By Kevin Grewal
As nations around the globe emerge out of a recession and agriculture prices lag behind other commodities like copper and oil, there is good reason to suggest that higher agriculture prices are coming.
From a demand perspective, overall world population growth is positive and higher incomes are starting to boost consumption. Additionally, changes in eating habits in the developing parts of the world will likely increase demand for meats, dairy and other non-plant based foods. As this trend continues to emerge, demand for staple crops such as corn, water and land to produce demand will likely follow. Lastly, higher demand from alternative fuels that are generated through the use of agriculture products, such as ethanol generated through the use of corn, is anticipated to drive demand for agricultural products.
Although demand will likely play a role in putting pressure on crop prices, the real pressure is expected to come from a supply perspective. El Nino like weather conditions have resulted in droughts in agricultural producing India and Argentina while typhoon like conditions in the Philippines have placed a damper on production and overall output of agricultural products, in particularly the world’s most consumed staple, rice.
To add to supply woes, inventories of many grains are low and continue to deplete. According to the U.S. Department of Agriculture, stockpiles in corn and rice will drop before the 2010 harvest, for the time in three years, and the supply of sugar is expected to drop to the lowest level in nearly 15 years. In fact, total global production of rice has lagged demand in four of the past eight years and with increasing consumption is anticipated to erode stockpiles by over 40%.
Stockpiles of nonfat dairy milk, a staple product in baking products, have fallen by more than half of what they were at six months ago as production is down both domestically and internationally. In the short-term, supplies for most agricultural products are likely to fall short of demand, which will push prices higher. In the long-term, if these trends continue, production and output will have to significantly increase to keep up with increases in global consumption.
Some equities that have already started to benefit from this include:
- the PowerShares DB Agriculture Fund (DBA), up 18% from its March low of $22.50 to close at 26.61 on Monday
- the Market Vectors Agribusiness ETF (MOO) up 83% from its March low of $24.20 to close at 44.22 on Monday
- the iPath DJ UBS Grains Subindex Total Return ETN (JJG), which is up 18% from its October low of $34.51 to close at $40.85 on Monday
When investing in these commodity based ETFs, it is important to keep in mind the inherent risks and volatility involved. A good way to mitigate these risks is through the use of an exit strategy. According to the latest data from www.SmartStops.net, an upward trend in the previously mentioned ETFs could come to an end at the following price points: DBA at $25.86; MOO at $42.39; JJG at $39.12. These price points change as market conditions fluctuate and updated data can be found at www.SmartStops.net.