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The Case for Investing in Agricultural Commodities, by Mish Schneider

U.S. markets have been choppy ahead of the elections as Nancy Pelosi challenges Steve Mnuchin to a fierce game of Pong.

Pong is a two-dimensional electronic sports game that simulates table tennis, however, the political version of Pong that Pelosi and Mnuchin are playing is three-dimensional and simulates the tabled stimulus.

When Pong first came out for release, the game was hailed for its “simple, intuitive gameplay.”

As the election deadline draws nearer, the political Pong has been anything but simple. In fact, that game is hailed for its counter-intuitive gameplay.

Hence, the market’s back and forth, sideways price action.

However, there are a few clearer and brighter spots in the market to focus on, not only in the next couple of weeks, but for the next several months at least.

Today, I am focusing on DBA, the Agricultural ETF.

 

Agricultural outperformance

This year, food prices in China have risen by 11.2%. With COVID-19, many other countries besides China are suffering from supply chain disruptions, low labor force and weather issues, which is creating significant food shortages.

Africa has a huge hunger pandemic with all the above issues along with locusts, which have ravaged millions of food acreage.

Economic conflicts are impacting the United States as well with many people that lost their jobs this year because of the pandemic, turning to food banks to ensure meals could be put on the table.

American experts predict the US will experience a massive food shortage within the next year.

The global overproduction of food that held commodity prices down for years has had a sea change. A “hoarding” mentality is starting to emerge with countries wanting to buy food now, and plant seeds later.

One way to invest in what I believe will turn out as a major food crisis leading to inflation or possibly stagflation, is to look at the ETFs specifically for wheat, corn, and soybeans.

All these commodities went up in price for the week, with most outperforming the overall market indices.

 

The agricultural ETF

Another way to invest in rising food prices, and global food shortages is through the ETF DBA.

DBA’s sector breakdown is 55.15% agriculture and 24.85% livestock.

DBA tracks an index of 10 agricultural commodity futures contracts. It selects contracts based on the shape of the futures curve to minimize contango.

The average daily volume is close to a million shares.

From a technical basis, DBA has cleared a key weekly moving average for the first time since late 2019. The monthly chart or longer-term trend, though, remains bearish. A monthly close over $15.40 will reverse an eight-year downtrend.

In the lower portion of the chart, I highlight is our proprietary indicator called Real Motion. The momentum has shifted to positive, outperforming price thereby creating a divergence. When this happens, we pay attention. If the price holds above the two daily moving averages, and now that it is above the key weekly moving average, we believe it is only a matter of time, the longer-term trend reverses as well.

Interesting to note is that Pong is part of the permanent collection of the Smithsonian Institution in Washington, D.C. due to its cultural impact. The same impact can happen when/if the stimulus passes as that too will have a huge cultural and financial impact.

The stimulus bill will indeed help folks in desperate need of money to help feed their families.

The bill could also turn out as a likely and unwelcomed catalyst for food inflation. Though, driving up money supply in an environment where food supply is diminishing is a topic for a future article. 

 

Bio

Michele 'Mish' Schneider currently serves as Director of Trading Research and Education at MarketGauge.com. She writes and produces daily market analysis in "Mish's Daily", and serves as a developer and trading mentor in several of our trading services, drawing on her 30+ Years of Trading and Teaching Experience.

Mish is a former floor trader on several New York Commodity Exchanges, including Coffee, Sugar and Cocoa, NYMEX and FINEX in NYC. While on the trading floor Mish also served as a market analyst for two of the largest commodity trading firms at the time - Continental Grain, and Conti-Commodities.

Mish also wrote the best-selling finance book, Plant Your Money Tree; A Guide To Growing Your Wealth.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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