Amid the hubbub surrounding the confirmation hearings for lofty cabinet offices at the State, Treasury and Defense departments, it was perhaps easy to miss the fact that there’s been no nominee advanced for Secretary of Agriculture—not yet anyway.
The same goes for the marketplace as well. With investor interest riveted on equities, gold and bonds, the quiet buildup in agricultural prices has basically gone unnoticed. Coffee prices have soared 11 percent since the top of the year, wheat has jumped 8 percent and soybean prices have climbed 6 percent. However, gold is only up 5 percent, stocks are eking out a 1 percent advance and 10-year note prices are still struggling to reach a 1 percent gain.
All that has pushed the PowerShares DB Agricultural Fund (NYSE Arca: DBA) up 5 percent this month. DBA tracks an index of 10 agricultural (“ag”) futures contracts, including livestock, grains and so-called “soft” commodities. Buying DBA gives an investor instantaneous long exposure to the whole ag sector as depicted in the table below.
So why would an investor care about ags? Why would anyone devote portfolio space to this sector? Well, first of all, there’s the inflation story. Did you see the CPI figures released Wednesday? The year-over-year inflation index rate notched its first reading over 2 percent since mid-2014. CPI’s annual rate of gain has been rising unabated since July. Food prices are often a bellwether for generalized inflation.
Second, there’s the technical pattern exhibited by the DBA fund: a double bottom at the $19.60 level followed by an upside breakout to challenge resistance at $21. Once clear of resistance, a pathway to the $22.45 level is open. Based on today’s price, that’s an 8 percent advance. Not a ten-bagger certainly, but it’s no stick in the eye, either.
Which brings us to a third reason. Ags are a diversifier. DBA’s r2 (r-squared) correlation to the broad U.S. stock market is only 10 percent. The fund’s r2 versus medium-term Treasury notes is negligible (.05 percent). In this market, risk diversification is more important than ever.
Right now, a DBA bet is relatively low-risk trade, unlike a nomination for Secretary of Agriculture.
Brad Zigler is WealthManagement.com's Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.