Investing In The Crop Report

By Matthew McCall | October 25, 2010 AAA

In early April, the U.S. Department of Agriculture (USDA) released its most recent crop report, and the end result was agricultural commodities rallying to limit up levels. The USDA reported that the average yield-per-acre for this year's corn crop would drop to 115.8 bushels of corn, well below the prior estimate of 162.5 bushels per acre. The lower yield will result in the tightest supply and demand balance for corn in 14 years.
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The most influential factor affecting the supply issue for the agricultural commodities such as corn, wheat and soybeans is weather. Farmers in the U.S. had unusual floods in the spring, and the Midwest suffered through an abnormally hot summer. (For more, see Harvesting Crop Production Reports.)

The U.S. was not alone in experiencing inclement weather. Russia suffered its worst heat wave in over a century, sending wheat futures to a two-year high earlier this year. It was so bad that Russia, one of the world's largest producers of wheat, was forced to ban exports during the crisis. Brazil also took a hit after a lack of rainfall, pushing sugar prices up nearly 100% in a matter of months. The country is the world's largest producer of the sweet commodity.

Protecting Against Higher Agriculture Prices
To protect your portfolio and wallet against rising commodity prices, here are a few investments to consider:

The iPath Dow Jones-UBS Grains Subindex ETN (NYSE:JJG) invests in three commodities directly affected by weather and increased demand. The ETN has exposure to soybeans (38%), corn (37%) and wheat (25%) and it charges an annual expense ratio of 0.75%. The ETN has been volatile recently, and is up nearly 50% in the last four months.

An alternative is the PowerShares DB Agriculture ETF (NYSE:DBA), which has 34% of its assets in the three commodities mentioned above. The remaining 66% is spread across eight commodities in the agriculture sector. The ETF charges an annual expense ratio of 0.85%, and it has a similar chart to JJG over the last few months.

In lieu of investing in ETNs that track the price of commodities, there are the agricultural commodity stocks. The Market Vectors Agribusiness ETF (NYSE:MOO) is a basket of stocks in the sector that will benefit from higher prices in the commodities. The ETF recently broke out to the highest level in over two years on the back of rallying agriculture prices. The largest holdings in MOO are Deere (NYSE:DE), Mosaic (NYSE:MOS), Monsanto (NYSE:MON), Willmar International and Potash (NYSE:POT). (For more, see 5 Agriculture Stocks To Grow With.)

Deere is not an agricultural commodity company, but it is one of the largest farm and construction machinery firms in the world. The stock is trading at a two-year high and has a forward P/E ratio of 14.9. Even with the attractive valuation, it's wise to look for a pullback to the 50-day moving average, currently at the $70 area.

Mosaic is a more pure-play company in the industry, and is the maker of concentrated phosphate and potash crop nutrients. The stock has been on a tear since hitting a low in early July and now trades with a forward P/E ratio of 15.5. Similar to DE, the time to buy into MOS is on a pullback near the $60 area.

The Bottom Line
The entire sector has run-up recently, and with the news cycle hitting a high it has attracted a lot of new money. The key is to not chase performance and buy on weakness based on the long-term theme of the sector. (For more, see 3 Value Plays Revealed Using Forward P/E.)

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