2 reasons investors are eyeing agriculture bets

• Investors are putting money into food ETFs and futures markets as fertilizer prices climb.
• The Iran war, the Ukraine-Russia war, and a forecasted record El Niño threaten global food stocks.
• Food commodity investments offer a potential hedge against a longer, more costly Iran War.

Investors are piling into bets on higher food prices.

Inflows into the industry-leading Invesco DB Agriculture ETF reached record highs of $413 million in the first quarter. Across eight agricultural ETFs managed by commodity investing firm Teucrium, investors have poured in another $345 million this year to date, driving roughly 80% of the funds' growth from $227.4 million to $666.7 million.

And it's not just ETF investors, smart money is going long on food, too. Professional investors held their largest net-long positions in all five food futures markets, the highest in a year, according to the CFTC's September Commitments of Traders report. Wheat and soybeans were the second-largest holdings since tracking began in 2009.

The bets on agriculture come as the Iran War heats back up and concerns of key supply shortages because of the blockade of the Strait of Hormuz are met with concerns of worsening weather.

Fertilizer prices are rising right as farmers in the Northern Hemisphere prepare to buy next year's fertilizer with their purse from this year's fall harvest.

According to a North Dakota State University study, they're likely to remain elevated through 2028. High fertilizer costs mean that farmers will have to ration their fertilizer use, depressing crop yields. This could cause global food prices to rise 5% in the first half of 2027, according to a JPMorgan report.

Some of the investor interest has to do with the particular threat this war poses on the fertilizer supply chain and global shipping, said Jake Hanley, Teucrium's director of investments. Others are considering it because food commodities act as great hedges during downturns.

"Every time the S&P 500 has gone down 10% or more, this agriculture benchmark has outperformed," Hanley said, referring to the performance of the Agricultural Fund Index, which is equally weighted among four major food commodities, since its 2012 inception.

His firm is seeing demand from individual traders who speculate on commodities, as well as financial advisors looking for a hedge for their clients in preparation for worst-case scenarios for the global economy.

"These are people reading headlines and connecting the dots," Hanley said. The thesis of wartime disruption is "really a 2027 thing," and market prices have only recently caught a tailwind, he said.

Behind the thesis

Nearly half of global urea exports, the most widely used fertilizer, and about 30% of global ammonia exports, which is used in fertilizer, are from countries exposed to the war's impact, according to the American Farm Bureau. These countries produce fertilizers largely as a byproduct of energy production. For example, liquefied natural gas is the primary material used to produce urea.

The USA, with a robust LNG industry, manufactures its own fertilizer, but it's not insulated from globalized free trade. Fertilizer prices are still up 20% because Brazilian farmers have had to switch their fertilizer sources away from Iran, Hanley said, crowding the American market.

This is then compounded by next year's likely record El Niño, which will disrupt weather patterns and has historically led to increased flooding, temperature swings, drought, and disease. Historically, El Niño has had a substantial impact on rice, sugar, and to some extent, wheat markets, Hanley said.

If Hanley's forecasts prove right, the consequences would extend well beyond investors' portfolios: Higher prices can deepen food insecurity, particularly in emerging markets and regions that depend heavily on imports.

He's expecting prices to soon play out a historical pattern that's been repeated multiple times over the past two decades. For long periods, food commodities trade at roughly the cost of production, but because of events like Russia's invasion of Ukraine, disrupting Europe's breadbasket, prices shoot up for a period.

Then, once increased production, political dealmaking, or weather patterns permit more supply, the prices go back down.

Why it's not a forever investment

This cyclicity means they're less correlated to the rest of the economy, which Hanley said makes them increasingly attractive in a complicated, hard-to-understand world. He described how many financial advisors he speaks to are considering it as a small sliver of a client's portfolio, "because that's gonna be the thing that maybe works if everything else falls out of whack."

But this alone means that these commodities are not long-term holds, said Jeff Baird, Managing Partner at Merritt Point and a 25-year commodity trading veteran.

"Commodities are by their nature a cyclical asset class. Are we coming into a time where prices might move higher? Yes, I think so," he said. "Does that mean I want a 30-year allocation to commodity prices? That's maybe not how I would think about it."

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