NEW YORK (TheStreet) -- The agricultural industry started off this year on a strong note and continues to generate headlines regularly.
However, increasingly, this corner has become a choppy region of the marketplace. With the divergence in crop prices, the full-steam-ahead mentality that defined much of the opening half of the year has begun to fall by the wayside.
During the weeks and months ahead, agriculture bulls will want to maintain a conservative stance on this industry in order to avoid being taken to the slaughterhouse
Clear evidence of the shaky action taking place in the food industry can be found when looking at the family of "soft" agriculture of commodities, which includes coffee, sugar and cotton.
Since the start of May, sugar prices have been on a tear, powering along a nearly uninterrupted upward path. This dramatic rally has continued into July. Month to date, the futures-tracking
iPath Dow Jones UBS Sugar Subindex Total Return ETN
has ascended nearly 15% to all-time highs.
As sugar prices ascend higher, cotton prices have not fared as well. This crop, whose steep rise during the closing months of 2010 and start of 2011 made it a darling amongst agriculture bulls, has seen a steep decline during the past few months. Since the start of April, the
iPath Dow Jones UBS Cotton Subindex Total Return ETN
has tumbled as a result, retreating to levels last seen at the end of November 2010.
The action witnessed from sugar and cotton highlights the inherently volatile nature of single-crop commodity ETNs. On a number of occasions I have warned that, while during times of strength these products can be wildly attractive, the pendulum swings dramatically in both directions. Investors caught with heavy exposure to these products when they turn south can suffer gut-wrenching losses.
It is difficult to determine what is next for individual crops and oftentimes, products like SGG and BAL can find themselves jockeying between big gains and major losses on a day-to-day basis. While, with a keen eye and plenty of patience, an agile, risk tolerant trader may be able to harvesting some strength from these products, investors with a weaker stomach for risk will want to look elsewhere for agriculture exposure.
PowerShares DB Agriculture Fund
Market Vectors Agribusiness ETF
are two products investors can use to steady agriculture volatility.
The two funds take markedly different approaches to tracking this corner of the market. Whereas, like SGG and BAL, DBA tracks a basket of crop futures contracts, MOO provides investors with exposure to the largest and most recognizable companies dedicated to providing the farming industry with chemicals, equipment and other goods and services. Top holdings include
Potash of Saskatchewan
The ample diversification that comes with using DBA and MOO to satisfy agriculture demand will help shield the fund against rollercoaster action. However, there is a tradeoff. As evidenced by the two funds' action month-to-date, their respective upside action is noticeable restrained. During this period, DBA has jumped less than 2%, while MOO is up 7%.
I am confident that the food industry will remain in the headlines in the weeks and months ahead as expanding nations around the globe work to feed their growing populations. Harvesting gains from this sector, however, may prove to be a challenging task.
Single crop commodity funds like SGG and BAL can cause headaches for risk-adverse investors. Those looking to take a buy-and-hold approach to this region of the market will be best off setting aside a small chunk of their portfolio to a well diversified option like DBA or MOO.
Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion Money Management did not own any of the equities mentioned.