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Stock Picks

ETFs that play on the agricultural boom

By Jason Chow
Globe Investor Magazine Online, Dec. 14, 2007

Agriculture is one of the brightest spots in today's markets and one way to get a piece of the action is through an exchange traded fund.

Commodities such as soybeans, wheat and corn have all hit multiyear highs at some point this year and, according to a recent report by Toronto-Dominion Bank economist Derek Burleton, farm products are on average 40 per cent more expensive than they were a year ago.

The boom in commodity prices has translated into a boost in farm-related stocks. Two fertilizer companies, Potash Corp. and Hang Feng Evergreen Inc., for example, have outperformed Research in Motion this year on the Toronto Stock Exchange, gaining 179 per cent and 204 per cent respectively.

Even the typically sleepy Saskatchewan Wheat Pool has gained an impressive 40 per cent. It's the same story in the United States: Deere & Co., the makers of John Deere tractors, has gained 84 per cent since January, while seed company Monsanto Co. has almost doubled.

The agriculture boom has been fueled by an increase in worldwide demand for foodstuffs - the growing affluence of China and India are creating a growing appetite for North American products - as well as a boost in demand for corn, thanks to the American push towards ethanol. Many economists say global demand will sustain the inflated prices, if not push them even higher.

Two ETFs that specialize in the sector are coming to Canadian investors in the near future, while two more already trade in the United States.

Next week, ETF creators Claymore Investments Inc. will be starting a new fund named MFC Select Global Agriculture Index (COW/TSX) and its top holdings will include Monsanto, Potash and Syngenta AG. It will trade in Toronto. Also, BetaPro just filed a prospectus last week for a Horizons BetaPro Agriculture Bull Plus Fund and a subsequent mirror-opposite Bear Plus Fund of the same sector. The launch date on the Toronto exchange has yet to be announced.

In the U.S., PowerShares DB Agriculture Fund (DBA/AMEX) is an ETF that plays the commodities market and buys futures contracts in the four most-traded farm-related markets - soybeans, corn, sugar and wheat. The fund is almost evenly distributed between the four commodities, with a slightly heavier emphasis on soy. The fund is not only intended to closely resemble the roller-coaster ride that farmers endure each year come harvest time, but it also mirrors the performance of the Deutsche Bank Liquid Commodity Index, which also follows the ups and downs of those four markets. DBA charges a modest 0.75 per cent management fee and the shares have gained 30 per cent since inception in January.

Another fund, Market Vectors Agribusiness ETF (MOO/AMEX), invests in stocks instead of playing the commodity game. It tracks the DAXglobal Agribusiness Index (from the Frankfurt exchange) and its holdings span the world and different aspects of the sector. Lately, the portfolio has been heavy on the chemical and fertilizer companies - Mosaic Co., Monsanto Co. and Potash Corp are the ETF's top three holdings - but it also includes stakes in companies like Deere & Co., pork producer Tyson Foods Ltd., Japanese equipment maker Komatsu Ltd. and palm oil giant Wilmar International. It has gained 29 per cent since its inception in September and charges a management fee of 0.65 per cent.

Despite the great returns, agricultural ETFs remain an unknown quantity among investors. Both existing funds are less than a year old and neither have a market cap of more than $1-billion.

"This a great story and it's under the radar," says Tom Lydon, editor of etftrends.com in Newport Beach, Calif. "Now is the time to look at the sector"

If you believe there's more to reap from the agricultural boom - and Lydon thinks there is - then you could buy either fund, if not both. The PowerShares DBA fund may scare away some investors because it is only focused on four specific commodities but Lydon says the ETF should not be overlooked. For most individuals, this fund is likely the only way one can play those booming markets without losing their shirts in commodities trading.

"Buying futures on your own is risky and confusing and the PowerShares ETF packages it all together for you and makes it easy."

He adds that the Market Vectors Agribusiness fund is attractive because of its diverse portfolio that spans the globe and touches all aspects of the sector, from seeds and tractors to fertilizer and pork bellies.

"The whole farming industry is booming and there's a strong case to own these companies that have been struggling for so long," he says. "Global demand is strong and agricultural exports are rising [out of the U.S. and Canada]. The profitability of these companies is going to rise. And this sector won't go down if the rest of the market slows. When times get tough, people still have to eat."

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