The world food index tracked by the United Nations rose to an all time high in February, indicating that food prices continue to rise and are likely to remain elevated in the near term future, providing positive price support to the PowerShares DB Agriculture Fund (DBA), UBS E-TRACS CMCI Food TR ETN (FUD) and the Market Vectors Agribusiness ETF (MOO).
The underlying force behind this price surge is an imbalance is supply and demand, which is likely to prevail for many years to come. On the demand side, the United Nation’s Food and Agriculture Organization estimates the world population to swelter to 9 billion over the next 40 years pushing organic demand for food up. Furthermore, consumers in developing nations are witnessing increasing purchasing power and a widening middle class giving them the ability to consume more meat, dairy and grains than ever before. As for the future of these nations, the International Monetary Fund expects emerging markets to continue to be at the forefront of economic growth, therefore supporting demand for livestock, dairy and grains.
As for supply of food, constraints and pressures are likely to continue to prevail in the near term. Food producers are likely to increase production as microeconomic forces dictate, but this will take years and years to implement and influence market prices. To put it into perspective, food output will have to increase by nearly 70 percent over the next four decades to keep up with demand. In fact, the US Department of Agriculture suggests that global inventories for all grains will drop by nearly 13 percent before the next harvest, marking the first supply decline since 2007.
To make things even worse, high inflation caused by rising food prices in developing nations has lead to political unrest and instability, which has further lead to positive price support driven by speculation.
At the end of the day, food prices are expected to remain high and are likely to continue to see an upward trend as global demand continues to outpace supply.
As mentioned above, some ETFs influenced by food prices include:
- PowerShares DB Agriculture Fund (DBA), which gives exposure to cattle, soybeans, sugar, corn, coffee, cocoa, wheat, lean hogs and cotton.
- UBS E-TRACS CMCI Food TR ETN (FUD), which seeks to replicate the collateralized returns of a basket of 11 futures contracts from the agricultural and livestock sectors.
- Market Vectors Agribusiness ETF (MOO), which is a diversified equity play on natural resource companies and includes Potash Corporation of Saskatchewan (POT), Deere & Company (DE) and Monsanto Company (MON) in its top holdings.
Disclosure: No Positions