Agriculture Puts Surge After ETF Rises Most Since 2009: Options

Agriculture Puts Surge After ETF Rises Most Since 2009
Monsanto Co. soybean plants grow in a research field near Pirassununga, Brazil. Tumbling commodities prices pushed down shares of agricultural companies, driving the price-earnings ratio on Monsanto to 20.6 on Sept. 30, the lowest level in a year. Photographer: Paulo Fridman/Bloomberg

Options traders are snapping up protection against declines in agricultural stocks at the fastest rate in four years, locking in gains after a security that tracks the industry rallied the most since 2009.

Puts to sell the Market Vectors Agribusiness exchange-traded fund outnumber calls 2.1-to-1, the widest gap in almost a year, according to data compiled by Bloomberg. The ratio has jumped from 0.74 on Oct. 14 for the biggest increase since January 2008, the data show.

The fund tracking Monsanto Co., Potash Corp. of Saskatchewan, Deere & Co. and 43 other stocks rose 13 percent this month after falling 17 percent in September. Investors are adding to hedges before Archer-Daniels-Midland Co. and 12 more companies representing 34 percent of the fund’s total market value report quarterly results in the next week.

“Deere and the fertilizer companies are providing equipment to the global economy so if there’s a slowdown in Europe and it affects Asia, there’s going to be less demand for the products,” Ann Miletti, who helps oversee about $209.1 billion as senior portfolio strategist at Wells Fargo Advantage Funds, said in an interview yesterday at Bloomberg headquarters in New York. “Global growth is the biggest question mark.”

Puts that pay should the ETF fall 22 percent from yesterday’s close to $38 by May had the biggest gain in ownership over the past week, rising by 2,092 contracts to 12,634. The total is also the highest open interest among the fund’s options, followed by puts priced at $40 and $42 in February, data compiled by Bloomberg show.

Volatility Decreasing

Implied volatility, the key gauge of options prices, for the ETF’s contracts expiring in 30 days plunged 38 percent from Oct. 4, when it reached the highest level since March 2009. The Chicago Board Options Exchange Volatility Index, known as the VIX, tumbled 21 percent during the period to 32.22 yesterday. The gauge’s 21-year historical average is 20.50. It fell 3.7 percent to 31.03 at 10 a.m. New York time today.

The world economy will expand 4 percent in 2011 and 2012, the International Monetary Fund said on Sept. 20, reducing its forecast from June estimates of 4.3 percent and 4.5 percent. European stocks slid from an 11-week high yesterday after EU finance ministers canceled a meeting, fueled concern that the region’s leaders may struggle to resolve the debt crisis.

“If you remain pessimistic on a European solution, this is a good way to play it,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York. “They’re growth-sensitive stocks so if we’re going to have a rerun to the downside then they would underperform.”

China, Europe

The S&P GSCI Agriculture Index of commodities had its worst drop on record in September amid concern that China’s economy is slowing and Europe can’t contain its debt crisis. The gauge has gained 5.7 percent this month.

Tumbling commodities prices pushed down shares of agricultural companies, driving the price-earnings ratio on St. Louis-based Monsanto to 20.6 on Sept. 30, the lowest level in a year. Multiples fell to the cheapest since 2009 for Potash in Saskatoon, Saskatchewan, and Moline, Illinois-based Deere.

U.S. consumers will pay 3.5 percent to 4.5 percent more for food this year than in 2010, up from a September forecast of 3 percent to 4 percent, the U.S. Department of Agriculture said in a monthly report. The world’s population will probably climb above 7 billion at the end of this month, according to forecasts from the United Nations.

Economic Health

“They really need what the U.S. and these agricultural companies can provide,” David James, who helps oversee $2.5 billion as a senior vice president of James Investment Research Inc. in Alpha, Ohio, said in a phone interview yesterday. “People have to be fed regardless of the state of their economy.”

The United Nations World Food Price Index has fallen 5.3 percent from a record in February. In August, Orrville, Ohio-based J.M. Smucker Co. reduced what it charges for Folgers coffee, the top-selling U.S. brand, as arabica-bean futures dropped as much as 24 percent from a peak in May.

Investors poured $217 million into the agribusiness fund during the past month, the second-most among all U.S.-listed global equity ETFs, following the PowerShares QQQ Trust fund, according to data from XTF Inc., a New York-based research firm.

The cost of three-month puts on the agribusiness ETF cost 28 percent more than calls yesterday, down from a 40 percent premium on Aug. 30 that was the highest since December 2008.

“For the last few years the agricultural sector was growing faster than the overall economy.” Jake Dollarhide, who helps manage $65 million at Longbow Asset Management in Tulsa, Oklahoma, said in a telephone interview yesterday.

“It was pretty incredible growth, but unsustainable,” he said. “The whole global economic situation can have nothing but a negative effect on demand for U.S. agricultural products.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE