• Agricultural commodities have been rallying

• MOO holds processors and pick-and-shovel agricultural companies- A significant gain in 2020

• Demographics favor MOO

 

• Bull markets rarely move in a straight line- Look to pick up MOO on a dip

If an ETF can be a growth stock, the VanEck Agribusiness ETF product (MOO) is a good candidate for 2021. Agricultural businesses and those that support the sector feed the world. Agricultural commodities grow in parts of the world where the climate, soil, and access to water support crop growth. The United States is the world’s leading corn and soybean producer and exporter. Over the past years, Russia exports the most wheat, the primary ingredient in bread, a worldwide staple. Brazil produces the most sugar, coffee beans, and oranges. Canada, Australia, and many other countries produce substantial amounts of agricultural products. Meat or animal proteins are also agricultural commodities as cattle, hogs, chicken, and turkeys consume grain-based feed to grow to process weights.

The agricultural sector also includes the companies that support production, including processing, equipment and supplies, fertilizers, and other pick-and-shovel products in the world of agriculture.

Rising inflationary pressures have been pushing agricultural commodity prices higher. As production increases, the demand for all related products will rise. Meanwhile, increasing inflationary pressures and a falling US dollar has put upward pressure on prices. The gains in the agricultural sector over the past months could be the beginning of a multi-year bull market, making products like MOO a growth stock.

Agricultural commodities have been rallying

Agricultural prices have been moving higher over the past months. Rising inflationary pressures from central bank liquidity and government stimulus programs, a falling US dollar, and other factors have been pushing grain and other agricultural product prices substantially higher. Soybeans, corn, wheat, and other products recently hit over six-year highs. The prospects for even higher prices are rising. Agriculture could be one of the most exciting sectors for those looking for capital growth over the coming years.

From 2008 through 2012, agricultural prices rose to multi-year or all-time highs in the aftermath of the global financial crisis. While the events in 2008 were far different than during the 2020 worldwide pandemic, the tools to stabilize economic conditions were the same. The only difference has been far more stimulus and liquidity to address the impact of COVID-19. Therefore, we should expect a similar, if not more significant, the inflationary backlash over the coming months and years.

Raw material prices have been trending higher since the first half of 2020, and that trend is likely to continue. As the volatile commodities have moved into a bull market trend, the companies that support production and processing should follow the same price path. We often refer to these companies as “pick-and-shovel” plays because they are highly sensitive to prices. In commodities, rising prices lead to increased production, pushing the profits and share prices of the related companies higher. Agricultural commodities and companies in that sector could be the most exciting growth areas for the coming years.

MOO holds processors and pick-and-shovel agricultural companies- A significant gain in 2020

The VanEck Agribusiness ETF product (MOO) holds shares in companies involved in the agribusiness. MOO’s top holdings and fund summary states:

Source: Yahoo Finance

As the chart shows, MOO’s portfolio includes equipment, seed, fertilizer, processing, and other companies that supply products and services to the farmers and businesses that feed the world. MOO is a liquid ETF product with $793.8 million in net assets and an average of 126,275 shares changing hands each day. The ETF charges a 0.56% expense ratio, but the blended dividend yield of 1.1% offsets the product’s cost for longer-term holders.

2020 was a turbulent year for all asset classes. MOO posted again last year after falling to lows in March along with most assets during the risk-off period.

Source: Barchart

As the chart shows, the MOO ETF closed 2019 at $68.73 per share and moved to $77.89 at the end of 2020, a rise of 13.3% from last year. The rally continued during the first month of 2021, with MOO trading at over the $80.60 level on Thursday, January 28. The trend since the March low at $42.52 has been higher. The shares hit the most recent high at $83.66 on January 21.

Demographics favor MOO

One of the most compelling factors supporting the agricultural sector’s growth is that each year there are more mouths to feed worldwide than the last. At the turn of this century, the global population stood at around six billion levels.

Source: https://www.census.gov/popclock/

As the chart shows, a little over two decades later, over 7.739 billion people inhabit our planet, an increase of 29%. The world adds approximately 20 million people each quarter, 80 million each year, and 800 million each decade. The world’s nutritional requirements are an ever-rising factor for the demand side of the fundamental equation for agricultural products.

The bottom line is that each year, more people require more food. Farming technology has kept pace with the increasing demand, but the weather and inflationary pressures can create price shocks as they did in 2012 when corn and soybeans rose to all-time highs and wheat moved to its second-highest price in history. In 2011, other agricultural products, including sugar, coffee, cocoa, and cotton, hit multi-year price peaks. The companies that support the production often experience a ripple effect from the bullish price action.

Bull markets rarely move in a straight line- Look to pick up MOO on a dip

Price corrections in bull markets can be brutal, but they offer an opportunity to hop on board the longer-term trend. Commodities are a highly volatile asset class, making selloffs particularly severe when they occur.

The technical trend in the agricultural sector has turned higher over the past months. A myriad of macro and microeconomic factors suggest that the trend is likely to continue over the coming months and years. Any corrections are likely to be buying opportunities if the price action from 2008 through 2012 is a model for 2020 and the coming years.

I would be a buyer of MOO on price corrections as the pick-and-shovel plays in the commodities that feed the world could offer incredible growth. While the ETF itself is not a growth stock, the portfolio mostly includes candidates for that designation. Therefore, the MOO ETF product has the potential to provide attractive gains, especially if inflationary pressures rise over the coming years.

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MOO shares fell $2.10 (-2.61%) in after-hours trading Thursday. Year-to-date, MOO has gained 3.16%, versus a 1.00% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...

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