Ag ETFs on a roll

Coffee, Pork

By far the biggest gain in major agricultural markets this year was in arabica-coffee futures(NYBOT:KCN14), which surged 83 percent and reached a 26-month high on April 23. Crops in Brazil, the top grower and exporter, have been ravaged by the worst drought in decades. Prices may average $1.90 a pound in the second quarter, compared with $1.53 in the first quarter, Rabobank International projected in a report e-mailed on April 29.

Livestock(CME: LCM14) prices rallied to records, led by a 44 percent gain in Chicago hog futures as a deadly virus spread to at least 29 states, killing piglets. Hog production may slump as much as 8 percent in the third quarter, spurring price gains of as much as a 25 percent, said Howard Hill, president of the National Pork Producers Council.

The feedlot herd unexpectedly fell in March from a year earlier, sending the price of feeder cattle to a record on May 2. Ranchers are holding back female cows for breeding, tightening supplies even further after the U.S. cattle herd started 2014 at the smallest in 63 years.

‘Transient Events’

Some analysts don’t expect the agriculture rally to last. Many of the gains this year were based on “transient events,” Jeffrey Currie, Goldman’s head of commodities research in New York said in an April 13 report. Weather and the tensions in Ukraine spurred higher prices in natural gas, gold and agriculture prices, the bank said. Goldman forecasts a “downside” for agriculture unless there’s an unfavorable growing season, according to the report, which noted there may be some adverse weather after the Brazilian drought and forecasts for an El Nino weather pattern.

Citigroup, in an April 24 report, said normal and favorable growing conditions are expected in the U.S., the world’s biggest producer of corn and soybeans and the top exporter of wheat. While tight balances, premiums from weather risk, strong export sales, and “geopolitical heat” in the Black Sea are supportive this quarter, rising supplies later this year will pressure prices, the bank said

Agriculture ETFs make up 3.6 percent of the $69.4 billion in commodity exchange-trade funds, compared with 74 percent, or $51.3 billion, in precious metals, Bloomberg data show.

Bullish Speculators

Hedge funds are betting that agriculture prices will keep rising. A measure of net-long positions across 11 agricultural commodities climbed more than 400 percent to 1.07 million contracts since the end of December, U.S. Commodity Futures Trading Commission data show.

Costs are rising for consumers, who will pay as much as 3.5 percent more for food this year, the USDA has projected. That’s the fastest rise in three years, with retail ground-beef, pork chops and processed American cheese reaching records in March, according to Bureau of Labor Statistics data.

“We’re trying to feed a growing global population,” said Brett Hundley, an analyst at Richmond, Virginia-based BB&T Capital Markets. “Investors see that, and they want a piece of the action. Agriculture this year is seeing a little bit of a revival.”

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