Home Substantial portion iShares MSCI Global Agriculture Producers ETF: May Fizz Away (NYSEARCA: VEGI)

iShares MSCI Global Agriculture Producers ETF: May Fizz Away (NYSEARCA: VEGI)

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The iShares MSCI Global Agriculture Producers ETF (NYSEARCA:VEGI) is an investment product that provides access to 145 producers of fertilizers, agricultural chemicals and agricultural machinery in developed and emerging markets. Companies involved in packaged goods and meats are also included in VEGI’s tracking index as they derive the majority of their total revenue from the production of agricultural products. Conversely, manufacturers of finished goods that depend on agricultural products as raw materials are excluded from the index. Also consider that although it appears to be a globally oriented product, a significant portion of the fund (57%) is biased towards US equities.

The largest stock in the ETF with a relatively high weighting is Deere & Co (DE) which accounts for 19% of the total portfolio (the second largest stock – Nutrien’s weighting is not even half that of Deere & Co.); As reported in The Lead-Lag Report, DE recently had a strong fourth quarter, with results beating expectations. Importantly, the company is also looking to take advantage of the high price environment, which should help it boost its margins. Overall, we saw DE lift its earnings guidance for the year.

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Should you consider VEGI?

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Over the past three months, when global risk aversion was particularly pronounced, VEGI posted strong double-digit returns of 11%, even as the MSCI World Index saw its net total returns fall by 7%. Clearly, this ETF is riding high, even as the FAO’s World Food Price Index hit record highs of 140.7%.

Food prices

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It’s easy to get overwhelmed with what’s happening in agricultural markets around the world, because it’s not just a one-month phenomenon, but something that’s been brewing for some time now. What catapulted agricultural prices to a different level was the speed and ferocity of the Russian-Ukrainian crisis which caught many players off guard. Both nations play a crucial role in agricultural markets; for example, the two nations together account for 33% of world wheat exports. Then with barley you are looking at an overall contribution of 25%, in the corn market Ukraine is the 4and leading exporter while Russia is the 7and largest exporter. Also consider that both countries, especially Russia, play a huge role in global fertilizer markets, with products like potash, ammonia, etc. This also weighed heavily in the rise in agricultural prices.

I would also like to reiterate that generally food prices increase slowly and steadily, which puts food producers in a good position to make price adjustments to keep pace with inflation. , but in recent weeks it has been anything but slow and steady. producers with very little leeway to make price adjustments. What I try to reiterate is that the “shock factor” in the current agricultural commodity price premium should not be underestimated, which can often prove to be short-lived rather than long-standing.

Obviously, the current crisis is not ideal, but as mentioned in the Lead-Lag report, we could see a resolution to this problem soon enough. This could quickly extinguish some of the recent largesse we have seen with agricultural prices, as we could see a potential downward boomerang.

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There is an antecedent for something like this to happen before; think back to the end of 2015, when food inflation in the United States soared to 4% due to issues such as avian flu and drought conditions. Within a year, the situation had reversed, with supply and demand conditions normalizing. I’m not saying we see the exact situation playing out, but I do believe that the current steep price conditions in agricultural markets look unsustainable and investors would do well not to be myopic and get carried away by the euphoria in the short term. term.

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Agricultural markets are currently on fire and I can see the temptation to jump on this bandwagon, but also note that the P/E valuations here aren’t too cheap with the ETF trading at 16x P/E . Conversely, if you are considering a more diversified natural resources option such as the SPDR S&P Global Natural Resources ETF (which gives you exposure not only to agricultural markets, but also to energy, metals and mining markets), you can acquire it at a 25% discount as it trades at just 12x P/E.

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