How to Invest in Agriculture Using a Stock Brokerage Account
Many investors (including famed commodity investor Jim Rogers) think that we are in the midst of a long-term bull market for agricultural commodities. Commodities are increasingly being accepted as an important asset class. Commodities often have a low correlation to traditional investments like stocks. Therefore they are considered by some people as a good investment for diversification, and as a hedge against inflation. In relation to agriculture, many believe that the fundamentals support higher food prices in the long-term. If you agree, you should consider investing in agriculture. But most of can't just go out and buy a farm (and probably wouldn't want to anyway). Our main way to invest is with our stock brokerage account. So here's how to invest in agriculture using only your basic stock brokerage account.
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Instructions
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Consider very precisely where you want to place your bet. The first option is to invest in the agricultural commodities themselves (through ETFs or ETNs). Buying an agriculture commodity ETF is essentially a bet that the *price* of the commodity held by the ETF will go up. This investment will reward you if you are correct about the price movement of a commodity (say, wheat). The performance of any individual company involved in agriculture is mostly irrelevant, because a commodity ETF does not own companies. The ETF owns instruments that are tied to the trading price of the commodity. The second option is to invest in companies that you think will benefit from higher food prices and greater investment in agriculture. You can do this by buying individual stock in those companies, or you can buy an ETF that tracks agricultural companies (see links at the end of this article). For example, you might consider buying a company that sells fertilizer or agricultural equipment.
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If you decide that you want to own an agricultural commodity ETF, the next step is to decide whether to buy an index ETF or to buy an ETF that tracks an individual commodity. An index ETF buys a basket of different commodities. So this is a bet more on the performance of agriculture generally rather than on the performance of any one particular good. There are a couple of different index ETFs available. For example, the Powershares DB Agriculture ETF (ticker "DBA") invests in corn, sugar, wheat, and soybeans. The iPath Dow Jones AIG-Agriculture ETN (ticker JJA) is a little broader, and owns soybeans, corn, sugar, wheat, coffee, soybean oil, and cotton #2. The ELEMENTS Rogers Agriculture Index ETN (ticker RJA) is the presently broadest agriculture index ETN to my knowledge, and tracks 20 different agricultural commodities.
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If you are interested in more than one ETF that invest in the same or similar commodities, compare the expense ratios. The expense ratio is the amount (expressed as a % of the holding) per year that the ETF issuer charges. Sometimes there can be relatively large differences in expense ratios, so keep an eye on this.
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When you find the ticker symbol for the ETF that you like, log into your brokerage account and buy the ETF just as you would buy a stock.
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Tips & Warnings
Commodity ETFs have their own unique risks. For example, commodity ETFs may not exactly track the underlying index or agricultural item that they attempt to replicate. This may be because the ETF invests in futures contracts, and the process of "rolling" futures contracts can create tracking error. Tracking error means that your investment may not perform exactly as the index or particular commodity performs.
Commodity ETFs and ETNs often have different tax consequences than stocks or stock ETFs. Check with a financial planner or your tax adviser to understand these differences and to make sure that you choose the right product in light of your tax situation. This is beyond the scope of this one particular article.
Commodity ETNs (and even some commodity ETFs) may have what is commonly called "issuer risk". That is, the ETF or ETN may wholly or partially be composed of debt instruments underwritten by a financial company. The underwriting financial institution may default on its obligation (or fail altogether). So you may lose some or all of your investment, even if the underlying commodities perform as you expect. In other words, unlike a stock, which represents ownership in a company, a commodity ETF or ETN is composed of other financial instruments which have their own risks. Read the prospectus to understand the ETF better.
Resources
- Photo Credit U.S. Dept. of Agriculture (public domain)
