The Real Crisis is Beginning to Unfold… and It’s Not Financial Part2
To rehash, we’ve added roughly three billion people to the earth’s population since the ‘60s. We accommodated this growth by using fertilizers, irrigation, and other systems that have deleterious effects on land overtime. As a consequence, worldwide arable land per person has essentially halved from 0.42 hectares per person in 1961 to 0.23 hectares per person in 2002.
Because of this, stocks-to-use ratios are now at their lowest levels since the ‘70s (a time that saw food prices spike dramatically). Thus we have growing demand, lower productivity and lower inventories. It’s not difficult to see where this is going.
Indeed, we have the makings of a real food crisis coming up in the next few years. A few bad seasons and it might come even faster. Indeed, 2007-2008 saw a record harvest for grains, but stocks-to-use ratios barely improved at all. So we’re already at the point that even a record harvest doesn’t dramatically increase the amount of extra food we’ve got lying around after demand.
There’s also another catalyst at work here: dumb government interventions. Last year’s rice shortage in Asia was induced NOT by lack of supply but by government restriction on exports. Given the unprecedented degree of government intervention we’re seeing in the financial markets (more in developed nations, than developing ones), it’s not a stretch to imagine the US or other developed nations imposing similar policies with equally disastrous consequences.
Barring some kind of serious change (a huge sudden wave of farms coming online, or some miraculous breakthrough in technology), the economics predict some kind of good shortage is coming our way. A few dumb moves by the government would set prices even higher, resulting in all out social unrest. Sounds crazy, but it’s already happened in 30+ countries worldwide in the last two years. And it’s not like the US or other developed nations are immune to food shortages.
So how does one profit from this?
There are a number of ways. You could invest directly in an agricultural commodities ETF or ETN. There are a fair number of them already available:
Investment Vehicle Symbol # of Commodities
Rogers Agriculture RJA 20
Bloomberg Agri ETN UAG 12
Bloomberg Food ETN FUD 11
iPath Dow Jones Agri JJA 7
Elements Biofuels FUE 7
Powershares DB Agri DBA 4
Elements Grains GRU 4
iPath Dow Jones Grains JJG 3
Bloomberg Livestock ETN UBC 2
iPath Dow Jones livestock COW 2
Elements Livestock LSO 2
You could also invest in a company involved directly or indirectly with agriculture:
Company Symbol Sector/ Focus
Syngenta SYT Seeds
Monsanto MON Seeds
Potash POT Fertilizer
Mosaic MOS Fertilizer
Agrium AGU Fertilizer/ Chemicals
Viterra TSX: VT Wheat
You could also play agricultural commodity prices with leverage via the futures market. Just make sure to use tight stop losses if you’re using leverage so you don’t blow up a la the Amaranth Hedge Fund if your trades go against you.
Personally, I suggest doing a mixture of all three. Buy one of the more diversified agriculture ETF (maybe RJA or UAG), a couple large cap agriculture companies (maybe TSX:VT and SYT), and then some futures. You could also go directly into the industry by investing in any number of privately held farmland or farming companies. In particular South America has a lot of high quality land available.
Thus far agricultural commodities have lagged their industrial and energy counterparts. This won’t last forever. The fundamentals are in line with an agriculture boom. And I expect we’ll see it begin in earnest in the next 2-3 years. I will, however, stress that I do not think agricultural prices will erupt within the next few weeks. This is not a short-term trade, but a long-term play.
