The Value Of Indices In Global Farming Investments (MOO, COW, EEM, DBA, TSN, ADM, POT, MON)

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January 22, 2012 10:11pm NYSE:COW NYSE:DBA

Alan Price: Each New Year brings with it a number of questions for investors: Am I investing in the right place? Should I be taking more or less of a risk? Should I have a more diverse portfolio?

Those in doubt should not panic, but take time to assess ETF sectors they may not have previously considered. At Indxis, we firmly believe 2012 is the year for investing in agriculture – a sector with enormous, oft overlooked potential.

For a number of years, investors have seen the value of investing in farming, either by buying a farm outright or by investing in targeted subsectors, such as machinery or fertilisers. But investors are missing a trick, which lies in the actual process of farming production. This is currently the most under-capitalised agri subsector, with a market cap of 0.2%, despite accounting for 22% of the global agri value chain. The most capitalised subsector is that of ‘suppliers’ with a 39.6% market cap, closely followed by ‘packing and distribution’ at 36.8%. Consequently, there are huge opportunities here to take advantage of this undercapitalisation, such as the production or cultivation of food and food products such as grains/maize/soy, oil bearing crops, meat/fish/poultry, fruit, sugar and milk.

A Hunger for Food

The world’s population is rapidly increasing. The UN expressed their concern early in 2011, emphasising that the growth rate must slow down significantly to avoid reaching unsustainable levels. It is predicted the global population is set to double by 2050, resulting in a huge reduction of arable land per capita; the World Bank estimates that demand for food will rise by 50% by 2030. This, along with poor weather conditions, increasing demand from emerging markets and a heightened popularity of crop-based bio-fuels, can push up the price of food, known as ‘agflation’.

A New Global Farming Index

There are various methods of investing in farming, whether through buying the land/farm itself or by investing in stocks, ETFs, funds and using tailored indices to monitor the top performing companies in the agri sector. Investors also need to take into consideration a number of influencing factors, such as structural and demographic growth trends (particularly in emerging markets), improvements in inputs, fertilisers and application methods, vertical integration of large farming companies and agri-land price appreciation. We recently established a new Global Farming Index with GAIA Capital Advisors, a Geneva-based fund manager and investment advisor specialising in global natural and agricultural investing. The index will form the basis for the launch of an Exchange Traded Fund. The index will offer investors exposure to farming companies that are attractive due to their exposure to millions of hectares of agri-land, market liquidity, high growth profiles, and low valuations. The selection criteria for the index covers all regions and market caps, with particular attention on the small and mid-cap segments, where most farming companies lie. Rebalance of the index is performed quarterly.

Index Constituents

The focus of the new Farming Index is on global farming companies offering liquidity, solid fundamentals and growth, many of which operate in emerging markets (NYSEArca:EEM). It is well-diversified geographically, including Eastern Europe, Asia, Latin America and Africa, and consists of produce such as meat, palm oil, diversified farming, fish, sugar, dairy and fruit. Its top three constituents are Wilmar International, an Indonesian Palm Oil company, global meat firm Tyson Foods Inc (NYSE:TSN) and MHP S.A, a Ukrainian Diversified Farming business, all at 3% modified MCap weight. Overall the top 20 includes a diverse range of businesses and countries, from dairy companies in China (such as I/Mongolia Yili In and Bright Dairy & Foo) to sugar businesses in Africa (including Illovo Sugar and Tongaat-Hulett Ltd.). The index is weighted most heavily by meat (20%), palm oil (20%) and diversified farming (13.8%), across China (22.8%), farming businesses operating globally (18.1%) and Indonesia (13.4%). Alternative indices such as the Market Vectors Agribusiness ETF (NYSEArca:MOO) cover multiple agri subsectors such as chemicals, agriculture (NYSEArca:DBA) and machinery, missing out on the niche opportunity of focusing on farming itself.

A Solid Performance

According to back-tested data, the GAIA Farming Index has an annualized return of 20.29% over three years, outperforming the MSCI EM small & mid cap by 8.56%. It has also outperformed peers, including the Market Vectors Agribusiness ETF (NYSEArca:MOO) and the Claymore Global Agriculture ETF (NYSEArca:COW) which have annualized returns over three years of 6.20% and 1.68% respectively. Investors seeking to diversify their investments by adding the agriculture sector to their portfolios should benefit from the attractive fundamentals and prospective returns available in farming.

Making the Right Choice

Those concerned with ethical and responsible investing are able to make careful decisions when investing in agriculture. Some have questioned whether it is ethical to make money from the sector, such as investing in food prices. However, the overwhelming theme of the GAIA Farming Index is food production to ‘feed the world’ and the proprietary selection methodology does consider issues such as food vs. fuel and sustainable and responsible development. For instance, companies deriving more than 50% of gross revenue from the sale of biofuel products may warrant exclusion or deletion from the index.

The Future for Farming

There is a wealth of opportunity in investing in agriculture over the coming years. The GAIA Farming Index follows the launch of GAIA’s World Agri Fund in May 2008, showing an appetite amongst investors. The cost-effective nature of indices make them a viable and profitable option at a time when caution is often needed. With increasing interest in agriculture, investors should seize the opportunity sooner rather than later to make an early impact. We are certainly excited to see what the future holds for the sector and with each quarterly reconstitution of the GAIA Farming Index, we will be announcing the latest findings to keep people informed. As we predicted previously in ETF Radar magazine, we have seen continued growth in the structured product market and a heightened demand for independent indexing services. We recently launched a new calculation platform which allows companies to maintain and customise their calculations in-house. This has previously only been possible through complex, bespoke system development or via an external provider. Investors are clearly hungry for new concepts and ways to invest. It is vital for companies such as ours to remain at the forefront of technology and research to understand what businesses and individuals need across all sectors. Those with their ear to the ground in the ETF market will agree farming is the sector with huge under-utilised potential over the coming year.

This Article Is Courtesy of ETF Radar Magazine

Founded in Spring 2009, ETF Radar is a smart, private and independent organization which provides comprehensive market intelligence, news and fundamental research solutions strongly focused on the exchange traded funds business. We are covering the ETF market globally and have launched the first global, high-end exchange traded funds magazine and will introducing new services within the next time in order to refine our value proposition. With our well established flag-ship publication, the ETF Radar Magazine, we strive to inform, inspire and educate investors around the globe. We are open-minded for new ideas and additional value-adding partners for our venture.

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