Don't go against the grain

These 3 ETFs offer long-term upside exposure to rising agricultural demand.

By TheStockAdvisors Mar 22, 2013 1:06PM
 Wheat field copyright Don Paulson Photography, SuperStockBy Jim Powell, Global Changes & Opportunities Report

In my opinion, the solid long-term fundamentals for commodities mean that today's off-peak prices are creating an excellent buying opportunity.

The most promising commodities now are the major crops, nearly all of which have performed well for several years. In a hungry world with an expanding population, I think agricultural commodities will continue to outpace many investments -- including precious metals.

In addition, there are other major factors that are pushing up agricultural prices:




  • Increasingly affluent people throughout the world are adding more animal protein to their diets. Because it takes 30 pounds of grain to make a pound of beef and 12 pounds of soybeans to make a pound of pork, it is easy to see the impact the expanding demand for protein will have on grain supplies.

  • The world is running out of phosphate and potash for fertilizer, neither of which can be manufactured. Rising fertilizer costs always push grain prices up.

  • Crop production is also highly dependent upon oil, another rising cost that will boost prices.

  • Many agricultural pests and pathogens are becoming resistant to antibiotics and poisons. Crop losses to diseases and bugs will have an increasing influence on prices.

  • Farm productivity growth is slowing dramatically and is close to what many experts believe to be its practical limits. That means the supply of food is unlikely to keep pace with increasing demand.

  • The amount of economically viable agricultural land is not increasing significantly. Water shortages are actually decreasing the amount of usable land in many of the world's bread baskets.

  • Climate change is causing severe disruptions to food production in many parts of the world. Australia, Russia, and the U.S. have been experiencing droughts and floods, sometimes going from one to the other from year to year.
The bottom line is, agricultural prices should rise significantly over the long term, and so should the profits of its most efficient producers.

Most investors overlook agricultural commodities because there has not been an easy or low-risk way to trade them. The traditional method has always been to take positions in the futures market, which for most investors can be like jumping into a pool of sharks.

However, futures are no longer the only way to invest in commodities. In recent years, several commodity ETFs have been introduced that make it easier, and safer, for individual investors to trade them. Millions of shares in popular ETFs are traded each day.

To avoid big price swings due to a low daily trading volume I think you should avoid small, highly-specialized ETFs.

Unless you have a cookie jar full of antacids, I also think you should avoid "ultra" and "double short" funds that double the size of the price changes the ETFs track.

Your best bet is to invest conservatively in long-range commodity trends. Although prices can swing widely near term, I believe long-range investments in agriculture will be very profitable.

For the broadest position in agricultural commodities, I recommend the large and diversified PowerShares DB Agriculture Fund (DBA).

This ETF tracks corn, wheat, soybeans, sugar, coffee, cocoa, cotton, cattle, and hogs – all of which are used in most regions of the world. If you want to own only one agricultural commodity fund, DBA should be your choice.

However, I think you will do better over the next few years if you focus just on the grains, for which demand is rapidly rising.

In my opinion, the most attractive ETF that tracks the price of corn, wheat, and soybeans is the iPath Dow Jones Grains Total Return Index (JJG). As its name suggests, the fund mirrors the performance of the popular Dow Jones Grains Index.

The iPath fund is currently correcting after the most recent of two large advances it made over the past four years. Perhaps the price will continue to weaken over the near term. Longer term, however, I expect to see the grains and the fund rebound.

For a diversified investment in companies (as opposed to the commodities themselves) that benefit from rising grain prices, I recommend the Market Vectors Agribusiness ETF (MOO). The fund has done very well in recent years, and it continues to look strong. I expect to see excellent long term profits from "The Moo Fund."

In addition to following the leading grain producers and processors, this fund also tracks the two leading fertilizer companies: Mosaic (MOS) and Potash (POT).

More from TheStockAdvisors.com

7Comments
Mar 23, 2013 11:26AM
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The main cause of high agricultural commodity prices is the federal reserve and printed money.
Mar 23, 2013 5:09PM
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Farmer Ray, you're right, especially when you figure that you're not just using the grain, but the whole plant for silage.  However, I think you're underestimating your feed requirements a little, but the author is off by a mile.
Mar 23, 2013 8:34AM
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I think the author has some bad figures in his article. It should take less than one fourth the feed to prouduce the meat he is talking about. Also soybean meal is used in hog feed as an additive not as        the sole source of feed.
Mar 22, 2013 10:10PM
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The iPath Grains Fund is an ETN. You take on counterparty risk by investing in this debt instrument.
Mar 24, 2013 1:34PM
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Didn't really think the FED printing money, or swapping debt...HAD VERY MUCH, to do with rising FOOD PRICES...??  (a touch of inflation,maybe ?)

 

Does this person really invest, or come only to Rant and Rave...?? sweet geezus..

 

The MAIN reasons from my perspective ( the Article points most out).

Are severe climate swings/droughts Worldwide..

Demand....For better food product worldwide.

Higher energy cost to produce..Effects everything from seed cost to trucking and processing.

10s of thousands of small farms/ranches 80-160 acres, have retired or died...

Much of that land lays fallow...."We are but one location" of thousands.

Mar 24, 2013 1:05PM
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I think when people write articles such as this, maybe more research should/could be in order...

 

Of course having an Agricultural or Farming Background might be beneficial also...??

Although having been around farming and ranching...

 

I guess before investing in GE, maybe "I should have known" something more about; Wind Turbines, Jet Engines and Locomotives ??

So the whole premise or point is moot....

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