At the beginning of 2012, agriculture prices are starting to turn around after the big correction that occurred in 2011 (Chart 1). Speculators have started to add net long positions in agriculture due to drought concerns in South America.
Soy Bean prices are going up on dry weather in Brazil and Argentina.
Palm Oil prices benefit from the problems in the Soy Bean crops.
Cotton prices are improving but are still weak. Cotton prices are bottoming out though.
The rubber market is likely to continue the uptrend due to bad weather conditions. Demand for rubber is strengthened by the buying up to the Lunar New Year.
Wheat prices are still weak due to large wheat production.
Coffee prices had a surge in 2010 and were correcting in 2011. Prices will remain firm though due to supply shortages.
Sugar is in an uptrend, but speculators are turning bearish.
Corn prices are weak due to a surplus in inventory, but seem to be bottoming out.
Rice prices are turning in a downtrend as India starts exporting more rice to the world.
Overall, we can say that agriculture prices are in the process of bottoming out. Wheat, corn and cotton (the three biggest agricultural commodities) are still in oversupply though.
If you are willing to play the agriculture market for the long term I recommend Adecoagro (AGRO) (Chart 2). Adecoagro is an agricultural company based in Brazil, Argentina and Uruguay. The company has plantations of soybeans, corn, wheat and rice. If you compare Chart 1 with Chart 2, you can see that there is a strong correlation between the two charts. Both charts are bottoming out. It's pretty safe to say that Adecoagro is a pure agriculture play and follows food prices. Agriculture had been correcting for the whole year 2011, so it's time to get back in.
Adecoagro is trading at a P/E of 12 and is basically at book value: 1.06 price to book value (120,499,090 common shares at $US 1.1 billion equity). The company has a nice track record of 15% production growth. George Soros has bought more shares of Adecoagro on 20 May 2011 and now owns 27 million shares (largest holding). Since Soros bought those shares, the stock has lost 15% due to decline in food prices, so it's not too late to get in.
HSBC is pretty bullish on Adecoagro and gives it a price target of $US 13, which is a 30% increase at today's prices. Reasons are that Brazil and Argentina are very low production cost countries. Although Jim Rogers has been very bullish on agriculture, he sees some problems with Brazil's government. One of these problems must be the fact that the Brazilian government put a limit on foreign investment in agricultural land in Brazil. This puts a damper on the growth of this company due to a diminishment in foreign investments (Adecoagro is based in Luxembourg).
But all in all, Brazil is a very commodity rich country and its government has a track record of investing in agriculture. The world population will keep growing so it's a must to at least keep some of your portfolio in agricultural land and Adecoagro is the perfect way to do. Considering that agricultural land is one of the best places to invest in, as Marc Faber has told us many times, I rate Adecoagro a buy.
Disclosure: I am long AGRO.