Why The Grain ETF Has Long-Term Profit Potential

Jun.19.12 | About: iPath DJ-UBS (JJG)

By Jonathan Yates

While legendary investors such as Jim Rogers, Warren Buffett, and George Soros have invested heavily in grains, the trend has not been a friend for shareholders in the grain ETF iPath DJ-UBS Grains TR Sub-Idx (NYSEARCA:JJG).

Jim Rogers is so bullish on grains and other agricultural commodities that there is a grain ETF (NYSEARCA:RJA) that tracks his investments. George Soros has invested directly, particularly in the Brazilian farm sector. And Warren Buffett has invested indirectly through railroads, which are needed to haul the grains from the producing areas to the ports that ship them to Asia.

That is small comfort however, for shareholders of grain ETF JJG, which is down almost 13% for the last 52 weeks of market action. For the last week, JJG is down 3.3%. It is trading below is 20-day, 50-day and 200-day moving averages. Yet the slide helps make JJG an attractive vehicle for investors to profit from the growing demand for grains.

By far the most positive trend is the rising consumer class in emerging market nations around the world. Even during the Great Recession, emerging market nations still grew. The economies of China, India, and other emerging markets are expanding much faster than the United States or Europe.

As the middle class expands around the globe, diets get richer in meat products. Farmers grow more grain to fatten up the cows and pigs for market.

There are also negative trends, though. Nations like Argentina are making it more difficult for foreigners to own farmland and related assets. But JJG offers a diverse portfolio to protect against such events.

Fossil fuels will also likely rise in value, which means more grains and farmland will be diverted to alternative energy. Reduced supply and high demand will raise the price of grains.

Those are long-term trends. In the short term, if a third round of quantitative easing is introduced, the JJG grain ETF will likely rise given how oil (NYSEARCA:USO) and other commodities soared with the second round of quantitative easing. During that period -- late 2010 to mid-2011 -- JJG went from trading in the mid-$30s to the mid-$50s as USO surged too.