ETF Spotlight: Diving Into Invesco’s Agriculture Fund

September 02, 2022

While corn, wheat and other agricultural commodities feed populations, they’re also used as pieces on the geopolitical chessboard.  

Russia’s invasion of Ukraine has created global grain shortages and pushed prices higher as Russia targets Ukraine’s agriculture and shipping sectors. For example, soft red winter wheat reached an all-time high this year. 

The Invesco DB Agriculture Fund (DBA) holds a portfolio of agricultural futures contracts with a significant weighting in soybeans, corn, and wheat. In late August, more than 40% of the ETF’s holdings were invested in the grain and oilseed futures markets. 

The odds favor high agricultural prices over the coming months and into next year as the 2022 harvest season begins in the Northern Hemisphere. DBA could be an excellent addition to portfolios for market participants looking for exposure to agricultural markets. 

War in Europe’s Breadbasket  

When Russia invaded Ukraine in February, the overwhelming force led many to believe the war would end quickly. Russia was wrong in its belief that Ukrainians would welcome the army, and the fighting continues as Ukraine refuses to capitulate.  

With Russia and Ukraine serving as Europe’s breadbaskets, grain and oilseed prices have continued to soar. 

 

 

The above chart highlights soft red winter wheat’s rise to an all-time peak of $14.2525 per bushel in March. At the $8.20 level on Aug. 29, CBOT wheat remains at the highest price since 2012.  

 

 

The above corn futures chart shows the rise to $8.27 per bushel in April, only 16.75 cents shy of the 2012 record high. At over $6.80 per bushel in late August, corn futures stand at the highest price since 2013.  

Fertile Acreage Into Minefields 

The war has turned fertile acreage into minefields. Russia is the world’s biggest exporter of wheat and the sixth-biggest corn exporter. Ukraine is the fourth-leading corn exporter, and Russia is sixth. The Black Sea ports have become a battlefield, preventing the normal flow of grains to worldwide consumers.  

A prolonged war leaves open the possibility of worldwide shortages, famine and continued inflation. As the world population nears 8 billion, supplies will struggle to keep pace with demand.  

And let’s not forget soaring fertilizer prices. 

DBA Is Liquid, Diversified  

While the Fed and other central banks worldwide have addressed inflation with higher interest rates, food supplies are a supply-side economic issue. Monetary policy can influence the demand side of the economy, but it has little impact on supply-side issues in the food and energy sectors.  

The most direct route for a risk position in agricultural commodities is via the futures and futures options traded on the CME’s CBOT division and other worldwide exchanges. DBA provides an alternative to the futures arena as it owns futures contracts in the leading agricultural commodities. At the $20.79 per share level, DBA had over $1.59 billion in assets under management. The ETF trades an average of over 1.4 million shares daily and charges a 0.93% management fee.  

The Trend Is Your Friend  

After reaching a pandemic-inspired low of $13.15 per share in June 2020, the trend in DBA has been higher.  

 

 

The chart above illustrates the path of higher lows and higher highs that took DBA to $23.01 per share in June 2022, a 75% rise from the June 2020 low. At the $20.79 level on Aug. 29, DBA was sitting not far below the recent high.  

The trend is always your best friend in markets, and remains higher in DBA. If the war continues, Europe’s breadbasket will not yield the corn and wheat necessary to fulfill worldwide requirements.  

Moreover, corn and soybeans are critical inputs in biofuel. Corn is the primary ingredient in U.S. ethanol, and soybeans are required for biodiesel production. With crude oil sitting around the $100 per barrel level and natural gas over $9 per MMBtu in the U.S. and higher in Europe, the highest energy prices in years put additional upside pressure on agricultural commodity prices. DBA could be a perfect addition for ETF investors looking to add agricultural exposure to their portfolios.  

Bull markets rarely move in straight lines, and corrections can be substantial. Buying DBA on price dips could be the optimal approach for ETF investors.  

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