For investors seeking commodity exposure outside of energy and metals, the PowerShares DB Agriculture Fund (NYSEARCA: DBA) holds contracts on 10 different soft commodities, including livestock, cocoa and sugar. The fund takes a different approach with its futures contracts than most exchange-traded funds (ETFs), which typically roll contracts to the next front month prior to expiration. Instead, DBA selects the length of its contracts to minimize or avoid contango, which can generate incremental losses when expiring contracts are automatically rolled into front month contracts with lower prices.
As of April 6, 2016, the fund had its four largest allocations in futures contracts for corn, live cattle, soybeans and sugar no. 11 (raw sugar). Each allocation represented 12.5% of the portfolio. The remaining 50% of the portfolio was distributed over six commodities, including cocoa at 11.11%, the coffee futures C contract (Arabica coffee) with 11.11% and lean hogs at 8.33%.
DBA had $678.17 million in assets under management (AUM) and averaged $6.75 million in daily volume, as of April 6, 2016. The ETF is structured as a commodity pool, meaning that investors receive a Schedule K-1 form, which reports internal gains generated by the fund at tax time, even if shares are not sold. Like the hard commodities sectors, agricultural commodities have generally trended downward since 2012. During this period, the fund has traded with seasonal patterns for increases in share prices as well as declines.
Fund Performance Since 2012
The agricultural commodities, since 2012, have suffered from the same supply/demand issues as the energy and metals sectors: oversupply combined with sluggish growth in demand. From 2012 through 2015, demand remained tepid due to slowing global economic growth. By 2015, China had become one of the primary drivers of the slide in agricultural commodity prices by reducing imports, thus lowering demand, and exporting stockpiled inventory such as grains, which added to global supplies.
In most economic models, stagnant demand results in diminishing supply levels until equilibrium is reached between the two forces. The period from 2012 through 2015, however, has been unusual because commodity production in virtually all categories has remained constant or declined only minimally. As a result, DBA has recorded losses in three of the last four years. In 2012 and 2013, the fund had an average yearly loss of 8.23%. However, the share price increased in 2014, delivering a return of 2.64%. The worst performance in the period occurred in 2015, which recorded a loss of 17.2% as slowing demand and concerns over a global recession weighed on commodity and share prices throughout the year. The average yearly return from 2012 to 2015 was -7.75%. The fund’s year-to-date return is 2.09%.
Seasonal Trading Patterns
Buying patterns for the shares of DBA have been somewhat inconsistent. Since 2012, the best month for the fund has been June, with an average monthly return of 3%. February has delivered an average return of 1.22%, due to a gain of 11% in 2014. Selling patterns are more clearly defined, as two months have delivered negative returns every year since 2010. Since 2012, the average monthly loss for May is 3.65%. November has an average loss of 1.3% over the last four years. On a sequential basis, in 2014, the fund had negative returns over five consecutive months from May to September. Over that span, DBA had an average monthly loss of 2.66%. After an increase in October of 0.4%, the fund generated losses from November through March 2015, averaging a loss of 2.86% per month.
The Bottom Line
Soft commodities have been pressured by the issues of slack demand and oversupply across all categories since 2012. After hitting its high for the year at $30.42 in August 2012, the fund had negative returns in three of four years, declining to a low of $19.55 in February 2016. Over that period, DBA lost 35.7% in share value. With steady pressure on share prices, seasonality trends for price increases are limited. However, there have been several noticeable selling trends, including 12 straight months of negative returns between May and November since 2010. The fund also had a long sequence of losses from May 2014 through March 2015. During that span, DBA had negative returns in 10 of 11 months and lost 23.9% in share value.