Eating never goes out of style, so why is the agriculture sector—and the exchange-traded funds that track it—seemingly undercooked?
One of the major investing themes supporting agriculture is demographics. The United Nations has forecasted there will be 9.7 billion mouths to feed by 2050, up from the current world population of 7.3 billion. And with the rising middle class in emerging markets, those people are likely to eat higher on the food chain and that means consuming more calories.
But the agriculture sector has been in a slump. Grain futures prices are down around 50 percent from the highs set in 2012. Prices for other U.S. agriculture futures such as livestock and cotton are off anywhere from 20 to 50 percent since their 2014 highs.
That’s somewhat reflected in the biggest agriculture-related exchanged traded funds. The VanEck Vectors Agribusiness ETF (MOO) has five-year annualized returns of 2.98 percent, and the largest ETF tracking commodity futures, the PowerShares DB Agriculture Fund (DBA), has annualized returns of negative 6.17 percent on a five-year basis and negative 2.05 percent on a 10-year basis, according to Morningstar. In contrast, the 10-year annualized track record for SPDR S&P 500 ETF Trust (SPY) is 6.94 percent and the five-year return is 13.34 percent.
People who follow this space say several factors are behind the low values, with the biggest being massive U.S. grain harvests for the past few years due to good growing conditions. Other parts of the world also saw several years of abundant harvests that overwhelmed demand. In other words, too much of a good thing.
In addition, the negative cash flow that has plagued U.S. farmers for the past four years has pinched their spending on new equipment, high-performance seed and costly fertilizer. That has rippled across agribusiness. Mike Zuzolo, president of Global Commodity Analytics and Consulting in Atchison, Kan., says he sees “an early 1980s scenario develop for the ag sector,” referring to the last U.S. farm crisis when big, overleveraged farmers declared bankruptcy and smaller farmers exited. Consolidation in agribusiness with some mergers and acquisitions is occurring now, too.
This could be the start of the agriculture sector turning around, Zuzolo says. If Mother Nature decides not to cooperate during the growing season and demand at least holds steady if not increases, the situation could turn rapidly.
“We can go from oversupply to undersupply in one year’s time,” says Shawn Hackett, president of Hackett Financial Advisors in Boca Raton, Fla. “The main story [feeding the world] is alive and well. It’s not a demand-side issue, it’s just that we’ve had really unusually good weather overall that produced a very large crop.”
According to ETFdb.com, there are 18 agriculture commodity-based ETFs and four agribusiness ETFs. Hackett says like other commodity producers, agribusiness companies’ earnings are cyclical, which means investors need to look at the median average of earnings to get a sense of how a company is doing.
While an ETF like MOO has what he considers to be the best risk-reward scenario for equity investors, Hackett thinks it may be too richly valued at this point.