Investing in agriculture may seem like a good strategic move. After all, whether the overall economy is in recession or booming, people still have to eat. Because of this, investments in agriculture and livestock are viewed by many investors as recession-proof. Furthermore, the world’s population is increasing and agriculture will play an increasingly important role in sustaining global societies.
But we would not like to influence investors to buy a farm, which can require a large commitment of capital, time and effort. Fortunately, investors have many other means of achieving industry exposure, without seeing themselves as “little house on the prairie.” Investing in agriculture means investing the money in the production, processing and distribution of food and crops. Since the world needs to feed a growing population with access to less land, interest in agricultural production has grown along with the population.
The corn and soybean prices, two of the most important agricultural products, advanced this year after Chinese purchases and post-harvest stock reduction expectations. But trading in grain futures markets is not for everyone, it is quite complex and specialized. But there are funds that allow you to gain exposure to corn, soybeans, sugar and even wheat.
Generally when asking an investor if their portfolio is diversified and if they have a position in raw materials, those who answer that it is generally because they have a position in gold via ETFs or mining companies, but raw materials is more than gold or oil. Food is important and leaving aside discussions about the generation of CO2 by livestock, and that you may or may not disagree, cereals are an important part of everyone’s diet.
The commodities have replaced part of the bond allocation in a growing number of portfolios due to low interest rates and search for uncorrelation with equities, since it is today the main risk of portfolios given the strong rise in equities and that we see that investors continue to allocate money to that asset.
The world demand for cereals has increased steadily in recent decades, both due to the consumption of meat and the demand for ethanol, not forgetting the strong demand from China, which has caused the price of corn and soybeans to be boosted. Corn is up about 35% so far this year, but even for 2021 post-harvest contracts they remain high, while soybeans are up 16% in 2021. The outlook is that inventories remain low even in 2022.
How to invest in these and other commodities?
There are several alternatives, but the most used is via ETFs. In the case of WisdonTree, it has several types ranging from classic to “enhanced”. There are generic ones for agriculture and cereals, soft commodities (which includes cotton, orange juice and others) and specific ones for coffee, corn, cocoa, soybeans, sugar, etc.
Given that it is very difficult to find the best performing commodity (as with stocks) we always consider that it is better to diversify and buy a diversified basket or fund, and therefore the best option is the WisdomTree Agriculture, which is in the daily EUR hedging version. Have a TER of 0.49% and a total of assets amounting to 190 million dollars. The bottom reaches a profitability of 21.68% at the end of May and according to the latest Morningstar data it reaches 25.91% until June. The volatility is 15.85% with a ratio of Sharpe of 0.34. The portfolio is invested in a balanced way between US equities (54.4%) and Non-US (45.6%), with a small and micro equity orientation and value bias.