A comment was left about the Agriculture ETF (DBA) being up 5% today along with some snapback in other commodity related things.
I disclosed buying DBA personally the other day. My price was $24.98. It immediately dropped $0.30 and as the reader notes it is up 5% today. My intention in buying was that I would pay closer attention to it as I am interested in buying for clients once I get a feel for how it trades. The 5% is fine personally but is a little bit of a bummer professionally. Today's move is probably due to corn but if 5% daily moves happen with any frequency, and to be clear I would not be shock if DBA gave this back next week, I doubt I would hold it for clients. Too early to know yet.
I have an email into someone I know ( sorry if that sounds pretentious) at Claymore about the huge premium in NAV of UCR and the huge discount in DCR; the MacroShares.
Wikinvest Wire
16 comments:
I wonder about the inherent risk in this sector that could be at the mercy of the weather? Australia for example is just now starting to get over a nasty drought.
How bad would a one summer drought in this country effect this ETF I wonder?
In any given season this ETF will likely be all over the map but the long-term trend for food (and water) remains up IMHO.
There is no telling how quickly developing regions such as Asia will pass through their initial industrial phase (probably more quickly than the current developed countries did) but a significant cost in that phase is the loss of arable land and potable water.
In addition even a modest gain in median income permits general improvement in diet as well as greater ability to satisfy demand for higher quality sources of protein; i.e., meat.
The net result is that countries such as China are now net importers of grains not only for human consumption but for animal feed.
Referring back to Roger's previous post and the reference to the diagram at Barry Ritholtz's site, one problem I had with that diagram was the absence of a line between Emerging Asia and Australia/New Zealand/Canada; other commodities aside, most of which emerging Asia is buying, Australia and Canada are major grain producers. Based on the diagram that entire relationship comes to less than $300 billion and that's frankly hard to believe.
I'll preface this by saying I found these stats of Wikipedia.
The world produced 721 million metric tons of corn (maize) in 2004. And 627 million metric tons of wheat.
According to my calculation Australia only produced 20 million metric tons of wheat and 3 million metric tons of corn (maize).
So, to answer the above commenter. I would seem that Australia's influence on corn and wheat world prices should not be too large.
http://en.wikipedia.org/wiki/Agriculture#World_production_of_major_crops_in_2004
http://en.wikipedia.org/wiki/Agriculture_in_Australia#Crops
Russ, that figure sounds about right. I should have added "available for export" to my final comment; e.g, according to their web site (http://tinyurl.com/ymdnpx), "AWB has captured a 16% share of the world wheat trade, with its major markets in the Middle East and South East Asia."
good chatter.
first the food/water and i'll throw in uranium (my perception not stating fact) themes are really quite grim. Not enough food and water combined with the world being forced to switch, to some degree, to nuclear points to some bad times in some places.
Ross, if the those numbers are correct you bring up an interesting point. It seems as though the world perceives Australia as supplying more wheat than that.
My comment about Australia had nothing to do with their economic output. My point was that bad droughts can happen anywhere, and that includes the USA. Ever hear of the dust bowl?
http://www.livinghistoryfarm.org/farminginthe30s/water_02.html
I am just considering another risk factor that other stocks don't take on. I was wondering how such a 1 or 2 year bad drought in a large economic area such as the USA would have on such a holding?
in vague terms, drought leads to less supply, less supply, demand being constant means prices go up. If they get too high then perhaps there would be innovation to create a substitute that would or could make prices fall.
So now, how do we apply this sort of textbook vaguery to the real world?
Geoff Considince recently made an interesting point on seekingalpha about the diversification benefits of utilities and how this diversification derives from utilities' depedence on the weather. Basically, since the weather partly drives the price of utilities, and because the weather is random (i.e., uncoupled from market conditions), utility prices exhibit a low correlation to the broader market. Intuitively, the same virtue is true of agricultural commodities. The article is here:
http://utility.seekingalpha.com/article/22876
To address the first post, the risk of holding DBA in isolation is high, especially if today's action is any indication. But seen in the context of a broader portfolio it could reduce risk. OTOH, if 8.5% price swings are normal, maybe not.
Looking at very long term fundamentals, I have hard time imagining how global warming could be good for crop yields. Increased risk of drought and severe weather generally would move farming North, but Canada's top soil is crap compared to America's (damn glaciers!). Of course, this is bad for the world but good for DBA (lower crop yields = less supply = higher prices). Regardless of the fundamentals, being "at the mercy of the weather" is probably good for part of one's portfolio.
If DBA turns out to be too much of a whirlwind, how about AND, a structured note on Archer Daniels Midland that pays 9% while you wait? Is that a safer way to go, or just a waste of time?
P, Geoff's stuff is written in such a way (too long) that i have trouble reading it, not trying to take a shot, I swear.
he certainly could be correct, iShares Utility (IDU) has a 0.55 correlation to SPX.
Interesting how much attention DBA seems to be getting out there.
As for the the ADM note. I don't know it, will it capture any of the move if corn triples?
I don't see how a fixed income product could capture the move in a commodity.
Actually if you look at a three month chart for ADM and for the EFTS Corn fund traded in the UK they appear to have a negative correlation.
Interesting negative correlation. Morgan Stanley and Citi have both put out notes based on ADM's stock price rising over the next year. Perhaps their idea was that nobody knows more about corn, but maybe profits suffer with too high a commodity price.
Anyway, the info is at
http://www.amex.com/?href=/strProd/prodInf/SpPiProdDesc.jsp?Product_Symbol=AND
Think I'll buy DBA on a pullback and break out the Bonine. Cheers.
Roger, there was a comment some time
ago about a free web site providing
correlation data between securities.
I lost my note to the comment. Do you
by chance recall it? Thanks.
Do you have any information about
what type of distributions DBA might
make in the future (i.e., trying to
decide if it might be more suitable
for a non-taxable account).
http://gummy-stuff.org/
for correlations
DBA owns a lot of Tbills which covers the expense with yields where they are now. The taxation of these are the 60/40 kind (check with your accountant for details on what the means. Where there is a choice I prefer this sort of thing for an IRA but tax issues are not more important that investment decision to me.
To be clear I have no client money in DBA and I don't recommend it to anyone.
Anon 4:52, I think you're thinking of the SPDR correlation web page: http://www.spdrindex.com/correlation/
Note a recent article on seekingalpha.com points out a flaw in this tool: It doesn't account for dividends. http://etf.seekingalpha.com/article/24018
The Excel file on gummy-stuff.org uses the adjusted close data from Yahoo which accounts for dividends. Geoff Considine also has a correlation calculator included in his Monte Carlo excel file, but the spreadsheet on gummy-stuff is free.
Thank you very much for this information.
sohbet
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