Down on the Farm

Crops and livestock are delivering among the biggest returns of any investment category so far in 2014.

With US stocks more or less flat so far this year, many food and grain commodities are up at least 15 percent. These include cattle, hogs, soybeans, wheat, corn, coffee and orange juice. The Commodities Research Bureau’s US Spot Foodstuff Index recently was up 19 percent in 2014.

As the Standard & Poor’s 500 surged 30 percent in 2013, the agricultural index tumbled 22 percent. There are several reasons for the reversal of fortune so far in 2014, all related to global supply problems.

These include cold weather in much of the US; drought in California, Brazil and elsewhere; a hog virus in the US; and concerns about exports of wheat and corn from the Ukraine and Russia.

Meanwhile, the Dept. of Labor’s Bureau of Labor Statistics says that the consumer price index rose just 1.1 percent in the 12 months through February. But the food index rose 0.4 percent in February alone, its largest increase since September 2011. The index for meats, poultry, fish, and eggs climbed 1.2 percent while fruits and vegetables rose 1.1 percent.

The supply disruptions may or may not hold true over the rest of the year. The US Dept. of Agriculture said this week that various measures of US food price inflation are expected to rise by 2.5-3.5 percent in 2014. This would be roughly in line with the historical norm, after subpar price increases last year.

But the USDA said its forecast was based on an assumption of normal weather conditions. The agency acknowledged that the ongoing drought in California could have “large and lasting effects on fruit, vegetable, dairy and egg prices.”

Taking the long view, the global population is expected to climb to 9 billion by 2050, up from 7 billion today.

The growth in population and food consumption will occur primarily in! the emerging markets. As incomes rise in the developing world, people eat more meat. Livestock production requires large quantities of grain and water. And water is becoming an ever-scarcer commodity.

Ways to Profit

There are several exchange-traded funds (ETFs) that track agricultural commodities. The biggest by far is PowerShares DB Agriculture Fund (DBA). After three consecutive down years, it has surged 17 percent so far this year.

The fund offers exposure to a basket of 15 agricultural commodity futures covering cattle, hogs, wheat, corn, soybeans, sugar, cocoa, coffee and more.

Among the 18 or so other agricultural commodities alternatives, almost all thinly traded, here are three standouts:

iPath DJ-UBS Livestock TR Sub-Index ETN (COW) has jumped 19 percent in 2014. It’s devoted to lean hogs and live cattle.iPath DJ-UBS Agriculture TR Sub-Index ETN (JJA) holds futures contracts for corn, soybeans, sugar, wheat, soybean oil, cotton and coffee. It has gained 16 percent over the year’s first three months.iPath DJ-UBS Grains TR Sub-Index ETN (JJG) holds corn, soybeans and wheat futures. It also has climbed 16 percent.Note that futures-based commodities exchange-traded products carry certain quirks that make them more complicated than vehicles that hold common stocks.

In the latter category, the leader and only practical choice for investing in agriculture-related issues is the highly liquid Market Vectors Agribusiness ETF (MOO).

The bad news is that this stock sector hasn’t caught on yet: The ETF is down 1 percent in 2014, after lagging the Standard & Poor’s 500 since 2011. But the good news is that the stocks are undervalued and out of favor, and a rally in this equity sector would suggest a longer-lasting advance for agricultural commodities.

You can buy either the Agribusiness ETF itself or choose among individual stock beneficiaries of a rebound in agriculture. The ETF’s largest stock holdings provide a goo! d shoppin! g list.

Among these are Syngenta (NYSE: SYT); Monsanto (NYSE: MON); Deere & Co. (NYSE: DE); Potash Corp. of Saskatchewan (NYSE: POT); Archer Daniels Midland (NYSE: ADM); Mosaic (NYSE: MOS); Agrium (NYSE: AGU); and CF Industries Holdings (NYSE: CF).