It’s Time to Ride the Bull Market in Agriculture (ZT)

Dear IDE Reader,

After a lackluster Santa Claus rally, the markets opened 2008 with a thud. The Dow fell 220 points, losing 1.67 percent on the day, while the S&P and Nasdaq sold off sharply as well. But it was not all bad news in the markets. Natural resources investors have a few things to smile about, with gold reaching a 28 year high at over $850 an ounce and oil hitting $100 per barrel for the first time ever.

Today’s trading makes the article below by IDE analyst Jon Herring all the more relevant. In it, Jon will show you two ways to profit from one of the most vital natural resources – food. Agribusiness and agricultural commodities are in the beginning stages of a massive bull market. And it’s a bull market that should continue no matter what happens to the U.S. economy. Keep reading to learn how YOU can reap the harvest!

MaryEllen Tribby

Publisher
Investor’s Daily Edge

There are two sure-fire ways to become wealthy by investing:

1. Compound your savings over a long period of time, or

2. Buy into the early stages of a major bull market.

Today, I will show you how to accomplish the second of these objectives by investing in what will be one of the biggest bull markets of the next 10 to 20 years.

Most investors are well aware of the existing bull market in precious metals, raw materials, and energy.  But there is another aspect of the natural resources bull market that has just begun ... and has gone virtually unnoticed.

I’m talking about the bull market in food and agriculture.  This bull market is being driven by the most fundamental concept of economics: supply and demand.  Quite simply, the demand for agricultural products is overwhelming the supply.  And this imbalance should continue for years to come, regardless of what happens in the broader economy.

For decades, food prices have been declining as scientists developed high-yield plant varieties and farmers implemented the latest improvements in equipment, pest management, and growth-promoting fertilizers.  But the days of declining food prices appear to be over.

According to the International Food Policy Research Institute, the world has consumed more grain than we have harvested in seven of the last eight years.  Currently, there is only 12 weeks worth of the world’s consumption of wheat and only eight weeks of corn remaining in stockpiles.  And demand for these grains is rising by more than 30 million tons per year!

Predictably, this has had an impact on prices.  In the past 12 months, corn and wheat prices are both up more than 50 percent, while soybeans, dairy, meat, and poultry are also on the rise.  For the three months ending in October 2007, the price of food rose at roughly three times the rate of overall inflation.

Why Demand is Outstripping Supply

There are several key reasons why the demand for food and agricultural products is soaring.

First, the world’s population is exploding.  There are simply more mouths to feed.  It is estimated that the world’s daily caloric intake will increase from 17 trillion calories per day today to nearly 25 trillion in the next two decades.

But it is not just the number of people that counts.  Even more important is what people are eating.  As the economies of developing countries grow, the personal wealth of billions of people is also growing.  In China, for example, the middle class is expected to grow from 100 million to 700 million people by 2020.

And as living standards improve, one of the first things to change is diet.  With the money to buy more than just a plate of rice and cabbage, the populations in developing countries are putting more eggs, dairy, poultry and meat on the table.

So not only is the demand for protein going up, but so is the demand for grain, because more protein consumption requires more grains to feed the animals.  In fact, it takes five to seven pounds of grain to produce just one pound of beef or pork.

The World Bank estimates that global grain production will have to climb by 50 percent and meat production by 85 percent to meet the projected global demand in the next 20 years.

Food vs. Fuel

But the increased demand for agricultural products does not just come from the dinner table.  The emergence of biofuels has also caused a significant boom in demand.

In the U.S., there are currently more than 130 ethanol refineries that consume 27 percent of the U.S. corn crop, according to the USDA.  An additional 80 plants are currently under construction.  When all of these facilities are operating, ethanol will account for half of the U.S. corn harvest!

Now combine that number with the 43 percent of the crop that goes to feed livestock.  That leaves just seven percent for food products.  Talk about a squeeze play.

To add to the supply and demand imbalance, consider that changes in climate and inclement weather have severely decreased crop yields in crucial places.  Drought in Canada, China, Europe, and Australia (suffering the worst drought in 1,000 years!) has also put significant pressure on world food supplies.

So what does this all mean?

Well, it means that over the long term, food prices are going up, up, up.  That presents an investment opportunity and inflation hedge in itself.  But it also means that any companies that help farmers produce more food, and do so more efficiently, will be very profitable investments in the coming decades.

And that will stand, no matter what happens to the global economy.  After all, people may cut back on clothes and cars and gadgets, but they won’t stop eating.

And in most countries, with declines in soil fertility, dropping water tables, and competition from urban development, it is proving difficult to increase the amount of land suitable for farming.  That means the best solution to the coming food crisis is for farmers to increase the yield they get from their existing land.

All of this translates into substantial long-term opportunities for the companies that grow, harvest, distribute; and service the global food supply.

Investing Safely in this Bull Market Mega-Trend

Well, fortunately it is much easier to invest in agricultural commodities and agricultural companies than it once was.  Here are two ways to do it:

Market Vectors Global Agribusiness ETF (MOO) – If you want to achieve wide global diversification among agriculture-related companies, there is no better way to do it than this ETF, with the appropriately named ticker.  MOO tracks the DAXglobal Agribusiness Index and holds positions in 40 companies trading on 13 global exchanges.

These companies run the gamut from equipment makers Komatsu and Deere, to seed and fertilizer companies such as Monsanto and Potash, to firms involved in agricultural chemicals, irrigation, food and livestock operations, ethanol and biodiesel, and food distribution.

This ETF began trading in September 2007 and gained 39 percent by the end of December.  Considering the long-term fundamentals of the agribusiness sector, this is just the beginning of greater gains ahead.  But keep in mind that this ETF is stretched to the upside, so it might be a good idea to accumulate on weakness.

PowerShares DB Agriculture (DBA) – There are few ways to invest directly in agricultural commodities without going into the futures markets.  But the PowerShares DB Agriculture ETF is one of the best.  This ETF provides equally weighted exposure to the four most widely traded “soft” commodities: corn, soybeans, sugar, and wheat.

DBA gained 34 percent in 2007, and with the supplies of these four commodities under long-term pressure from rapidly rising demand, this upward trend should continue in the years to come.

The Train is Leaving the Station ... Are You on Board?

No matter how strong the fundamentals, bull markets don’t move up in a straight line.  This one will be no different.  There will be certainly be volatility and corrections along the way.  But the fundamentals of the supply and demand equation foretell a long-term uptrend.

Do you expect the price of energy to go down in the long run?  Do you believe that governments will stop encouraging biofuels?  Do you think that the two billion people in China and India will stop eating anytime soon?

If you answered no to these questions, then it is time to build a long-term position in agribusiness companies and food commodities.  This mega-trend is on solid ground and the bull market is just beginning.

Sincerely,

Jon Herring