We think one of the big themes in 2010 will be investments in agriculture and soft commodities. We feel that due to the unique supply/demand dynamics of these markets, a normalization of global growth will result in relatively large price increases. The Goldman Sachs Commodity Index has recovered to levels around the 500 point mark, compared to about 350 points at the trough.
However, this is still far away from the all-time high of 890 points seen in 2008 when prices were driven by a lot of speculation. This time we think things are different and that current prices are very well supported. There is probably going to be more speculative money flowing into commodity markets again in 2010 but considering the supply/demand situation, we think soft commodities could easily go up 30%+ in 2010 and still not look overly expensive.
Here are various ways to play this opportunity but investors should look along the whole value chain in agriculture and not just invest in futures or ETFs. Some investments are a more leveraged play on rising agriculture prices - one of our favorite investments is fertilizer companies. They are in our opinion at the sweet spot of this development, since the rising world population requires a rapidly expanding supply/production to keep up with demand. In order to increase production efficiency it is essential to use more fertilizer to keep soil fruitful and achieve rising harvest yields.
The amount of land which can be utilized for the production of many agriculture products is relatively limited, therefore increasing production and efficiency is crucial. In anticipation of rising prices, increasing margins for producers, there is going to be more money available for fertilizers and crop protection products. Many of the companies in this area are still trading at attractive levels and we feel that prices of many of those companies could double within the next 12-24 months.
Disclosure: No positions