Riding the Agricultural Commodities Rally with Exchange-Traded Products and Dividend Stocks

Published Tue, 9 Oct 2012 08:30 CET by TopYields.nl


This summer, the worst U.S. drought in 56 years pushed grains prices to record highs. Prices of commodities such as corn and soybeans surged to all-time records as crop yields were decimated amid the unseasonably dry weather (see charts below). While the current surge in grains prices will stimulate farmers to boost production for the coming year, the grains supply shortages, which drive surges in grains prices, could become a routine because of the projected increase in the global population and an expected deterioration in global weather conditions. Some renowned investors, such as Jim Rogers and George Soros, are betting big on this new trend in agricultural commodities. Based on analyses of climate, agriculture and water resources, a renowned value investor, GMO's Jeremy Grantham, is forecasting a severe and ongoing food crisis, recommending investors to structure portfolios with a focus on natural resource plays so as to maximize returns and prevent losses due to surging commodity and food prices, and a spike in inflation.

Corn Price Chart
Soybean Price Chart
Investors seeking exposures to the vibrant grains market have several investment choices, including exchange-traded products and stocks of dividend-yielding companies. There are a number of exchange-traded notes (ETNs) and exchange-traded funds (ETFs) providing access to the agricultural commodities market. For example, iPath Dow Jones UBS Grains Total Return Sub-Index (NYSE: JJG), ELEMENTS Exchange Traded Notes MLCX Grains Index-Total Return (NYSE: GRU), and iPath Pure Beta Grains (NYSE: WEET) are all exchange-traded notes, representing senior, unsecured, unsubordinated debt issued by underwriting banks with returns that are linked to the performance of specific benchmarks (in this case, the grains indices) or strategies.

There are also several ETFs that give investors access to agricultural commodities markets. The PowerShares DB Agriculture (NYSE: DBA) is one such ETF, which tracks the performance of a rules-based index comprising of futures contracts on some of the most liquid and widely traded agricultural commodities such as corn, wheat, soybeans, and sugar. Another broad agriculture-based ETF is the Teucrium Agricultural ETF (NYSE: TAGS), which invests a quarter of its value in each of its funds tracking individual agricultural commodities including corn, wheat, soybean, and sugar. The Teucrium funds family thus provides an opportunity to invest in individual grains types, such as corn, wheat, soybean, and sugar. For instance, the Teucrium Corn ETF (NYSE: CORN) is a pure play on corn futures prices. It is up 17% over the past year. The Teucrium Soybean ETF (NYSE: SOYB) is a pure play on soybean futures prices. That ETF has gained 19% over the past 12 months.

Furthermore, dividend-investors have an option to invest in several dividend-yielding stocks of agricultural commodities producers and seed developers. One dividend payer in the industry is Archer Daniels Midland (NYSE: ADM), which is a $17-billion world leader in the production of soy meal and oil, corn, wheat, and cocoa. Despite a contraction in its EPS over the past five years, on average, Archer Daniels Midland boosted its dividends at an average annual rate of 9.5% over the same period. Although the drought is adversely affecting the company's exports and squeezing profit margins, mainly on ethanol, the company is forecast to expand its EPS at an average annual rate of 10% per year for the next five years. ADM is currently paying a dividend yield of 2.5% on a payout ratio of 38%. The company is in a phase of an international expansion, which bodes well for future global sales capacity. The stock has seen some notable insider buying activity in recent months.

Another agricultural commodities play in the sector is ADM's competitor Bunge (NYSE: BG), a $10-billion processor and seller of agricultural commodities and commodity products, including oilseeds and grains such as soybeans, rapeseed, canola, sunflower seed, wheat and corn. It also sells fertilizer. The company's dividend is yielding 1.6% on a payout ratio of 22%. The company boosted its dividend at an average rate of 9.4% per year over the past five years. For the next five years, Bunge's EPS is expected to accelerate to 10.0% per year from 6.5% annually. The Bunge's stock is trading at a discount to its respective industry and appears to be undervalued based on the price-to-book and price-to-sales ratios.

Given that higher grains prices are stimulating higher future production, seed and herbicide producers are expected to fare well in that environment. Monsanto (NYSE: MON) is one such company. It pays a dividend yield of 1.6% on a payout ratio of 40%. The company's dividend increased at an average rate of 18.3% per year over the past five years. On a forward P/E basis, the stock is fairly priced relative to its respective industry. Billionaire hedge fund manager Stephen Mandel of Lone Pine Capital, who owns some $667 million in the stock, is bullish about the company's prospects.


Stock name Dividend Yield
Archer-daniels-midland 2.87
Bunge 2.82
Monsanto 2.11

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