Financial Professionals




During the mid-2000s, rising demand for agriculture from the emerging markets, in particular China, encouraged investors to actively incorporate agriculture investments in their portfolios. I maintain that as the emerging market consumer seeks better energy, technology, healthcare, and food, an investment in agriculture should be considered.  However, an "over attraction" to an investment will significantly diminish returns, in particular for such a volatile sector as agriculture. Just like maintaining your proper weight means that "small portions" are warranted, the same is true when investing in agriculture.

Let's provide some insight as to why the agriculture investment is front and center in the capital markets in August.
Inventories of wheat reached a trough in the second quarter of 2008. Three months later, the global economy began to contract as the U.S. credit crisis unfolded. The 2008-2009 consumer balance sheet recession restricted demand for agriculture, allowing inventories to build to historically high levels. Derivative players quickly reduced long positions in wheat futures. In fact, short players raised positions to historically high levels. The once highly desirable agriculture investment underperformed the S&P 500 Index throughout the 2009-2010 capital markets recovery.

US Wheat Inventories August 31, 2004 to July 31, 2010

Source:  Bloomberg

CFTC Data for Short Futures Contracts held August 17, 2004 to August 3, 2010

Source:  Bloomberg

The weak market currently faces significant supply shocks due to the world's fourth largest wheat exporter, Russia, experiencing an every 100 years-type drought, as well as the world's second largest exporter, Canada, harvesting 20% less wheat due to unusually wet weather. 

The question is: are we revisiting the 2006-2008 wheat bull market?  There are clear differences.

In 2010, wheat inventories are coming from historical high levels. Back in 2006-2008, those inventories were already at low levels.  In addition, U.S. wheat production will remain unchanged from last year's very strong yields. 

So, while the focus in the capital markets is on the impact of surging wheat prices and falling supply, I caution investors to keep the investment strategy simple, as in Keep It Simple Stupid.  The emerging market consumer will exhibit continued demand for all agriculture.  That is enough reason for investors to maintain some exposure to agriculture in their portfolios.  However, the headlines being created from global supply shortages should not motivate investors to over-allocate to the agriculture space.  Unfortunately, 2006-2008 provided investors with a harsh lesson regarding over-allocation.

KISS is your best strategy. A market weight allocation is suggested.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.