Why Investors May Want To Think About Adding Commodities To Their Portfolios

Recent reports such as the Consumer Price Index (CPI) and wages have shown inflation coming under control but these data points come with a lag and measure end point prices. If you look at the source or input prices you’ll see things are not so subdued.

Using raw commodity prices as a gauge it looks like inflation embers are still glowing and have the potential to flare higher in coming months.

Indeed one of the factors causing a spike in some commodity prices, especially within the agricultural sector, is the global heatwave. It is stressing crops in terms of both yield and the ability to harvest and transport.

According to recent agricultural reports from the USDA 57% of the domestic corn crop and 51% of soybeans are dealing with drought conditions. These conditions are expected to worsen as El Niño develops, a climate pattern that can bring drier and hotter weather to the Midwest.

Other issues facing agricultural commodities include the ongoing war in Ukraine in which Russia recently stated it will stop exporting wheat which caused the price of wheat futures to spike some 10% in a single day hitting a “limit up” trading halt.

So while everyone has become re-enamored with stocks, especially the big cap tech names, don’t overlook the importance of diversifying portfolio with some exposure to commodities.

But what may be bad news for your grocery bill could be good news for your portfolio.

Historically commodities have low correlations to equities and the recent relative underperformance suggests this could be a good time to consider adding agriculture to a diversified strategy.

Let’s go to Magnifi to research ETFs, which provide exposure to commodities.

The Invesco DB Agriculture Fund (DBA) is a great way for investors the to invest in a basket of commodity futures without having to open a commodity account or manage their own positions.The fund holds the major agricultural commodities, including corn, soybeans, wheat, sugar, cocoa, coffee, cotton, live cattle along with a nice weighting of US Treasury securities for interest income.

Those top six commodities comprise 60% with 40% concentrated in the grains sector. The fund rebalanced annually in November with an expense fee is 0.85%.

Soft commodities were the best-performing sector of the commodities market in Q1 2023, with cocoa and sugar reaching 10-year highs. This propelled DBA shares from a low of 19 to 22.

The grains, on the other hand, have just begun to rally off of their yearly lows. With the bulk of the summer growing season ahead of them, this provides a nice tailwind for the fund going forward.

Investors who would rather invest in one of the specific grain commodities, as they are trading at lower, more advantageous prices for this time of the year, can do so with targeted ETFs.

The big three are Soybeans (SOYB), Corn (CORN) and Wheat (WEAT) which are all run by Teucrium trading, which is an ETF provider focused solely on U.S. Agriculture with low expense ratios below 0.28%.

The SOYB fund allocates exposure to three soybean futures contracts which trade in future months holding 35% exposure to the second month, 30% to the third month, and 35% to the important November contract which is the benchmark price for the year’s crop.

CORN is the most interesting price wise as it fell to 3 year lows last month but now with the new hotter and drier weather forecasts shares have rallied from 21.74 to 25 but still well off it’s all time high of 30.30.

WEAT recently rallied from yearly low levels on renewed Ukraine export restrictions.

With crop prices at a significant discount to their 2022 highs, investors can now gain exposure to the prices of the commodities that are essential to global food production.

Whether to choose an overall basket of commodities like DBA or individual commodities depends on each investor’s individual objectives.

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