While the Gulf Coast is dealing with far too much rain, food prices are reflecting the effects of the worst drought in 50 years in the corn-, soybean-, and wheat-raising areas of the US, to which are added the effects of drought conditions in Russia, the Ukraine, and Australia and the possibility that one or more countries will impose export controls. Although the threat of a repeat of the global food crisis of 2007-8 has moved off the front pages, this risk remains very real in our view. There have been a few developments since we last wrote on the subject. Several commodity ETFs that investors can use to get exposure to agricultural commodities are also discussed below.
On Friday, August 24 the Pro Farmer crop report for the United States corn crop was released. The Pro Farmer estimate of 10.478 billion bushels fell below the US Department of Agriculture’s already very low estimate of 10.78 billion bushels. The news was no better for soybeans. The Pro Farmer report’s estimate of the nation’s soybean crop was 2.6 billion bushels, compared with the USDA estimate of 2.69 billion bushels. The second largest corn exporter, after the US, is Argentina, which will begin planting in September. There are reports that, due to inadequate rain, their planted acreage will be reduced significantly. Argentine wheat producers have already curtailed their production materially, apparently because of uncertainty about the government’s new export quota system. In contrast, Brazil, the world’s fourth largest corn producer, has reported a 25% increase in its crop this year.
Over in Eastern Europe, Russia is the sixth largest exporter of corn and an important exporter of wheat, which accounts for some 80% of its grain exports. Russia has also been hit by a drought, which has reduced grain yields by more than 25%. The Russian government announced that it will not limit grain exports, as it did in the 2007-8 food crisis, even if its exportable surplus is exhausted. The Ukraine has also indicated that its grain exports will not be impeded, despite the drought in Eastern Europe. But the Ukrainian Grain Association complains that the quarantine office that inspects exports is impeding grain exports.
Last Tuesday the G20 reported that a Monday conference call concluded that, while rising corn, soybean, and wheat prices were “worrying,” they would not at this time schedule an emergency meeting to discuss the global food situation. They decided that because of stable rice prices, “… no threat is hanging over world food security.” They decided to await the next US crop report, at which time they will reassess the situation.
While “food security” possibly may not yet be threatened, world food prices clearly are under pressure. The World Bank just reported that world food prices jumped 10% in July. The FAO cereal price index rose 17% in July. The effects of such increases are more severe for developing countries than for advanced economies. While consumers in the advanced countries typically spend about 10% of their income on food, that share rises to 40% or more in countries like Egypt. In view also of the recent increases in oil prices, the only reason that overall inflation pressures have remained moderate in most countries has been the subdued pace of economic activity.
For investors interested in having exposure to commodity markets, there are a number of commodity ETFs, as well as exchange-traded notes, ETNs, available in the US market. We prefer ETFs, due to the credit risk of ETNs. In the agricultural commodity area there is only one ETF that is highly liquid, PowerShares DB Agricultural Fund (DBA), with a large ($2.1 billion) market capitalization. Over the past three months it is up 17%, but only 5% for the year-to-date. It steadily declined earlier in the year, until mid-June. The Teucrium corn fund, CORN, also has good liquidity, with a market capitalization of $90.1 million.
It surged upward after mid-June, rising some 41% over the past 3 months. Its year-to-date increase is about 23%. Please note that in both cases the performance in August was very flat. Teucrium also has a soybean ETF, SOYB, with a modest market capitalization of only $12.8 million, and a wheat ETF, WEAT, with a very small market capitalization of $3.1 million. For a more diversified commodity ETF, we use the PowerShares DB Commodity Index Tracking Fund, DBC, which is up about 14% over the past 3 months, and about 7% year-to-date. Its asset allocation is 55% energy and 22.5% agricultural commodities, the rest being metals.Bill Witherell, Chief Global Economist, email: email@example.com.
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About The Author
Bill WitherellChief Global Economist and Portfolio Manager
William Witherell joined Cumberland Advisors as Chief Global Economist in November 2005 and became a Portfolio Manager in December 2005. He is also a Senior Consultant for Finance and Corporate Governance to the Organization for Economic Cooperation and Development (OECD). From 1989 through September 2005, he was OECD’s Director for Financial and Enterprise Affairs. He joined the Secretariat of the OECD in Paris, France, in 1977.Dr. Witherell is a graduate of Colby College and holds M.A. and Ph.D. degrees in economics from Princeton University. Dr. Witherell began his career as a business economist with Exxon and Esso Eastern, from 1967 to 1973, where he held positions in the economics, treasury, and corporate planning functions. He moved to the international economic and financial relations field in 1973, with positions first in the U.S. Department of State and then in the Department of the Treasury, from 1974 to 1977, as Director of the Office of Financial Resources and Energy Finance.
Dr. Witherell currently resides in North Grafton, Massachusetts. He is a past Chairman of the International Roundtable of the National Association for Business Economics, and a member of the Boston Economic Club and the Westborough, MA Rotary Club.