ZEAT – A Pure Play on Agriculture Equities

Jan. 30, 2023


  • The financial markets turmoil of 2022 left few hiding spots. Investors turned to inflation-linked bonds and energy stocks to hedge against rising inflation as traditional 60/40 portfolios suffered. Inconspicuously, one such inflation hedging strategy proved to be agriculture equities.
  • Correlations between agriculture and broad market stocks substantially decreased during the market selloff in 2022, as the risks facing financial markets were tailwinds for agriculture equities.
  • While inflation has been coming down, the food component remains sticky and faces many risks in the form of geopolitical conflicts, climate, and energy price shocks.
  • Companies involved in the food supply chain grew revenues in 2022 from higher food prices, often able to pass on increased input costs to end consumers.
  • Continued growth in the world population, along with an emerging middle class in populous nations, bode well for the long-term demand for food.

BMO Global Agriculture ETF (Ticker: ZEAT)

Trade Idea
ZEAT – agriculture with a profitability screen

The BMO Global Agriculture ETF (ticker: ZEAT) invests in equities that drive most of their business from agriculture-related activities, offering pure play exposure to the food supply chain. Consequently, the portfolio is concentrated the industry’s 30 most relevant names globally. 

The portfolio construction process behind ZEAT incorporates metrics, such as a profitability screen to ensure that companies in the fund have the highest earnings margins amongst their peers. This approach should allow the fund to perform particularly well during periods of elevated food inflation.

Sub-Industry Weight
Agricultural & Farm Machinery15.7%
Fertilizers & Agricultural Chemicals36.6%
Agricultural Products15.8%
Packaged Foods & Meats21.6%
Oil & Gas Refining & Marketing0.5%

Source: Bloomberg, as of January 262023.

Inflation hedging – owning exposure to the key risk

Canadian CPI (Consumer Price Inflation) ended 2022 at an annual rate of 6.3%, with the food component growing by 10.1%1. While geopolitical conflict in Europe and pandemic disruptions played key roles in elevating inflation, the outlook for food price is imperiled with risks.

An escalation of the Russia-Ukraine conflict could further hamper the supply of vital food commodities. Furthermore, emerging climate risks, due to extreme weather patterns, threaten farms all over the world, especially since recent farming practices have focused on extracting more yield from the same area of land. The impact of weather on farmland thus leads to greater loss of output than ever before. Additionally, another price shock in oil could raise input prices for food. 

As previously mentioned, given that ZEAT is designed to hold companies that have higher profit margins, the fund may potentially be more resilient in an environment where there are increasing inflationary pressures on food. As a result, escalating or persistently high food price levels should positively impact ZEAT’s performance. 

2022: Correlations between agriculture stocks and broad markets have significantly declined

Agriculture equities (as proxied by the Solactive North American Listed Global Agriculture Index (SOLNAAG) have shown strong performance in low and high inflationary environments alike. 

Low Inflation Regime: 2017-2021

Per-Annum MetricsGlobal Ag IndexS&P 500 Index
Total Return11.7%16.0%
  • Correlation: 0.97

High Inflation Regime: 2022

Per-Annum MetricsGlobal Ag IndexS&P 500 Index
Total Return8.3%-12.2%
  • Correlation: 0.18

Source: Bloomberg, Solactive; Numbers in Canadian dollar terms. SOLNAAG: The global securities listed in North America of companies that have business operations in the Agriculture or Food Production industries. S&P 500: A stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

6 Month Rolling Correlations: Global Agriculture vs S&P 500

6 Month Rolling Correlations: Global Agriculture vs S&P 500

Source: Bloomberg, as of December 312022.

As shown above, SOLNAAG returned 11.7% per annum in the five-year period from 2017-2021 and rose by 8.3% in 2022. Furthermore, the correlation of SOLNAAG with the S&P 500 Index went from 0.97 during 2017-2021 to a mere 0.18 in 2022


Long-term demographic trends should support growth in agriculture companies

While inflation is a near-term concern, there are longer-term structural issues that may keep food prices high. The amplified spending power of an expanding middle class around the world, most notably in emerging markets like India, should shift global food consumption patterns away from necessities towards more nutritious foods. The U.N. Food and Agriculture Organization estimates we will need to increase global food production by 70% by the year 2050.2 These trends and tailwinds could positively impact many of the companies in the BMO Global Agriculture ETF (ticker: ZEAT) over the long term. 

1 StatsCan, as of December 312022.

2 United National Food and Agriculture Organization.


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