ETF Talk: I’m Hungry!

The recession has forced people to reevaluate many facets of their lives. Things such as a steady job, luxury goods, and a comfortable lifestyle should not be taken for granted by anyone. While people may be cutting expenses, they still need to eat. As a result, the demand for food should stay fairly steady, and exchange-traded funds (ETFs) that invest in agriculture may be worth considering as a way to profit in the midst of a recession.

One factor to consider is that consumers may substitute lower-priced food items for more expensive ones. Prime rib and filet mignon are tasty but you could scale back by enjoying Italian sausage and Polish kielbasa or even hamburgers and hot dogs. In fact, the substitution could extend further if cost-conscious people begin consuming less meat and more agricultural products, such as fruits and vegetables.

In addition, consider the potential of soybeans as a source of high-protein animal feed. With meat consumption increasing in developing countries such as China and India, demand for soybeans worldwide could rise.

There is no reason to think that the food supply will change significantly in the short term. Do not expect much help from biotech crops, at least in the near-term. The International Service for the Acquisition of Agri-Biotech Applications reports that global plantings of genetically modified corn, soybeans, and other crops grew only 9.4% in 2008. Although President Obama may increase research funding for corn and ethanol-based fuels, it should not have any immediate effect on the corn supply.

However, a risk to the food supply could occur if farmers are unable to obtain credit due to lending constraints. If lending to farmers slows, the result could be reduced plantings, delays in purchasing new equipment, and cutting back in other ways. A significant reduction in credit availability might leave farmers struggling to buy fertilizer to grow their crops. As a result, do not expect much, if any, short-term increase in the food supply.

Demand for food only should rise, especially with the world’s population still growing. In addition, people in China and India are enjoying improved standards of living and now are able to afford better quality food and more of it. For example, the 2008 per capital income in China reached $6,000 (USD) in purchasing power parity (PPP), which measures the cost of goods and services if each country used a common currency. It marks a dramatic jump from China’s per capita income of just $439 (USD) in 1987, according to U.S. government sources.

How do you, as an investor, profit from this knowledge? Well, take a look at the following chart of the Market Vectors Agribusiness ETF (MOO), which now has broken above both its short-term, 50-day moving average (blue line), and the long-term, 200-day moving average (red line).

Since everyone needs to eat, agriculture always will be somewhat recession resistant. With expanding food consumption in developing countries, this sector may well escape the worst ravages of the current recession. While I am not recommending any agribusiness ETFs right now, you may want to monitor the sector. If it begins to flourish, you’ll still have time to position yourself to profit. In that case, Bon Appétit!

For those of you who want advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here. As always, I am happy to answer your questions about ETFs. To send me a question, please click here. You may just see your question covered in a future ETF Talk.