With low world stocks of food commodities, food prices are vulnerable to a production shortfall in one or more major production areas, says the USDA. If a significant shortfall occurs this year due to weather or disease, food prices might continue to rise sharply from the current high level. On the other hand, prices could retreat if weather cooperates and crop production increases.

While uncertainty is nothing new when it comes to commodity prices, the recent run-up has raised concerns about a sharp pullback. "As we learned from the credit bubble, the speculation chapter of a mania story can close quickly, even if the demand chapter is more slow-moving," warns Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. A slowdown in growth among major economies, she adds, "will unleash lower commodity prices."

Another warning note comes from Lehman Brothers analyst Edward Morse, who says a willingness among investors to chase returns on commodities is providing "fertile grounds for an asset bubble." The recent introduction of new funds that take short positions on commodities is one sign that the party in agricultural products and other commodities may be drawing to a close.

Others acknowledge that while there has been short-term speculation, longer-term trends such as sustained and strengthening demand from emerging economies provide ample fodder for higher commodity prices in the years ahead. "The rise in food prices is not a contrived scare. It's a powerful force," says David Hightower, editor of The Hightower Report, a Chicago-based commodities newsletter. "If speculation were the main factor driving up food prices, there would be a lot of supply building somewhere, and that isn't happening. The markets are only going to get tighter."

Advisors leaning toward Hightower's view who are interested in making a focused play on long-term food prices should check their portfolios to assess their current exposure to the agriculture sector. Harter, the Indiana financial advisor, invests only about 5% of his client's portfolios in investments tied directly to commodity prices because the clients also get a lot of indirect exposure through their diversified stock investments, as well as direct exposure through their livelihoods working in this industry.

Many mutual funds also invest in agribusinesses. According to Morningstar's database, a number of well-known funds, including Bridgeway Aggressive Investors, CGM Focus, Fidelity Independence and three funds by Janus, have from 18% to 23% of their assets in agriculture, agriculture machinery and agrochemical stocks. For those interested in broad, direct plays on commodity prices, several commodity ETFs-including iPath Dow Jones-AIG Commodity Index Total Return ETN (DJP) and the PowerShares Deutsche Bank Commodity Index Tracking Fund (DBC)-include agricultural products as well as energy, metals and other commodities.

    Most agricultural ETFs purchase futures contracts to track the price of a basket of commodities such as corn, wheat and soybeans. Commodity exchange-traded notes, or ETNs, are senior, unsecured debt designed to mimic the returns of an agricultural benchmark, less fees. Below is a sampling of available exchange-traded funds and exchange-traded notes that focus on the sector.
    PowerShares DB Agriculture Fund ETF (DBA): Introduced in January 2007 and valued at some $2.6 billion, it is the oldest, largest, and most liquid pure agricultural ETF play. The base allocation for the fund is equal billing for corn, sugar, soybeans and wheat, although those weightings shift with changes in the underlying futures prices.
    Van Eck Market Vectors Agribusiness ETF (MOO): With $1.5 billion in assets, this ETF introduced in August 2007 has its annual expenses capped at 0.65% of assets through April 2009. The market-cap-weighted index it is based on is designed to track the securities of companies involved in the agriculture business. It includes names such as Potash Corp., Monsanto and Deere & Co. Unlike its competitors, which use futures contracts on the underlying commodities, MOO's returns will be affected by underlying stock performance.
    iPath Dow Jones AIG Agriculture Total Return Sub-Index ETN (JJA): This Barclays offering follows the price of soybeans, corn, wheat, sugar, soybean oil, coffee and cotton, with the first two commodities representing nearly half of its underlying index weighing. With a narrow focus on wheat, soybeans and corn, the iPath Dow Jones AIG Grains ETN (JJG) offers a pure play on grains. Meanwhile, the iPath Dow Jones-AIG Commodity Index Total Return ETN (DJP) is based on a broader index that has about a one-third weighting in agricultural commodities and livestock.
    Elements ETN- Rogers Agriculture Trust (RJA): Based on a portion of the broadly diversified Rogers International Commodity Index, this exchange-traded note features a diverse cupboard of different agricultural commodities ranging from the familiar, such as wheat, corn, sugar and cattle, to the exotic, such as greasy wool and azuki beans, and it is the most diversified of the group.
    E-TRACS UBS Bloomberg CMCI Agriculture Index ETN (UAG): Broadly spread among a dozen agricultural commodities, this ETN has its largest presence in corn (19%) and wheat (16%).
    Opta Lehman Brothers Commodity Index Pure Beta Agriculture Total Return ETN (EOH): Soybeans dominate this six-month-old offering, accounting for 42% of the index on which it is based, followed by sugar at 15% and corn at 12%. Another Lehman Brothers ETN, the Opta LBCI Pure Beta Total Return Index (RAW) also provides exposure to agriculture and livestock and has a presence in energy and metals as well.

First « 1 2 » Next