Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
2013 will be an interesting year for investors. With so many unanswered questions, investors must decide how to best allocate their capital. One industry that I think will be strong is the agriculture space. Although there are several companies worth considering, I think a better play is to consider investing in an exchange traded fund. They offer the benefit of diversification, which in this case makes the most sense, as the industry as a whole is set to perform well. Below are two ETFs worth considering, especially in light of the possibility of inflation setting in towards the latter part of next year.
Why Agriculture?
If inflation sets in, one sure way to hedge is to get long agriculture. This typically includes fertilizer, grains, and foods. When the dollar weakens, these items become more expensive in real dollar costs. Additionally, with the world population continuing to increase, demand for these items will continue to be strong. Demand will particularly be strong in Asian nations, where both economies and populations continue to grow. Jim Rogers, a well-known advocate of owning hard assets, thinks the agriculture industry could have another 10 to 15 years of solid returns. If you share his belief, consider the two ETFs discussed below. They were selected because they offer investors the most liquidity, which unfortunately, not all ETFs are able to provide.
Market Vectors Agribusiness ETF (MOO)
Profile: The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal Agribusiness Index. The fund normally invests at least 80% of total assets in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture, which derive at least 50% of their total revenues from agribusiness. Such companies may include small- and medium-capitalization companies.
Top Holdings: The top holdings of MOO include Monsanto (MON), Potash (POT), and Deere & Co (DE). Together, the three companies account for roughly 21% of the total exposure of MOO.
Liquidity: The average daily volume of MOO is 542,000 shares, which offers investors ample opportunity to both enter and exit a position.
Technicals: MOO has had a 52 week trading range of $43.43 to $53.89. It closed today at $52.95 so clearly, the ETF has had a strong year, along with most of the agriculture industry.
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Purpose: MOO is the better of the two options for investors who want to have diversification in the equities world. Since all of MOO's holdings are equities, investors must evaluate the actual companies in the fund's portfolio.
- Monsanto : The company has a market cap of $49.3 billion and has an average stock volume of roughly 3 million shares a day. The company was founded in the early part of this century, but even as a relatively new company, has quite often found itself a top analyst pick. Monsanto has two main business units, which include seeds and genomics and agricultural productivity. The company is able to produce a wide variety of seeds including corn, soybeans, and canola. Additionally, the company develops biotechnology traits to help farmers control pest population. During the year, the company sported an impressive 25% growth in earnings. Also, Monsanto has a healthy balance sheet with $2.4 billion of free cash. This reinforces the strong fundamental environment in agriculture. In 2013, the company hopes to earn between $4.18 and $4.32 per share. That would make investors and analysts quite pleased, as Monsanto earned $3.70 in 2012. This reinforces the belief that the company has the right strategy in place. The company is also accelerating growth in Latin America.
- Potash : Potash is one of the largest and most recognized producers and sellers of fertilizers, industrial products, and feed products in the United States and Canada. Although the company hasn't enjoyed the same level of performance as Monsanto, Potash has reason for optimism. Potash demand is rising as of late. With the average age of farmers rising across the world, there is more pressure on them to maximize their crop yields. Its most recent Q3 earnings report indicated that Potash's earnings dropped to 74 cents, a 20 cent drop year over year from the previous 94 cents. Revenues also dropped to $2.143 billion vs. the prior year's quarter of $2. Additionally, Potash's offshore shipments were 1.1 million tons versus 1.4 million tons in the same period a year ago. Clearly, these were extremely disappointing numbers, especially when the agriculture market has been relatively strong. Although the company didn't perform as well in 2012, the CEO has forecast industry improvement for 2013. The forecast is for global potash shipments to rise to 58 million tons, which surpasses analyst forecasts for 56 million tons. Additionally, Potash CEO Bill Doyle expects China to sign new contracts with the firm.
- Deere & Co. : One of the richest men in the world, Bill Gates, owns 7% of the stock through his holding company, Cascade Investment. Warren Buffett's Berkshire Hathaway also owns 1% of the company. It's hard to argue with the fact that two of the most successful businessmen in the world believe in Deere. Deere announced record earnings on November 21. It recorded its best ever sales and earnings for the fourth quarter and fiscal year. The company also issued a forecast calling for continued growth in equipment sales and profits for 2013. For the quarter, net income rose to $688 million from the previous quarter in 2011 of $670 million. For 2012, net income increased to $3.065 billion from $2.8 billion in 2011. The company also projected that equipment sales should increase by 5% in 2013. What is really encouraging about Deere is that even though the company had to deal with a drought that plagued the U.S. during the summer, the stock still trades very close to a 52 week high. Pretty impressive. Additionally, the company derives two-thirds of its current sales in the U.S. alone. There is plenty of room for international growth, and the company appears to be making strides to capture more business overseas.
PowerShares DB Agriculture (DBA)
Profile: The investment seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index-Optimum Yield Agriculture Excess Return. The index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities like corn, wheat, soy beans and sugar. The index is intended to reflect the performance of the agricultural sector.
Top Holdings: The top holdings of DBA include a variety of futures contracts, which currently include sugar, live cattle, corn, soybeans, and cocoa.
Liquidity: The average daily volume of DBA is 697,000 shares, which offers investors ample opportunity to both enter and exit a position.
Technicals: DBA has had a 52 week trading range of $25.70 to $30.87. It closed today at $28.18, which is roughly in the middle of its yearly trading range.
Purpose: DBA is a better option for investors who want to have exposure to agriculture futures contracts rather than equity holdings.
Agriculture Risks
There are several risks to the industry that investors should be aware of. Potash providers had a less than stellar year in 2012. As a whole, companies in that segment reported lower than expected earnings numbers on the heels of fewer offshore shipments. In addition to that, agriculture is a supply and demand industry. Should there be any type of global recession, demand could be less than expected, causing a drop in prices across the board. This would have a negative impact on the performance of the two ETFs outlined in this article.
Conclusion
One of the biggest benefits of investing in an exchange traded fund is the chance to capture diversification. This is especially important for investors who feel strongly about a certain industry or sector, but aren't sure about which companies to invest in. MOO offers investors the chance to have exposure to a broad selection of equities, and DBA offers investors the chance to have exposure to a variety of futures contracts. Whatever your choice is, feel confident that agriculture is the right space in which to be invested.
Source: http://seekingalpha.com/article/1078461-2-agriculture-etfs-to-keep-an-eye-on?source=feed
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