Agriculturally Speaking

The importance of growing and protecting food crops received extra attention this year as rising oil prices pushed grocery prices for milk and eggs upward. As oil prices have retreated below the psychological barrier of $100 a barrel, agricultural investments have also fallen. Investors looking for an agricultural ETF for their portfolio can choose between one that focuses on agribusiness and another that focuses on agricultural futures contracts. (To learn more about sector ETFs, check out Singling Out Sector ETFs.)

Agribusiness

The Market Vectors Agribusiness ETF (AMEX:MOO) invests in companies that play a role in the digging, planting, seeding and maintenance of food crops around the world. While most of the fund's $1.6 billion in net assets is invested in U.S.-based companies like farm and construction machinery maker Deere & Co (NYSE:DE) and soil nutrient maker Mosaic Co (NYSE:MOS), the remainder is focused across a range of countries. For example, among MOO's top holdings are Switzerland-based herbicide producer Syngenta AG (NYSE:SYT) and Canada's fertilizer and feed maker Potash Corp of Saskatchewan (NYSE:POT).

Negative to Positive

MOO has declined about 21% since the beginning of the year as portfolio holdings like the S&P 500 Index member Deere lost nearly 34% of its value during that time frame. Deere may be undervalued at its current $62 price range. With a price/earnings to growth ratio of about 1.16 and an equally low price-to-sales ratio below 1, value investors should give the depressed stock price of Deere some attention as a possible recovery story once commodity prices move to the upside. (To gain better insight into some of the more actively followed commodities, check out Commmodities That Move The Markets.)

Agricultural Futures

The PowerShares DB Agriculture ETF (AMEX:DBA) invests in futures contracts tied to the supply and demand constraints of its underlying commodities. More than 60% of DBA's roughly $2 billion in assets is invested in soybean, sugar No.11 and wheat futures contracts (as of July 31). A large portion of the fund's balance is invested in corn futures contracts.

At the beginning of 2008, agricultural commodities made strong price increases, but sugar and wheat began their retreat in March while corn and soybean prices began their decent in July. Despite the recent pullback, DBA managed to return about -1.94% year to date. Climate-control concerns, land maintenance and competition between the use of crops for food versus fuel suggest more up-and-down swings in agricultural commodities for years to come.

Final Thoughts

Investors should keep in mind that there's no rule against owning two or more investments related to any one sector. The combination of MOO's agribusiness focus and DBA's commodities base could lead to less volatility over time, easing a portfolio's exposure to the unpredictability of future oil prices.

To gain additional insight into what factors can influence oil prices, see What Determines Oil Prices.