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Agri investors may need to be more selective

CHICAGO - Since the start of 2011, investors looking for exposure to the agriculture arena have been better served by holding specific futures contracts rather than taking a ‘basket’ approach via funds that hold an array of agricultural commodities futures.

Even funds that hold stocks of agri-businesses such as seed giant Monsanto and tractor maker Deere & Co have outperformed funds that diversify holdings across agricultural futures.

For 2013, the more focused approach looks set to pay dividends again, as each of the main crop and agriculture product markets are being driven by starkly different fundamental stories that all but guarantees that a group-based approach will lag more selective strategies.

As commodity markets emerged as one of the hottest sectors to invest in over the past 5-10 years, a slew of sector-specific investment vehicles cropped up that promised investors superior return or risk diversification potential. In the agricultural space, the Deutsche Bank PowerShares Agriculture Fund has been one of the most popular options globally, with investors of all stripes finding the fund an attractive and convenient way to gain exposure to the world’s most widely traded agriculture commodities. The fund tracks the performance of the Deutsche Bank Agriculture Index, a rules-based index composed of futures contracts in corn, soybeans, wheat, cocoa, cattle and a number of other markets. Total net assets held by the fund peaked at close to $4 billion in March of 2011 as decent returns since its launch in 2007 drew widespread investor interest. An equally prominent vehicle in the equities arena has been ‘MOO’, the Market Vectors Agribusiness ETF (Exchange Traded Fund) which provides investors with exposure to the share prices of companies engaged in various aspects of agriculture, such as Monsanto (MON), the Potash Corporation of Saskatchewan, Inc and Deere & Co Holdings in this fund surpassed $6 billion this time a year ago, and it remains by far the largest agri-related vehicle in terms of overall holdings.

Other well known vehicles designed to offer exposure to the agricultural space include the iPath Exchange Traded Note (JJA), which is another index-based futures fund launched in 2007 that holds seven commodities futures that are rolled forward according to a pre-determined schedule, and DIRT, which was launched in 2011 and tweaks the futures basket approach a little by allowing the fund’s managers more flexibility when rolling positions into forward contracts.

Outright holdings in JJA and DIRT are substantially smaller than either MOO or the DB fund, but remain popular benchmarks for investors looking for broad exposure to the agriculture arena.

A popular, more focused vehicle is the Teucrium Corn Fund which is a Commodity Pool that confines its holdings to an array of CBOT corn futures contracts. The total value of the fund topped $130 million in mid-2011, and for most of its first year of existence managed to outperform front-month corn futures by a considerable margin.

However, with the exception of equities-based MOO, all of these vehicles have suffered from steep outflows of investor funds in recent months in a sign that investor interest in gaining or maintaining exposure to agricultural commodities could be waning. A graph of the price performance of these popular agri funds versus the price performance of front-month corn futures reveals a potential reason for the recent deflation in interest in the investment vehicles.