Academic journal article Journal of Agricultural and Applied Economics

Discussion: Agricultural Commodities and Agribusiness Stocks as Financial Assets

Academic journal article Journal of Agricultural and Applied Economics

Discussion: Agricultural Commodities and Agribusiness Stocks as Financial Assets

Article excerpt

Nonfarm investors might benefit from diversifying their portfolios by investing in the agricultural sector. Such diversifying investments could include investments in agricultural stocks or long-only futures positions through index funds. The papers in this session investigate the diversification potential of agricultural investments and discuss the effects of investments in index funds on agricultural markets.

Key Words: commodities, diversification, futures markets, index funds, stock markets

JEL Classifications: G1, Q13

These papers look at the possible benefits and effects of investors trying to diversify their portfolios by investing in the agricultural sector. With fluctuations in the stock market and low interest rates, investors are looking for alternative places to put their money. Schnitkey and Kramer (2012) examine returns from owning agricultural-related stocks. Zapata, Dette, and Hanabuchi (2012) have two analyses: one that looks at cycles in commodity and stock prices over a long time period and one that looks at optimal portfolios over a very recent time period. Irwin and Sanders (2012) examine the likely effects of the influx of investment in commodity futures through index funds.

Zapata, Detre, and Hanabuchi

Zapata, Detre, and Hanabuchi (2012) address a question of much current interest, how good of an investment are commodities for a typical investor. Their first analysis suggests that commodity prices are negatively correlated with stock indices. Their second analysis shows that during a time period when stocks did poorly and commodity prices rose, investment in a commodity index would have been part of an optimal portfolio.

Much of the first analysis is spent on measuring long-term cycles in the ratio of commodity and stock prices. Even with a 140-year data period, a 31 -year cycle will only be observed four and a half times. This makes for a small number of observations. No strong theoretical explanation is offered for the cycle and structural change over this time period has been substantial. While this is a fun thing to do, I am skeptical of attempting to trade based on this analysis.

Note that their Figure 1 shows that stocks have gone up at a rate 10 times that of commodities over the last 100 years. Holding commodities would typically have storage costs that are not included in the analysis. So, commodities are not a good investment for an investor with a long time horizon.

Their second analysis looks at a very short time period when stocks have done poorly and commodity prices have risen. It is not surprising that commodities are part of the optimal portfolio. Thus, commodities are a place to park money when stock returns are low. Note that this time period is not representative and a quarterly planning horizon is much shorter than that of most investors.

Schnitkey and Kramer

Schnitkey and Kramer (2012) examine the returns of agricultural stocks versus returns from the S&P 500 stock index during 2000-2011. Agricultural prices increased substantially over this time period and incomes of agricultural producers have gone up accordingly. They seek to determine if stocks of agricultural companies have also done well. They find that agricultural companies have performed better than the S&P 500. The better performance of agricultural stocks occurred before the main rise in agricultural prices. So mis suggests either stock investors foresaw the rise in commodity prices or that the correlation between the prices of agricultural stocks and agricultural prices is even weaker than it first appears. They use timetested methods so there is littìe to complain about in their procedures.

With an increase in demand for agricultural products such as corn for ethanol, we would expect returns to initially increase for all producing sectors. In a competitive market, the excess profits should be competed away and the returns should eventually go to holders of resources such as land or to specialized labor and management. …

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