Index Funds Offer Ag Exposure

According to the World Bank, global food prices have risen 45% on average in the past nine months. Huge populations in India, China and other emerging markets are consuming a tremendous amount of food.

On top of all the growing consumption, much of the world's food supply is not eaten, but converted into biofuels. For example, 24% of last year's U.S. corn crop was used to produce ethanol.

Ethanol production is subsidized in the U.S., and that pushes up the price of corn. Unfortunately, ethanol is just not going to get the job done, because even if all of the grains harvested in America were converted to fuel, it would represent only about 15% of automobile needs. That is just not enough to make it practical, let alone cost-effective.

While much of the world is worried about getting food supplies in the future and having enough to eat, there are investment funds that have found an opportunity in this dire situation and are offering investors an easy way to invest in these assets. In the past week, at least four funds offering exposure to the performance of agricultural markets such as corn, wheat, rice and soybeans have been launched in Singapore.

In the U.S., agricultural-based commodity funds pop up as the demand for these products increase. Several of them have been around for quite some time and offer investors an easy way to have exposure to the actual commodities themselves.

Today, we're going to look at three of these funds.

PowerShares DB Agricultural Fund (DBA)

Click here for larger image.

Source: TC2000

The PowerShares DB Agricultural Fund (DBA - commentary - Cramer's Take) ETF was launched in 2007. It tracks the Deutsche Bank Liquid Commodity Index and invests in an equally weighted portfolio of wheat, corn, soybeans and sugar futures collateralized by U.S. Treasury securities.

You can see from the chart at right that the price has been trending down since the high in March. It has been unsuccessful in breaking back above 50-day moving average. The $36 level has thus far been able to hold, but technically it is forming a descending triangle; if it doesn't break above the upper boundary fairly soon, there is a good chance that the lower level will be breached. If that happens, I expect a test of at least the $34 level.

You can also see there is a negative divergence between the price and the money stream at the bottom of the chart. If the price can break above the $38 level, it would probably make a pretty good entry point as long as the money stream and heavier volume accompanied the move.

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Elements Linked to the Rogers International Commodity Index (RJA)

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Source: TC2000

The Elements Linked to the Rogers International Commodity Index (RJA - commentary - Cramer's Take) exchange-traded note (ETN) represents a basket of 20 agricultural commodity future contracts and tracks a sub-index of the Rogers International Commodity Index. Components of the index are weighted by global liquidity and consumption, and the weight is allocated to corn, wheat, cotton and soybeans.

This chart also looks a lot like the DBA chart, except it is little more volatile. Support here has been in the $11 range and if that level doesn't hold, there is a good chance it will test the November lows. There is also quite a bit resistance around the $12 area, and I would like to see a break above that before I would be willing to enter into a position.

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iPath Dow Jones AIG Livestock (COW)

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Source: TC2000

The increased global consumption of dairy and meat products has also contributed to pressure on the grain market. Asians used to be mostly vegetarian, but their economies are stronger today, so they can afford more meat and dairy products. This increased demand puts upward price pressure on grain prices because livestock consumes large quantities of feed.

That means that as the price of grain continues to increase, farmers will begin to slaughter more of their livestock and decrease breeding to cut down on increasing cost. That in turn will begin to throw the supply/demand situation out of balance and eventually create much more price inflation in the livestock area.

The iPath Dow Jones AIG Livestock Total Return (COW - commentary - Cramer's Take) ETN represents a benchmark for livestock. It's composed of cattle and hogs along with Treasury bills. You can see that this index has only been trading since October, and it immediately went into a downtrend that bottomed on the first of April.

It is right up against the $44 resistance level after making a head-and-shoulders type of bottom. As long as the price can hold up above this level, it may be worth taking a partial position with a stop under the $42 level.

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Jim Rogers, author of Hot Commodities, has said that agricultural investments are the most promising areas of the commodity sector and that their run could last at least another 10 years. This is also an area in which I'm very interested in re-establishing positions. As you can see, however, the technical picture for the first two charts is not very attractive. That means I will wait until they break out above the upper boundaries or form a better technical bottom to buy off of.

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At time of publication, Manning had no positions in the stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.

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