Growing, Growing… Gone?

Jeff Opdyke (August 13, 2010)

The Decade of Rising Commodity Prices And Where to Look for Profits

In a world where many are preoccupied with Malthusian worries about too many people and too few resources to feed them, should you start stockpiling foodstuffs in the event that you might be in danger of going hungry in a decade?

Many of you might already have a well-stocked pantry just in case of an emergency of some sort. Or in the event that you want to be prepared to satisfy a major chocolate craving … every night for the next five years, it’s a great excuse.

But when it comes to the global food supply, chances are that we’re not going to run out of chocolate … or vegetables, dairy, wheat or even meat anytime soon.

The picture isn’t totally rosy, however, as challenging weather conditions mean reduced or even destroyed harvests for many of the world’s farmers. It is because of these shortages that prices are gearing up for a big bull run over the coming months, and well into the next decade.

For you, this means a bounty of investing opportunities. In other words, instead of looking at your growing supermarket receipts with a sense of defeat, you have an incredible opportunity to instead look at your brokerage statement to see the growing returns you can make off a diminishing – but certainly not disappearing – food supply.

The UN Food and Agriculture Organization (FAO) and the Organization for Economic Co-operation and Development (OECD) recently released a joint report, Agricultural Outlook 2010-’19. They conclude that global Ag output will likely slow over the next 10 years. But the industry globally is on track to meet expected world food demands.

The bad news: The OECD-FAO expects farm-commodity prices over the next decade will be on the rise.

Wheat, Meat and Oil …

On average, the Outlook report expects that wheat and coarse-grain prices will be between 15% and 40% higher in real terms (adjusted for inflation) than prices between 1997 and 2006, just before the commodity spike of 2007-’08.

Edible-oils prices: up more than 40%.

Dairy prices: 16% to 45% higher.

The bodies expect livestock prices to jump as well, though not necessarily as markedly as other commodities. But you have to remember a few facts about livestock pricing that could muck up those calculations and result in sharply higher meat prices:

1) Livestock depend on other commodities, such as corn and other crops for feed. Higher prices elsewhere on the farm will flow through to the price of beef, pork, lamb, etc.

2) Land prices, despite America’s property-price purge of late, are growing more expensive, making it costlier on some level to buy additional land to increase production.

3) Increasing wealth in developing nations is driving demand for animal protein at a pace “faster than for any other farm commodities,” the Outlook report notes.

Hungry and Angry …

Though price rises will be an annoyance for Western economies, they probably won’t be a major cause for concern. Food costs as a percentage of income are relatively low to exceedingly low: about 6% in the U.S., and 15% or less throughout the bulk of Europe, Australasia, and big, developed Asian economies like Singapore, Hong Kong and Japan. That data, 2008 vintage, comes by way of the U.S. Department of Agriculture’s Economic Research Service.

But this is where problems arise that could cause normally rising prices to surge, and create all manner of havoc. Food costs have a major impact in developing and frontier nations … Russia, 30% of income; China, 34%; India, 36; Egypt, 38%; Vietnam; 39%; Nigeria, 40%; Indonesia, 44%.

Those countries represent a very large part of the world’s population, and are home to some of the world’s poorest people. All told, the OECD-FAO estimates that 1 billion people in the world are currently undernourished because they don’t have the money to eat more than a few nibbles of rice or legumes or wheat noodles a day.

As commodity prices rise for items like wheat, rice and cooking oils, the number of people whose income can’t cover basic food costs naturally swells.

And suddenly we have a problem.

The last go-round with food-price spikes caused a rash of rioting and unrest all over the world.

Numerous countries, in turn, imposed export controls on various food commodities, exacerbating the price increases and, thus, the intensity of local anger over personal food security

Already this year, wheat is up some 70% on the Chicago Mercantile Exchange because drought conditions in various wheat-growing regions have sharply reduced expected yields. Russia in August banned grain exports because of the worst drought that wheat has seen in 130 years of weather records.

Where to Harvest Profits …

For investors, Mother Nature is sending you a big ol’ buy signal.

She’s saying the commodity bull market still has many miles to run before the legs weaken.

Ups and downs will punctuate the journey, as with any market. But over the longer haul, commodities will continue to provide solid returns for long-term investors.

You can choose to play that trend through commodity-focused ETFs and ETNs (my colleague Eric Roseman showed you why you should pick up some grain plays in The Sovereign Investor yesterday), or you can buy and sell commodity contracts (a much riskier endeavor, unless you’re an expert).

Me? I like to own the commodity companies that look to profit from higher prices for the foods they produce.

I can choose specifically the commodities I want to target (palm oil will be a big winner). And I don’t have to worry about the short-term impacts of seasonal variations tied to drought and overabundance that are endemic to commodity contracts.

I’d be looking for dairy, grains and livestock operations in places like Australia, New Zealand, Argentina and, particularly, Brazil, where the ag industry is the fastest-growing in the world.

I’d certainly be doing a lot of digging into the palm-oil plantations in Malaysia and Indonesia.

Edible-oil consumption rises alongside income in developing nations, and these two Asian nations are world leaders in palm-oil production — a staple around the world.

You’ll find sugar production in parts of Southeast Asia, particularly Thailand, as well as in places like (again) Brazil, and Egypt and Western Africa.

And don’t rule out fertilizer firms.

Farmers need fertilizer in increasing quantity to improve yield, which is a key issue as food demands increase on the world’s arable lands. You’ll find fertilizer makers listed on markets all over the world, including the U.S., though some of the cheapest plays on fertilizer are listed on developing exchanges, where most American investors never think to look.

And that underscores the final point here … no matter how you go about investing in the ongoing commodity trend, pay attention to valuation.

Commodity stocks go through periods of hype followed by periods of ennui. Find the ones you like and buy during those periods of ennui. The shares will be cheap, probably in the single-digits on the basis of price-to-earnings (P/E) ratios.

And don’t forget to poke around overseas stock markets. As I’ve noted many times, opening a brokerage account overseas is exceedingly easy these days and gives you access to investments you just can’t find stateside. Best of all, they’ll often offer you far more value in terms of potential return and dividend income.

Now, go forth and sow some Ag profits…

Until next time, keep a global view.

Jeff Opdyke
Senior Editor, The Sovereign Society

P.S. My colleague Eric Roseman is a global commodities guru with 20 years experience. He’s got 8 compelling reasons you should be buying commodities now.

We’ve prepared a special FREE video for readers. Click here now to watch the video, and to find out how you can get 2 months free of Eric’s signature investment research and top picks in his Commodity Trend Alert.