Geopolitical Risk Hits Agriculture ETFs

August 11, 2014

Russian import bans are impacting agriculture ETFs.

Agriculture_ETFs_React_to_Russia

Chart courtesy of StockCharts.com

Commodity investing incurs unique geopolitical risk because of the globalized nature of commodities—a reality that has played out negatively over the past week. Commodities markets are usually localized in the short term; for example, agriculture goods are usually sourced regionally, but prices are ultimately interconnected globally.

Polish fruit farmers usually sell their goods to regional buyers at established prices but, for example, when Russia bans Polish fruit imports, farmers must look elsewhere. This amounts to excess supply flowing through global commodity markets, which drives down prices.

We saw this in action the week of Aug. 7, when Russia banned agricultural imports from the U.S., EU and other Western countries. With a large buyer is taken off the market, prices reacted immediately.

The PowerShares DBA Agriculture ETF (DBA | B-7) fell more than 2 percent, while the more specialized iPath Dow Jones-UBS Livestock Total Return ETN (COW | B-85) and the Teucrium Wheat ETF (WEAT) fell more than 3 percent on the heels of Russia's announcement. The drops highlight the point that saber-rattling between Western nations and Russia has real financial and economic ramifications.

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