Wall Street was downbeat in February on rising rate worries. Reaccelerating inflation data released for the month of January as well as upbeat economic data points triggered the bets for a more hawkish Fed this year. The S&P 500 was off 2.5%, the Dow Jones lost about 3.4%, the Nasdaq retreated about 2% and the Russell 2000 slid about 1.1% past month (as of Feb 24, 2023).

However, agricultural ETFs trumped Wall Street in February with broader Invesco DB Agriculture ETF (DBA Quick QuoteDBA - Free Report) gaining about 6.1% past month. iPath Series B Bloomberg Coffee Subindex Total Return ETN is one of the top-performers in February.

Let’s delve a little deeper.

Inside the Flourishment of Agricultural ETFs

Inclement weather is primarily held responsible for the rally in agro-based ETFs. Coffee, sugar and cocoa were the clear winners while wheat, soybean, cotton and livestock did not fell behind. Arabica coffee futures in the United States rose to about a four-month high on concerns over supply shrinkage. Inclement weather in Brazil’s major growing region has weighed on coffee prices, per tradingeconomics.

Cocoa prices shot up to their highest level since February 2022, due to tight global supplies. Cocoa exporters in Ivory Coast, the world's top producer, are on the verge of defaulting on their agreements due to a lack of cocoa beans. On the demand side, a cocoa exporter group Gepex reported processing 58,554 tons of cocoa increased 13% year over year in December, indicating higher demand, per tradingeconomics.

Raw sugar futures in the United States are hovering around the six-year peak due to tight supply from the world’s top producer India. India revised sugar production expectations lower to 34.3 million tonnes in the current marketing year, as lower solar radiation weighed on crops and resulted in early maturation of the incoming cane harvest, as quoted on tradingeconomics.com.

Despite solid production and shipment in key wheat producer Russia, wheat prices remained steady due to considerable decline in Ukrainian grain shipments. Logistical issues caused by the Russian invasion led to this fiasco. Soybean prices have been oscillating between two factors like likelihood of record supply from Brazil and strong demand expectations from China, per tradingeconomics.

Will the Rally Last?

First of all, if the Fed continued to hike rates in the coming months, the U.S. dollar is likely to gain strength. This, in turn, would weigh on commodity prices as most commodities are priced in the U.S. dollar.

The year 2023 will likely see El Niño – a warm-water phenomenon that blows up off the Pacific coast of South America – after about two years. El Nino causes weather disruptions in many regions around the world, including drought in some and flooding in others due to abnormal warming of the Pacific Ocean.

El Niño historically reduced global-mean crop yield by 1.32%, 1.33%, and 0.37% for wheat, rice, and maize, respectively, but increased it for soybean by 1.9%, per sciencedirect.com. So, we can see a run-up in wheat prices ahead, benefitting Teucrium Wheat ETF (WEAT Quick QuoteWEAT - Free Report) .

Notably, CRISIL MI&A Research recently said that if the ongoing high temperatures continue through March, the rabi wheat crop production will be hurt in India, quoted on Economic Times. El Nino events have a negative impact on cocoa production too. If El Nino sets in this year and becomes mature in winter, iPath Bloomberg Cocoa Subindex Total Return ETN may be a fruitful investment.

Meanwhile, key grower Brazil's coffee crop in 2023/24 was forecast to jump to 67.1 million 60 kg bags, up from a median estimate of 61.5 million bags for the 2022/23 crop. For other crops too, investors need to keep a close tab on weather forecasts.