Staying on Farm Beats Wall Street as Hogs Crush Stocks

Like Elton John, investors should’ve stayed on the farm this year.

Hogs, cattle, soybeans, wheat, corn -- just about everything that can be grown or raised is beating stocks as the first quarter of 2014 heads for the history books.

The reasons are varied and, fair warning, sometimes disgusting: The same Ukraine story that is helping to keep a lid on equities is fueling a rally in wheat on concerns about Russian crops; the pigs in China are gobbling up U.S. soy, while the hog supply in the U.S. is being hurt by a nasty case of “porcine epidemic diarrhea virus.” (You were warned.)

The numbers tell the story: The Standard & Poor’s 500 Index is flat in 2014 and the Dow Jones Industrial Average is down 2 percent, while measures of crops and livestock in the S&P GSCI Index of commodities are up at least 15 percent.

The returns also mark a reversal of fortunes from last year, when the S&P 500 rallied 30 percent while the agricultural index dropped 22 percent as the so-called “commodity super cycle” became “just another bubble.”

So far in 2014 it’s worth taking note of the leaders to show that while alpha may not grow on trees, it can sometimes grow in the fields:

• Lean hogs are up 51 percent this quarter. Harley-Davidson Inc. (ticker: HOG) is down 3.7 percent.

• Corn is up 16 percent. Apple Inc. is down 4 percent.

• Even untradable chicken wings (specifically the USDA Georgia Dock Chicken Ready To Cook Wings Spot Price) are up 8.9 percent. Goldman Sachs Group Inc. is down 8.8 percent.

Farm ETFs

If you are not a farmer or a commodity-futures trader, it may be tempting to play or short the rally through exchange-traded funds tracking farm goods. Investors have poured $680 million into ETFs tracking commodities this year after a net $30 billion flowed out in all of 2013, according to data compiled by Bloomberg.

The PowerShares DB Agriculture Fund, the most-traded ETF tracking crops, has risen 17 percent this year. The iPath Dow Jones-UBS Livestock Total Return Sub-Index ETN (easier to remember its catchy ticker symbol COW) has rallied 18 percent.

With gains like this, it’s a good time for a reminder of how tricky those securities can be because of potential return-limiting quirks such as contango and the rolling over of futures contracts. (Read more about those phenomenon here.)

The futures curves for crops currently aren’t showing “any alarming or suspicious slopes,” John Gabriel, an ETF strategist at Morningstar Inc. in Chicago, said in an e-mail, so exchange-traded products will produce returns close to the spot price performance of the commodities.

Corn, wheat, and coffee are all in “slight contango” which translates into an annualized cost of about 5 percent to roll into new futures, Gabriel said. Soybeans and cotton are in “backwardation,” with contracts further in the future costing less than those expiring in the near term, so rolling into new contracts actually helps returns, Gabriel said.

Hogs futures for June cost about 35 cents more per pound than those due in June 2015.

Send a get-well card to those poor pigs.