12/22/07

Investing in Agriculture, ETN, Jim Rogers

I've recently started a small position in The Rogers International Commodity Index Agriculture Total Return ETN (RJA). View the prospectus here.

RJA is rather new, just starting out in October. It tracks the RICI-Agriculture Index, which "is an index of 20 commodity futures contracts, representing commodities consumed in the global economy." It "aims to be an effective measure of the price action of raw agriculture materials...around the world."

The positive aspects about investing in agriculture:

1. Worldwide demand for food (grains, livestock) is out pacing production, and is expected to do so for quite a while.

2. Worldwide supply of food is at 30 year lows.

3. An emerging middle class in places like China contributes to rising grain and livestock prices. The new middle class buys more meat, thus raising prices. As livestock feed on grain, grain prices rise also.

4. Grain prices, especially corn, rising because of US Congress' obsession with ethanol.

Positive aspects of investing in RJA:

1. .75% expense ratio and commodities have a negative correlation with the stock market as a whole.

2. As mentioned above, RJA includes some 20 different agriculture commodities.

3. It's a great hedge on inflation.


Here are some negative aspects that I've considered:

1. The commodity market prices can change unpredictably.

2. The publisher of the index may stop publishing, which would make it harder to price the market value of RJA.

3. While diversified over a host of agriculture materials (e.g. cotton, corn, wheat, sugar), it is not a diversifed investment because it is concentrated in the agriculture sector.

4. No dividends.

5. Very low liquidity, at least right now. As of the previous market close of this post, the average dollar trading volume was around $1.5 million.

6. This is an ETN (exchange traded note), not an ETF or a closed end exchange traded fund. It attempts to track an index and is traded on AMEX, but it's a bond. This means that there's issuer risk in the sense that the bank issuing this unsecured debt can default. Here, the issuer is a Swedish bank SEK. It is a quasi governmental entity, so its default risk should be low. Apart from default risk, there is also credit rating risk. That is, if SEK's credit rating is downgraded, RJA's value may decrease even while the underlying index rises.

Other things to consider:

1. If RJA is not diversified enough for you, maybe ELEMENTS Rogers International Commodity ETN (RJI) is. Agriculture is about 1/3 of its holdings, with other commodities, such as metals, natural gas, and oil, making up the rest. View the prospectus here.

Another option includes investing in the Goldman Sachs Commodities Index through iPATH S&P TOTAL RETURN INDEX (GSP), also an ETN. Just as RJI, it is spread out through agriculture, energy, and metals. Its expense ratio is .75%. While this ETN has been around since the 3rd or 4th quarter of 2006, it is still very thinly traded, with an average daily trading volume around $1.3 million. As GSP has been around longer than the Rogers ETNs, it may indicate how RJA and RJI will be traded a year from now--still thinly. However, given rising inflation, investors may become more interested in commodities to diversify their portfolios.

iPATH offers other commodity ETNs, with different allocations and underlying indices. If you are interested, check out their page. In the upper left hand corner you should see a tab labeled "commodities." Clicking on that shows you 11 different ETNs.

2. Some stocks, such as Dupont (DD), Monsanto (MON), and Deere (DE) might be better options for investors, as they offer dividends and more liquidity.

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