Key facts
- Investors are increasing their positions in agricultural commodities, including wheat and soybeans.
- Inflows into agricultural ETFs have reached record highs, with $413 million entering the Invesco DB Agriculture ETF in Q1.
- Professional investors hold their largest net-long positions in food futures markets in a year.
- Concerns over supply shortages due to the blockade of the Strait of Hormuz and worsening weather are driving interest.
- Fertilizer prices are rising, potentially leading farmers to ration use and depress crop yields.
- A JPMorgan report estimates global food prices could rise 5% in the first half of 2027 due to high fertilizer costs.
Investors are increasingly allocating capital to agricultural commodities, driven by a confluence of geopolitical risks and potential supply shortages. Inflows into agricultural exchange-traded funds (ETFs) have surged, with the Invesco DB Agriculture ETF seeing a record $413 million in the first quarter, and Teucrium's suite of agricultural ETFs attracting $345 million year-to-date.
Professional investors have also boosted their exposure, holding their largest net-long positions in all five food futures markets in September, according to the CFTC's Commitments of Traders report. Wheat and soybeans, in particular, represent the second-largest holdings since tracking began in 2009.
Two primary factors are fueling this interest: escalating tensions in the Middle East, which raise concerns about key supply chain blockades, particularly through the Strait of Hormuz, and the anticipated impact of worsening weather patterns. The rising cost of fertilizers, a critical input for farmers, is a significant concern. With Northern Hemisphere farmers preparing to purchase fertilizer for next year's planting, prices are expected to remain elevated through 2028, according to a North Dakota State University study. This could lead farmers to ration fertilizer use, depressing crop yields and potentially causing global food prices to rise by 5% in the first half of 2027, a JPMorgan report estimates.
Jake Hanley, Teucrium's director of investments, noted that some investor interest stems from the specific threat to the fertilizer supply chain and global shipping posed by current conflicts. Additionally, food commodities are being considered as a hedge against broader economic downturns, as they have historically outperformed the S&P 500 during periods of significant market decline. Hanley's firm is observing demand from both individual traders and financial advisors seeking portfolio diversification and protection against economic uncertainty.
Nearly half of global urea exports and about 30% of ammonia exports originate from countries exposed to geopolitical risks, as these fertilizers are often byproducts of energy production. While the US produces its own fertilizer, it is not immune to global market dynamics. For instance, Brazilian farmers switching sourcing away from Iran have increased demand in the American market, contributing to a 20% rise in fertilizer prices. This situation is further compounded by the potential for a record El Niño, which historically disrupts weather patterns, leading to increased flooding, temperature swings, drought, and disease, impacting crops like rice, sugar, and wheat.
While these factors suggest potential short-term gains for investors, the cyclical nature of commodities means they are not typically considered long-term holds. Jeff Baird, Managing Partner at Merritt Point, emphasizes that commodities are inherently cyclical and that while current conditions may favor price increases, a 30-year allocation might not be advisable.