By Vivek Dasari + Raj Udeshi
Agricultural commodities came close to their all-time highs in mid-February. Despite the market turbulence we've been experiencing the past few months, and the headwinds ahead, agricultural commodities look to be a promising investment choice.
David Hallam, director of FAO's Market and Trade Division, warned last week that the short supply of agricultural commodities will drive up the price of food in the low-income food-deficit countries, like Egypt. One reason for the shortage – grain supplies being dangerously low due to hostile weather. Bloomberg noted that "parts of China, the biggest grower, had the least rain in a century, some European regions are the driest in 50 years and almost half the winter-wheat crop in the U.S., the largest exporter, is rated poor or worse."
Not only are the agricultural commodities supply unusually low, but also demand for these commodities are continuing to rise. Despite Russia lifting its export ban, farmers will not be able to produce enough food to satisfy the growing demand. To us, that means agricultural commodity prices have nowhere to go but up. Silver and gold and other precious metals are likely speculation-plays at this point, but Agriculture macro picture provides more rational reasons to go up.
Although the increase in agricultural commodities signals tough times ahead for the poorer nations, the effects may not be felt strongly back home. As the EU remains on unstable ground, especially with the S&P on default watch for Greece, more and more investors will look towards the U.S. dollar for stability. Caveat – if the USD index manages to rise at the same rate as agricultural commodity prices, then the U.S. won't feel nearly as dramatic a rise in the price of food on its shores.
Using the HiddenLevers Macro Trend Screener, we looked for the best picks to take advantage of the growing agricultural commodities market. We chose the Dow Jones Agricultural Commodities Index as my lever, to find the stocks most highly correlated with that economic trend. Compare CF Industry Holdings (CF) and Archer Daniels Midland (ADM):
(Chart created using Hidden Levers app)
CF is the definite winner, with an Agricultural Commodities Impact of 12.38. Meanwhile, ADM has an Agricultural Commodities Impact of .44. The economic lever exposes the winner in so many industries.
One last note - Our technical instincts make U.S. a little fearful of the M pattern that is forming in the Agricultural Commodities lever. (Look at 5y + 10y charts). The U.S. dollar could shoot up for a number of reasons, crashing commodities across the board – the instability of poorer countries devaluing their currencies, the ECB actually letting Greece default, etc. — this could make U.S. all eat our words.