The prices of agricultural crops keep varying depending on the forces of demand and supply. In the agricultural profession where returns are unsure, agricultural crop price futures helped farmers and even middlemen to hedge against possible losses. Today, when prices of agricultural commodities keep rising, agriculture/crop price ETFs helps them to benefit from the high prices.
Retail investors were never much into agricultural crops. For them commodities like gold and oil were the weapons used to combat inflation and those were the commodities they invested in. But investors today realize that when inflation keeps raising its ugly head for whatever reason - excess money, high demand or supply shortage, the price of food commodities will surely go up even if gold and oil don’t. But trading in agricultural crop price futures pose risks for individual investors and agriculture/crop price ETFs are much safer and affordable.
Why Are Agriculture/Crop Price ETFs a Safe Bet In An Uncertain Market?
- Population Explosion: The population keeps on increasing year after year and this rising population has to be fed. Advances in health care have improved longevity which again adds to the demand for food.
- Shortage of land: The increasing population will naturally need more land. Lands used for farming are being converted for housing and industrial purposes, more so in developing countries. Rapidly declining land resources leads to fall in agricultural output which in turn spikes prices of agricultural products.
- Vagaries of weather: Agricultural crop yields are closely associated with the weather. Each crop has specific requirements of rainfall, humidity, temperature and sunlight. Often unsuitable weather results in crop failure and shortage in supply will push up prices.
- Advancement in Technology: A few food crops like sugarcane and corn are now used for purposes other than food. Innovation and development in technology has resulted in these crops being used for producing bio-fuel. This diversion of crops for other purposes reduces its availability for use as food, thereby resulting in a price rise.
- Government Policies: Ban on exports of certain food items by governments especially in developing countries, to keep down the prices at home, results in an artificial shortage which will impact prices.
So it makes perfect sense to have investments in Innovation and developments as a hedge against falling stock prices. This is one investment where the chances of price falls are very low except when there is oversupply or excess speculation.
Agriculture/Crop Price Etfs Invest In Agricultural Commodity Futures And Not In The Commodity Itself Due To The Following Reasons-
- The storage costs will be humongous.
- There is the risk of spoilage in case of agricultural products like food grains.
However, the fund will have to keep rolling the futures contract on the expiration of the current contract.
Different Kinds of Agriculture/Crop Price ETFs:
- Single Agricultural Crop ETF: This ETF is dedicated to one particular agricultural commodity say cotton or corn.
- Broad based Agriculture ETF: This ETF is exposed to a basket of commodities like coffee, sugar, wheat, cocoa and so on.
- Grain Commodity ETF: This ETF is only for grains like corn, soybeans and wheat.
- Agribusiness ETFs: This ETF is invested not in the agricultural commodity itself but in stocks of various companies which are into activities related to agriculture and farming. The drawback of such an ETF is that it is exposed to stock market variations.
The comparative safety of agriculture/crop price ETFs will surely attract more investors in the times to come.