This year’s record advance in crop prices is drawing investors to U.S. agricultural funds for the first time since 2010.
Exchange-traded products tracking farm commodities grew by $542.7 million since the end of last year to $2.5 billion as of May 2, data compiled by Bloomberg show. The 27 percent gain since Dec. 31 follows three years of declines. Dry weather and shortages have investors betting the rally will continue, even as Goldman Sachs Group Inc. sees losses and Citigroup Inc. forecasts a correction should weather improve for farmers.
Hedge funds have increased their bullish bets by fivefold on agricultural futures this year as drought eroded prospects for Brazilian crops including coffee, sugar and soybeans, while shrinking U.S. herds sent meat prices to records. World food costs reached a 10-month high in March, and consumers in the U.S. are facing the fastest rate of food inflation since 2011.
“The bottom line is: crops are unreliable,” Sal Gilbertie, who helps manage about $145 million of assets as president and chief investment officer of Teucrium Trading LLC in Brattleboro, Vermont, said in a telephone interview on April 22. Having farm commodities “in a portfolio is going to be pretty important as the globe becomes more stressed from population,” he said.
Signs of stress already are emerging. Companies including Chipotle Mexican Grill Inc. and Kraft Foods Group Inc. are reporting bigger-than-expected gains in the cost of everything from beef and pork to dairy products and coffee, eroding profit margins and increasing the chances of higher prices on restaurant menus and grocery stores.
The Standard & Poor’s GSCI Index of eight crops rose 20 percent this year, the most for this date since at least 1970, exceeding the 2.8 percent gain in the energy-weighted S&P GSCI gauge of 24 commodities. The MSCI All-Country World index of equities added 1.3 percent, and the Bloomberg Treasury Bond Index rose 2.6 percent.
Flows into agriculture funds as of May 2 reached $107.17 million in 2014, headed for the first yearly inflows since 2010, according to data compiled by Bloomberg.
Demand for new shares of the PowerShares DB Agriculture Fund(NYSE: DBA), the most-traded ETF tracking crops, is up 9.6 percent this year, after a four-year slump of 47 percent through 2013. The iPath Dow Jones-UBS Livestock Total Return Sub-Index ETN(NYSE:COW), has climbed 15 percent, heading for the first yearly gain since 2010.