The Upcoming Wheat Crisis

By Aaron Levitt | July 02, 2009 AAA

While most Americans have never heard of Ugandan 99 (Ug99) or Stem Rust fungus, it is a hugely growing concern in the world of agriculture and food production. Nearly 80% of the world's most widely grown crop is in danger, and farmers in the United States estimate that nearly 10 billion dollars of wheat could be lost if the fungus makes it to our shores. The fungus has been a problem in regions of Africa for many years; it has recently "jumped" the Red Sea and infected wheat in Iran. Scientists for International Centre for Agricultural Research in the Dry Areas (ICARDA) recently predicted that Ug99, which is typically spread via the wind, would soon affect additional farms in the Middle East, Central Asia, South Asia and East Asia. The International Maize and Wheat Improvement Center in Mexico estimates that nearly 19% of the world's total wheat production is in imminent and immediate danger of collapse.

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There is reason for concern. Looking back at history, various stem rust outbreaks in the United States between 1917 and 1935 were responsible for wiping out nearly 20% of the wheat production. In the 1950s, a particular strain of black rust destroyed nearly 40% of the spring wheat crop. And with the last major outbreak, which occurred in 1962, the fungus destroyed 5.2% of the U.S. wheat crop.

A Monumental Task
Germany's agricultural giant Syngenta (NYSE:SYT) is the leading producer of fungicides for stem rust. However, Ug99 is proving to be resistant to such applications. In addition, two recent variants of the pathogen have shown immunity to genes Sr24 and Sr36, the two genes that provide resistance in Eastern and Great Plains wheat; North America's major plantings. Crop scientists are now working at breakneck speeds on genetically modifying wheat seeds, a process that can take 9-12 years to fully introduce to fields. Nearly 50,000 wheat varieties are being tested for their virulence. So far, efforts are slow. Researchers in Kenya have only identified a small handful of promising results. Similar endeavors in the United States have produced plants that will stand up to Ug99. However this type of wheat produces very low yields.

How to Position Yourself
With agricultural researchers calling the crisis "inevitable," it may be prudent for investors to protect their portfolios from the upcoming inflation and supply shocks in the short term. In the long term, increasing global populations will continue to drive the demand for food.

With an almost 47% weighting towards wheat, the ELEMENTS MLCX Grains Index ETN (NYSE:GRU) will be a clear winner if the Ug99 fungus continues to wreak havoc on the worlds grain market. The fund also includes holdings in corn, soybeans and soybean meal. The exchange traded note is set to mature in February of 2023 and charges 0.75% annually. (See Trust In Jim Rodgers to read more on ELEMENTS notes)

Barclays competing iPath line of exchange traded notes also has a cereals focused fund. The iPath Dow Jones AIG Grains Sub-Index ETN (NYSE:JJG) includes a 25% weighting towards wheat and a longer maturity time line of 2037. The fund also charges 0.75% in expenses and features a low 33% correlation to the S&P 500.

For investors wanting to eliminate the added risk that comes with investing in exchange traded notes, PowerShares offers the DB Agriculture ETF (NYSE:DBA).The exchange traded fund actually holds futures contracts on four of the major agricultural commodities, including corn, sugar, soybeans and wheat. With base weights set at 25% each contract. The fund is also the most heavily traded on this list, with nearly 3 million shares daily. The DB Agriculture charges 0.91% in expenses, which includes a futures brokerage charge. There are special tax considerations with the ETF as it is set-up as limited partnership, so you may need to consult a tax specialist for your unique situation.

Bottom Line
The world's most widely grown crop in danger from a very deadly pest. The Ug99 fungus has the potential to wipe out vast swaths of worldwide wheat production causing inflation and price shocks. Investors can position themselves to take advantage and protect their portfolios. The proceeding exchange traded products offer an easy way to do that. (For further reading, see Exchange Traded Notes - An Alternative To ETFs and ETN Credit Risk May Outweigh Benefits For Some)

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