Ride the Agricultural Boom Using the ETFs: DBA, RJA & MOO

The price of oil has been hitting new highs lately, and gold is worth more than ever. If you're interested in investing in commodities, but skittish about these two already highly priced items, you may want to look at agricultural goods. These have been rising in value too, recently, and, according to experts, they still have further to climb.

Why are agricultural goods getting more expensive? There are several reasons. The most obvious is that large areas of the world are developing rapidly. The growth of India and China alone - which make up more than a third of the world's population - is resulting in a sharp increase in demand for rice, soybeans and milk, for example.

As countries develop, their citizens don't just eat more, they also tend to eat higher protein foods. Thus, sales of pork and chicken have been rising as well, and this has driven up demand for the grains used to feed these animals.

The rise in oil prices has boosted the value of corn because the U.S. government is pushing corn-based ethanol as a way to reduce the country's dependency on foreign petroleum; and because farmland used to grow corn is also ideal for soybeans, this has made soybeans more dear too.

The increasing price of oil is making it more expensive to cultivate, harvest and transport all types of crops because petroleum used to power farm machinery, trucks and ships is getting more costly.

Climate change has also played a role. Water has become scarce in certain parts of the world (in sections of Australia, for example) and governments have had to either increase the price of water or reduce supply for agricultural purposes, or both.

Then, as always, there's speculation. Professional investors, seeing the momentum of rising prices in this sector, have no doubt piled on and driven the price of agricultural commodities up even further. It's unclear how much of the increase is due to this factor, but be aware that speculators can exacerbate both price upswings and downswings. Should they see prices falling over a period of time, they may bet against agricultural goods futures, thereby driving prices even lower.

Recently, however, prices have been going up. One way to gauge this increase is through the exchange-traded fund DBA, which tracks futures contracts (what investors think it will cost in the future) for corn, wheat, soybeans and sugar. Over the last six months (ending Jan. 14, 2008), this ETF has risen 31.48% in value. (All data compiled from Google Finance.) It may interest you to know that, over this same time frame, the U.S. stock market, as represented by the S&P 500 Index, has fallen 8.94%. Since Oct. 17, 2007, RJA, an ETF that tracks futures contracts for a basket of 20 agricultural commodities, has risen 14.51%. (DBA and RJA will be discussed in further detail below.)

What the Experts Say

The obvious questions to ask when seeing a performance record like this are: "Will I be buying in at the top?" and "Have agricultural commodities run their course?" I personally have no idea, so I'll let the experts speak for themselves:

Jim Rogers, a former investment partner of George Soros who has made a fortune investing in commodities, believes prices will rise further. "The commodities bull market still has years to go," he told Fortune Magazine in the Dec. 24, 2007, issue. The only thing that could rein in prices, he said, is an economic collapse. "But if that happens, everything else is going to be a much, much worse investment." ("Hog Wild for China," by Brian O'Keefe.)

In BusinessWeek's Jan. 7, 2008, issue, entitled, "Where to Invest," agribusiness is listed as one of the sectors with a positive outlook. "Prices for wheat, soybeans, and other farm products soared in 2007, and so have shares of companies that produce tractors, seeds, and fertilizer. Persistent droughts and booming demand from China and biofuel makers should keep prices high." (From the article, "Old MacDonald Had a Good Year," by Aaron Pressman.)

The Economist Magazine concurs with this viewpoint. "It is risky to predict long-run trends in farming - technology in particular always turns out unexpectedly - but most forecasters conclude ... that prices will stay high for as much as a decade." ("Food Prices: Cheap no More," Dec. 6, 2007)

How to Invest

So how does one go about investing in agricultural commodities? If you would rather not (or don't have enough money to) buy options at your nearest commodities exchange, there are three exchange-traded funds that should meet your needs: DBA, RJA and MOO.

DBA (PowerShares DB Agricultural Fund), mentioned above, is an ETF that tracks a commodities index managed by Deutsche Bank that includes corn, wheat, soy beans and sugar. This ETF is more popular than RJA and MOO, in that it's trading volume is about three times higher. DBA was launched on Jan. 5, 2007, and charges a management fee of 0.75% and an "estimated futures brokerage fee" of 0.16%. (These are expenses you will pay in addition to regular commission charges when you trade this ETF.)

RJA (managed by AB Svensk Exportkredit, the Swedish Export Credit Corporation), also mentioned above, is an ETF that tracks an index put out by Rogers International (owned by the famous Jim Rogers), that follows futures contracts for a basket of 20 agricultural commodities. Because it tracks more commodities, this ETF tends to be less volatile than DBA, and is preferred by some investors for this reason. RJA made its debut on Oct. 17, 2007, and carries a management fee of 0.75%.

MOO (Market Vectors - Agribusiness ETF), is an ETF sold by Van Eck Global, and has been on the market since Aug. 31, 2007. It tracks the DAXglobal Agribusiness Index, managed by Deutsche Borse AG, which includes 40 companies worldwide engaged in agriculture business. MOO carries a gross expense ratio of 1.07% and has risen 44.08% in value over the last six months.

Note that MOO differs from DBA and RJA in that it doesn't track commodities prices, but the share prices of companies involved in agriculture. Therefore it is not a pure agricultural commodities play.

For ease of reference, I've listed this information below:

Ticker: DBA
Name: PowerShares DB Agricultural Fund
Administrator: DB Commodity Services LLC
Purpose: tracks corn, wheat, soybean & sugar futures
Management Fee: 0.75%
Estimated Futures Brokerage Fee: 0.16%
Inception: Jan. 5, 2007
Performance: +31.48% (over last 6 mos.)

Ticker: RJA
Name: Elements Linked to the Rogers Int'l Commodity Index - Agricultural Total Return
Purpose: tracks futures of 20 commodities
Administrator: AB Svensk Exportkredit (Swedish Export Credit Corp.)
Management Fee: 0.75%
Inception: Oct. 17, 2007
Performance: +14.51% (since inception)

Ticker: MOO
Name: Market Vectors - Agribusiness ETF
Administrator: Van Eck Global
Purpose: tracks 40 agribusinesses worldwide
Gross Expense Ratio: 1.07%
Inception: Aug. 31, 2007
Performance: +44.08% (over last 6 mos.)

NOTE: You invest at your own risk. The author and this website cannot be held responsible for investment losses incurred by readers of this article. (Be careful. You could lose your shirt.)