Ways to Trade the Ag Space

A reader asked in an email, "if one wanted to invest in Grains, what symbols [do] you recommend?"

I don't know if I would necessarily recommend any symbol. The two stocks that I am most familiar with in this arena are the Rogers Agricultural Index (RJA) and the PowerShares DB Agriculture Fund (DBA). I once owned RJA so let's start with that one first.

RJA is an ETN designed to track the (Jim) Rogers Agricultural Index, which itself is a blend of a whole slew of soft commodities in various weights. You can get more information from its prospectus. The important item to note on RJA is that it is basically a promissory note, not an ETF, and does not hold any actual commodities or contracts. It is a liability of the bank or organization that sponsors it. In light of the financial crisis, this is an important consideration. Also, while RJA promises exposure to a wide range of commodities, the weighting may dampen any price run-up. For instance, when rice made its huge run, RJA barely moved as rice was less than 5% of the index at the time.

DBA is an actual ETF that is basically equal-weighted in four commodities: wheat, corn, soybeans and sugar. Obviously, this leaves investors out in the cold if rice or orange juice makes a big run but conversely, sugar is on a tear and the 25% (actually 31% according to ETFConnect) weighting gives investors better exposure to price moves. I would advise interested readers to read the prospectus to find out more about how the fund buys its contracts and how that might affect investor returns.

My inclination at this point would be to play the ag space via companies in the supply chain which can range from equipment suppliers like Caterpillar (CAT) to fertilizer producers like Mosaic (MOS) to seed companies like Monsanto. I feel more comfortable making buy/sell decisions on companies, where I can estimate intrinsic values, than with commodities where I have less of a base to judge fundamental value.

Keep in mind that each investor should determine the appropriate strategy for his own portfolio. What works for me may not be right for you and vice versa..seeking alpha