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What You Need to Know

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What Are Agricultural ETFs?

Agricultural exchange-traded funds (ETFs) offer a convenient way to gain exposure to the agricultural sector. These funds track the performance of agricultural commodities, companies, and indexes. Unlike buying individual commodities or stocks, investing in an agricultural ETF gives you a diversified portfolio in this sector with shares that trade like stocks. These ETFs can provide a basket of different agricultural assets, from corn and wheat to companies specializing in farm equipment.

Key Takeaways

  • Agricultural exchange-traded funds (ETFs) expose investors to the agricultural sector and its potential for long-term growth.
  • There are two types of agricultural ETFs: those for agribusiness stocks and those for sector-specific commodities.
  • When investing in agricultural ETFs, you’ll need to review their expense ratios, liquidity, underlying assets, and performance history.
  • Top agricultural ETFs include Invesco DB Agriculture Fund (DBA), VanEck Vectors Agribusiness ETF (MOO), and iShares MSCI Global Agriculture Producers ETF (VEGI).

Understanding Agricultural ETFs

Agricultural ETFs work by pooling investor capital to buy a range of assets related to farming and agriculture. These ETFs then track the price movements of those assets.

When you invest in an agricultural ETF, you’re essentially buying shares in this portfolio. The value of your shares goes up or down with the fund’s performance. The fund is managed by authorized participants, who are there to ensure the ETF’s price reflects the value of its underlying assets.

There are two main types of agricultural ETFs:

  1. Those that invest in the stocks of agribusiness companies listed on stock exchanges, known as agribusiness ETFs.
  2. Those that invest in one or more agricultural commodities (either directly or indirectly using derivatives contracts).

Agribusiness ETFs

The first type of agricultural ETF focuses on investing in the stocks of agribusiness companies. These companies are involved in all or part of the agriculture supply chain, including production, processing, distribution, and retail. Investing in these ETFs exposes investors to seed and fertilizer manufacturers, farm machinery producers, food processing companies, and large-scale farming operations. Agribusiness ETFs offer a way to invest in the business side of agriculture, leveraging the potential growth of these companies.

These ETFs typically track an index comprising agribusiness stocks. Investors benefit from the diversification these ETFs offer since they are not tied to the performance of a single company but the collective performance of several. However, it’s important to note that investing in agribusiness stock ETFs also means exposure to risks typical in the stock market, including market volatility and company-specific risks. These ETFs generally suit investors interested in the agricultural sector’s growth potential but prefer publicly traded companies’ stability and established nature.

Agribusiness ETFs Compared
Symbol ETF Name Mandate Expense Ratio Total Assets ($MM) Avg Volume Dividend Yield
MOO VanEck Agribusiness ETF Selects pure-play agribusiness stocks whose revenues are more than 50% derived from agri-chemicals, animal health and fertilizers, seeds and traits, farm/irrigation equipment and machinery, aquaculture and fishing, livestock, cultivation, plantations, and trading of agricultural products. 0.53% $927 77,300 2.96%
VEGI iShares MSCI Agriculture Producers ETF Includes stocks of companies in both the developed and emerging markets involved in the production of fertilizers, agricultural chemicals and products, farm machinery, and parts, or in packaged food and meats. 0.39% $166 40,500 2.56%
FTAG First Trust Indxx Global Agriculture ETF Consists of the following sub-industries: chemicals and fertilizers, seed manufacturers, irrigation equipment providers, and farm machinery companies. The portfolio also includes farmland companies, a unique feature in global agriculture. 0.70% $12.4 6,000 3.11%
IVEG iShares Emergent Food and AgTech Multisector ETF Tracks an index of companies that are expected to benefit from the integration of new agricultural technologies or food products or services. 0.47% $4.8 1,000 2.43%
KROP Global X AgTech & Food Innovation ETF Passively invests in global companies working on advancing technologies in the agricultural and food industry spaces. 0.50% $4.7 3,000 1.38%
Source: ETF.com (figures as of January 2024)

Risks and benefits of agribusiness ETFs

The primary advantage of these ETFs lies in their diversification within the stock market, tapping into the growth potential of agribusiness companies driven by global food demand and technological advances. Investors can expect more stability than direct commodity investments, as these ETFs are tied to the performance of established companies.

However, they are not without risks, including market volatility and sector-specific and company-specific issues. These ETFs are best suited for investors seeking exposure to the agricultural sector through a traditional stock market approach, combining the potential for growth with the stability of established companies.

Agribusiness ETFs Pros & Cons

Pros

  • Allow profiting from production, distribution, and processing

  • Diversification within the sector

  • Professionally managed portfolios

Cons

  • Limited direct commodity exposure

  • Exposed to input cost inflation, food safety issues, and changing consumer preferences

Agricultural Commodity ETFs

The second type of agricultural ETF invests in agricultural commodities. These ETFs offer exposure to physical commodities like corn, soybeans, wheat, and cattle. Some invest directly in these commodities, but most use derivatives contracts such as futures and options to gain exposure. This approach allows investors to invest in the price moves of these commodities without the need to hold the physical goods.

Commodity-based agricultural ETFs are an excellent tool for investors looking to hedge against inflation or diversify their portfolios beyond traditional stocks and bonds. Since the performance of commodities is often uncorrelated to stock markets, they can provide a cushion during market downturns. However, these ETFs also come with their own risks. Commodity prices can be extremely volatile, influenced by weather conditions, geopolitical tensions, and changes in supply and demand. Additionally, investors need to be aware of the complexities of derivatives trading, such as the potential for contango and backwardation in the fund’s performance.

Agricultural Commodity ETFs Compared
Symbol ETF Name Mandate Expense Ratio Total Assets ($MM) Avg Volume
DBA Invesco DB Agriculture Fund Tracks an index of 10 agricultural commodity futures. This index includes corn, soybeans, wheat, Kansas City wheat, sugar, cocoa, coffee, cotton, live cattle, feeder cattle, and lean hogs. 0.93% $780 519,000
WEAT Teucrium Wheat Fund Tracks an index of wheat futures contracts, excluding front-month contracts. 2.80% $184 723,500
CORN Teucrium Corn Fund Tracks an index of corn futures contracts, excluding front-month contracts. 2.71% $85 48,100
SOYB Teucrium Soybean Fund Tracks an index of soybean futures contracts, excluding front-month contracts. 2.73% $30 19,700
CANE Teucrium Sugar Fund Tracks an index of sugarcane futures contracts, excluding front-month contracts. 2.80% $18 84,200
TAGS Teucrium Agricultural Fund A fund-of-funds that invests directly in the four Teucrium commodity funds. The fund rebalances daily to provide equal exposure to corn, wheat, sugar, and soybeans. 0.13% $19 4,200
OAIA Teucrium AiLA Long-Short Agriculture Strategy ETF Actively traded fund that provides broad long/short exposure to between one and nine commodity futures contracts. 1.63% $6.2 1,800
TILL Teucrium Agricultural Strategy No K-1 ETF An actively managed portfolio that holds four agricultural commodities futures contracts: corn, wheat, soybeans, and sugar. The contract selection is at the fund advisor’s discretion. 1.03% $4.2 1,600
Source: ETF.com (figures as of January 2024)

Risks and Benefits of Agricultural Commodity ETFs

Agricultural commodity ETFs offer more direct exposure to the commodities markets, specifically targeting agricultural products like grains, livestock, and related products. Their main benefit is providing a hedge against inflation and a diversification option that’s not typically correlated with the performance of the stock market. These ETFs can be attractive for their potential for high returns, especially during times of commodity scarcity or increased demand.

However, they come with inherent risks such as high volatility because of weather conditions and geopolitical events. Additionally, the use of derivatives in these ETFs adds a layer of complexity and risk, including the effects of contango and backwardation. Agricultural commodity ETFs are suitable for investors looking for direct exposure to the commodities market and willing to navigate the higher volatility for potentially greater returns.

Agricultural Commodity ETFs Pros & Cons

Pros

  • More direct tracking of specific commodity prices

  • Easier than trading directly in the commodities or derivatives markets directly

  • Could be a more effective inflation hedge

Cons

  • Use derivatives, which can be complex and carry additional risks like contango and backwardation.

  • Face more direct risks from bad weather, natural disasters, and sudden shifts in the supply and demand balance for the specific commodity.

Things to Consider When Investing in Agriculture ETFs

Here are some key factors to consider when evaluating agricultural ETFs:

  • Commodity exposure: Some agriculture ETFs focus on farming equipment, fertilizer producers, distributors, etc. Others directly or indirectly hold agricultural commodities. The latter tend to have more volatility.
  • Global diversification: Look for ETFs exposed to agriculture across geographies, including emerging markets with strong population growth. This mitigates weather effects or natural disasters that can impact production or distribution.
  • Supply chain positioning: ETFs focused on upstream producers face more weather risks vs. downstream processors and distributors with more diversified input sources.
  • Dividend potential: Some agribusiness companies offer attractive dividends that contribute to total returns. Commodities-based ETFs, however, do not pay dividends.
  • Environmental, social, and governance (ESG) criteria: Sustainable farming practices and other ESG criteria are increasingly important to many investors.
  • Costs: Compare expense ratios between ETFs with similar exposures. All else equal, funds with higher expense ratios will eat more into net returns.
  • Liquidity: Check that an ETF has enough assets under management, reasonable bid-ask spreads, and daily trading volumes for easy purchases and sales.
  • Index methods: Evaluate how the ETF’s underlying index is weighted among subsectors, market caps, geographies, etc.

Incorporating these factors into due diligence will help identify well-structured agricultural ETFs suited to an investor’s specific objectives and risk tolerance. Periodic rebalancing is also recommended to maintain target allocations over time.

Tax Considerations

Some commodity exchange-traded products are structured as limited partnerships (LPs). Investors in these ETFs might receive a Schedule K-1 for tax purposes, which can complicate tax filings as LPs pass through their income, gains, losses, and deductions to their investors.

Investments in certain types of commodity ETFs could also generate “unrelated business taxable income,” which can be an issue for tax-exempt investors like individual retirement account holders.

Commodity ETFs that hold futures may generate income subject to the blended 60/40 tax rates applied to Section 1256 contracts. This blend aims to balance short-term and long-term rates.

Investing in Agricultural ETF vs. Individual Agricultural Stocks v. Agribusiness ETFs

This table offers a snapshot comparison of investing in individual agricultural stocks compared with agriculture commodity ETFs and Agribusiness ETFs. When considering such an investment, it’s important to review each option in terms of your financial goals, risk tolerance, and market conditions.

Aspect Individual Agricultural Stocks Agribusiness ETFs Agricultural Commodity ETFs
Investment Focus Specific agricultural companies Range of companies in the agribusiness sector Agricultural commodities directly or via derivatives
Diversification Low, focused on individual companies Higher, across various companies in the sector Moderate, across different commodities
Market Exposure Direct exposure to company performance Exposure to the broader agribusiness sector Exposure to commodity market dynamics
Volatility Higher, subject to company-specific risks Moderate, diversified across multiple stocks High, subject to commodity market fluctuations
Potential for Growth Depends on individual company growth Depends on overall sector growth Depends on commodity market trends
Complexity Moderate, requires research on individual companies Lower, due to managed portfolio Higher, especially if ETF is using derivatives
Suitability Suitable for investors with specific knowledge or interest in a company Suitable for those seeking broad exposure to agribusiness Suitable for those looking to invest directly in commodities
Risk Management Requires active management and research Generally lower risk due to diversification within the sector Requires understanding of commodities and derivatives
Income Potential Dividends from individual companies Dividends based on the fund’s holdings Typically does not focus on income generation
Liquidity Varies based on the market involved Generally high, as ETFs are traded like stocks Generally moderate to high, but can vary based on the ETF

Is There an ETF that Invests in Farmland?

While there’s no specific ETF for investing exclusively in farmland, the First Trust Indxx Global Agriculture ETF (FTAG) comprises farmland companies and firms involved in chemicals & fertilizers, seeds, irrigation equipment, and farm machinery. Other agribusiness or agricultural commodity ETFs like MOO or DBA can give indirect exposure to farmland through the crops they produce or the equipment that farms them. This is mainly because ETFs are structured to hold securities like stocks and bonds rather than direct land holdings.

That said, at least two real estate investment trusts (REITs) hold primarily farmland. Like ETFs, REITs trade like shares on stock exchanges but own and manage real property on behalf of shareholders:

  • Gladstone Land Corporation (LAND): With farmland and farm facilities across the U.S., primarily targeting fruit and vegetable cropland.
  • Farmland Partners (FPI): purchases, leases, and manages farmland throughout North America, comprising more than 178,000 acres.

Are Agriculture ETFs a Good Long-Term Investment?

Whether agriculture ETFs have been a good investment in the past often depends on the specific time frame and the type of ETF. Historically, agriculture as a sector has shown mixed results. Their performance is closely tied to the agricultural commodities market, which can be highly volatile. Weather patterns, geopolitical events, global demand-supply dynamics, and economic trends significantly influence this sector. For instance, periods of commodity scarcity or booming global demand can lead to impressive returns, while oversupply or reduced demand can lead to underperformance.

Still, as the world population increases, so does the demand for food and related businesses. This fundamental need can drive long-term growth in the agriculture sector. Innovation in agricultural practices and sustainability measures can also boost productivity and efficiency in the industry, potentially benefiting agribusiness companies’ profitability.

Is Agriculture a Good Inflation Hedge?

Agriculture is often considered a good hedge against inflation, primarily because it involves tangible assets whose value can rise with increasing prices. The essential nature of agricultural products further ensures steady demand, which tends to remain resilient or even grow during inflationary periods, potentially leading to higher commodity prices. Additionally, supply constraints in agriculture, such as limited land and water resources, can further elevate prices when demand outstrips supply, especially during inflation.

Research shows that agricultural products, historically, have had the highest correlation with inflation compared with energy and industrial commodities, with grain commodities like barley, oats, and wheat exhibiting especially high inflation hedging capacity over the centuries.

However, since the second half of the 20th century, the correlation between agricultural commodities and inflation fell from the 0.6 range to just around 0.2, while energy commodities became a more effective hedge. The declining hedging capacity of agricultural commodities over time was attributed to the rising importance of industrial and energy commodities and greater diversity in consumption baskets determining inflation.

The Bottom Line

Investing in Agricultural ETFs offers a balanced mix of risk and potential reward. It allows investors to tap into the vital agricultural sector’s growth while providing diversification to stabilize their portfolio. Agribusiness ETFs invest in diversified portfolios of stocks related to the agriculture and farming industries, while commodities ETFs invest in one or more agricultural products like corn or wheat using derivatives contracts. Understanding the nuances, from expense ratios to global market influences, is key to making informed investment decisions in this field.

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