Strategies that dabble in futures markets have been profitable, but carry ethical concerns
For exchange traded fund investors who wish to invest in the themes of food, food production, and agriculture, dire predictions of growing food insecurity present opportunities and potential ethical issues.
This year, a conventional approach to investing in the industry has shown to be very profitable. As reported by the Financial Times, the US$361-billion SPDR S&P 500 ETF Trust, the Teucrium Wheat Fund (WEAT), which invests in futures contracts, produced gains of more than 48% in the year to June 13.
However, WEAT raises ethical issues in addition to the risk of exposure to a frequently volatile futures market and potential regulatory restrictions on its marketing and distribution.
Despite widespread academic disagreement, there are still concerns that speculative investing in the futures market would increase spot market prices and exacerbate global food shortages.
“People could be asking themselves: ‘should we be profiting when there is going to be a shortage of food?’,” said Nikolai Roussanov, professor of finance at the University of Pennsylvania’s Wharton School of business. However, on the question of whether futures market pricing could spill over to the spot, he said: “In academic circles, it’s still not a settled question.”
But there are a few additional methods to get exposure to food and the food sector for ETF investors who would still prefer to stay away.
There are just three ETFs that concentrate on the industry outside of China, which is home to the largest food ETF: the Global X Ag Tech & Global Food Innovation ETF (KROP), the VanEck Future of Food ETF YUMY), and the Europe-listed Rize Sustainable Future of Food Ucits ETF (FOOD). At the conclusion of the first quarter, Morningstar reported that there were $1.8 billion in global assets in food ETFs.
But according to data from TrackInsight, all three have lost more than 20% of their value since the year's beginning.
“This is not a fund designed to gain exposure to food price inflation,” Rahul Bhushan, co-founder of Rize ETF, said of its FOOD vehicle.
Bhushan emphasized that all innovation stocks have been severely damaged this year, and the ETF was created to concentrate on important areas of innovation that may offer a sustainable agricultural system.
Shawn Reynolds, portfolio manager for the natural resources equity strategies team at VanEck, agreed. “It’s not entirely due to the Russian invasion of Ukraine. A lot of food prices were starting to move before the invasion.”
He cited worldwide dynamics that were also raising food prices, such as the movement of people from rural areas to urban centers and the expansion of the middle class globally.
“The truth is we get a very narrow view from the west of the true extent of today’s global food crisis. The inconvenient truth is that many emerging markets face pretty ugly realities,” said Bhushan. “In food, we already have vast inequality right now and we would expect things to probably get worse before they eventually get better.”
