cattle and lean hogs. Considering that live cattle was the second-best-performing commodity in 2011, DBA is a good product for investors looking for the most widespread exposure to agriculture.

Those interested in single-commodity exposure have options as well. Teucrium Trading, a startup in the ETF space, has recently launched several single-name commodity ETFs. These include the Teucrium Corn Fund (NYSE Arca: CORN), Soybean Fund (NYSE Arca: SOYB), Sugar Fund (NYSE Arca: CANE) and Wheat Fund (NYSE Arca: WEAT).

The corn fund offers direct exposure to the corn futures contract traded on the Chicago Board of Trade (CBOT) and reflects the average settlement price of three key contract months. This offers the regular investor the opportunity to get exposure to corn without actually trading the physical contract on the CBOT.

Can this product be used by farmers and other physical users for hedging purposes? Theoretically yes, but the realities of the market indicate that in practice, it’s very tough to hedge using this ETF, or any other ETF for that matter. Hedging requires an active management strategy using calls, options, futures and other derivative instruments that a simple ETF or ETN cannot provide.

As far as shorting these single-name ETFs, it’s tough to do because the number of shares outstanding is miniscule, so it’s hard to borrow against them. For example, out of all the products that Teucrium has issued, the corn product is the largest fund even though it only has $66 million in assets; the sugar fund only has $2.3 million in assets tracking it.

I like that there are more options out there for investors to choose from to get exposure to agriculture; however, the liquidity and depth of market is not there at the moment. That said, I recommend continuing to monitor the market for liquidity and for new products that will help make your investing life easier.

Disclosure: The author doesn’t have any positions in the stocks mentioned.

Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the best-selling “Commodities For Dummies,” published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it. .