How to Invest in Agricultural Commodity ETFs

At the moment there are a good many investors who are concerned with the economy and inflation in general. While many markets suffer due to inflation, investing in the agriculture commodity ETF market is seen as a sound investment as inflation impacts this type of investment in a positive way. For a basic understanding of how the Agriculture Commodity ETF market works, consider the following information.

Sound Investments during Times of Inflation
One of the reasons why many investors put their money in gold and oil during periods of inflation is simply because history shows that this drives the prices up of both gold and oil. Of course investors want to get a piece of the pie if the price is going to go up because their stocks or futures will necessarily be worth more as a result. The same holds true for most agricultural commodities. It is statistically proven that when inflation runs rampant we pay much, much more for the food we eat. Inflation always equals higher prices at the grocery store, there is no doubt about it.

Agricultural Commodity ETF Explained
While Exchange Traded Funds (ETFs) can invest in a physical commodity that will be held in storage some are also futures contracts. Still others seek to track performance of a certain agricultural commodity index which could include a combination of individual commodities that are comprised of both derivatives and physical storage commodities. Agricultural Commodities are likely to include cocoa, cattle, corn, coffee, lean hogs, cotton and soybeans. By taking a quick look at that list it is easy to see how inflation could drive the prices up, especially of those commodities, which would make a bull market and would be great for a commodities investor.

Agricultural Commodity ETF Price Drivers

  • Global Population: Perhaps the most significant price driver is global population. As the population expands there is a greater demand for food and other agricultural products. One leading factor at the moment for such a high demand in Ag products, most especially corn, is the ethanol market because of a need for alternative fuel sources. This places a great strain on the amount of corn that will be available as a food source which isn’t great due to an expanding population.
  • Technological Developments: However, technological developments are also price drivers. This again places ethanol into the mix. Biofuel is a huge factor that drives agricultural commodity ETF prices and with each new innovation, prices in such commodities as corn are driven even higher because of supply and demand.
  • Weather Anomalies: There is one other factor that is considered to be a price driver and that is weather anomalies. Of course that stands to reason since one major weather event could wipe out an entire crop which would send the price of that commodity skyrocketing.

While ETFs can, in theory, buy and store the underlying commodities it would be both impractical and highly expensive. In the end, an Agriculture Commodity ETF will most often deal with futures. As this strategy tends to correlate to spot price movement, it is a strategy that is far removed from perfect, but the only viable way to avoid taking possession of the actual commodity. Even so, this is an up and coming investment vehicle simply because of the rising cost of agricultural products. On a global level food is becoming increasingly scarce and many countries are in political upheaval as a result. The impact on the Agricultural Commodity ETF market is evident as a result. For anyone who is looking for a bit of risk but a lot of potential for gain, investing in an Agricultural Commodity ETF does make sense.

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