By Steven Orlowski
A recent report by UK-based “think tank” Chatham House suggests that the world is mere steps away from a food crisis. Spurred on in part by emerging market growth, what may become a troublesome situation for the world can be a profitable opportunity for investors.
The report stated that the past decade of increasing commodity demand has created an environment of “resource stress.” The prime contributor being the rapid growth and sheer amount of consumption within the emerging market regions.
The report points to expected “supply disruptions, volatile prices, accelerated environmental degradation and rising political tensions” in the coming years. The report also suggests that the although the “resource boom” is maturing, food commodity supplies will remain strained and that the world remains perilously close to a food crisis.
In addition to the BRIC countries, the significant impact of which has been in effect for many years, some of the “frontier markets” were noted as having particular impact over the coming decades -- countries like Turkey, Thailand and Vietnam.
With significant amounts of people within the more “developed” emerging markets and the up-and-coming frontier nations, there will undoubtedly be continued strain on producers and suppliers. One way to play the impact of emerging markets on agricultural commodity prices is the the Powershares DB Agriculture Fund (NYSEARCA:DBA). DBA does not owns stocks, but rather invests in futures on agricultural commodities. The top four holdings, representing 12.5% of the portfolio each, are corn, soybeans, sugar and live cattle. The fund is very liquid, and is the most actively traded agricultural commodity fund. For sophisticated investors, there are plenty of other more focused funds to consider, but DBA is a great place to start building the agricultural component of a portfolio.
Although the fund is essentially flat on a year-to-date basis, there can be an argument made that a slight uptrend is being established. What may prove to be a double bottom also seems to be developing, between mid-November and mid-December 2012, which would support the idea that the fund is ready to move higher.
The five-year chart also supports this idea, with a consolidation in play that began at the end of 2008. The fund appears to be trading right in the middle of the current range, between approximately $26.00 and $31.00 per share. Downside risk in the near term should be limited to the low of $26.00. The upside, however, could be much greater given previous levels achieved in recent years.
It is difficult to imagine demand for agricultural commodities not increasing in the future. As witnessed in the United States with a plague of droughts recently, food shortages send prices higher. Although a crisis on a global scale is not something any of us wants to witness, it does, however, present a potentially very profitable trade.