Food Prices Will Only Rise: The Time to Buy is Now

Do you know Jim Rogers? Recently, the bow-tied investing legend has taken to appearing on CNBC and blasting the Federal Reserve for its anti-dollar policies. I respect Jim for speaking his mind. But I respect him even more for his investment insights.

Jim Rogers co-founded the Quantum Fund with George Soros in 1969. Between 1970 and 1980, the fund returned an incredible 4,200%, outperforming the S&P 500’s performance of 47% by an enormous margin. Rogers, by then a multimillionaire, “retired” at the ripe age of 37. He has since completed two massive trips around the world: the first via motorcycle, the second in a custom made Mercedes S series. I highly recommend his books chronicling these trips, Investment Biker and Adventure Capitalist. They’re entertaining readers. And Rogers’ knowledge of international markets is virtually unparalleled.

So when Jim Rogers talks, I listen very closely. Starting in 1998, Rogers became bullish on commodities. Dissatisfied with the commodity indexes that were available at the time, he didn’t just sit back and watch. Instead, he launched his own commodity index. Since that time, the Rogers International Commodities Index has risen nearly 400%. In contrast, the S&P 500 is only up 18%.

However, the vast majority of Rogers’ commodity gains have come from hard commodities. Oil, gold, aluminum, copper, and nickel have all tripled in the last five years. Soft commodities, like wheat, corn, and soybeans on the other hand, remain at historic lows relative to their hard counterparts. In 1960, one barrel of oil traded for around the same price as one bushel of wheat or a bushel of corn.

Today, oil is at $100, wheat is at $10 and corn is at $5.46. It’s quite a discrepancy. And it won’t last long. Even if oil prices drop, agricultural commodities could see their prices triple and still not be even close to their historic relationship. It’s a simple matter of supply and demand. From 1974-2005, the world’s population grew by more than 1.1 billion people. However, most of them (?) and the rest of the world for that matter (?) weren’t eating anything resembling a western diet. For example, in 1980 the average Chinese consumer lived off $1 a day. However, as emerging markets’ economies began to expand, so did the diets of their citizens. In 1985, the average Chinese consumer ate 44 pounds of meat per year.

Today, it’s more than doubled to 110 pounds. And it takes 17 pounds of grain to generate one pound of beef. However, despite their massive growth in population, most countries haven’t increased their available farmland. In 1989,worldwide arable land was 1.6 billion acres. It’s 1.6 billion acres today. On top of this, inventories for corn, wheat, and soybean are near 40-year lows. Other soft commodities like cotton, sugar and coffee are at historically low inventories too. And thanks to a Congress that doesn’t understand economics, more and more farmland in the U.S. is being devoted to biofuels. This year one third of all U.S. corn production will go towards ethanol.

Simply put, food prices are not going down anytime soon. The time to buy is now. Jim Rogers certainly is. In an October 2007 interview he stated:

God knows how high the price of agriculture is going to go, so that's where I'm putting more of my money now... I think I'm going to make more money in agriculture than I make in precious metals.

There are a number of different ways of playing this trend. You could buy an Agriculture ETF, like the Powershares DB Agriculture ETF (DBA) or the iPath Dow Jones Agriculture ETF (JJA). A Swedish Bank has recently launched a fund that tracks the agriculture portion of Roger’s International Index too. Or you could buy a peripheral food play… say a fertilizer company like PotashCorp (POT) or Agrium (AGU). But no matter what you do, get some money into agricultural commodities soon. This will be one of the biggest trends of the next two to three years.

Disclosure: none

Comments

[Malkiel]

Buy? Forget that, START EATING!...

[UpNAmpd]

I placed a bet on GCC - the new kid on the block - but I'm holding onto DBA for the ride up. No doubt, the trend is from the lower left to the upper right.

[FootballGeek]

Anyone who wants to read about potash, and in general the boom in
commodities, there is a very good article in Saturdays edition of the
Globe and Mail.
globeinvestor.com
The title is "a lot more than wheat"

[whidbey]

My farm clients are confirming the problems of producing food in California and the Midwest. They are saying that for them the next ten years appears to be "locked in." The only sticker is water, California has limited water and the midwest is worse. I am buying both water and ag products. Very interesting article.

[fernando]

arable land havent increased but that land has became more productive over time

[Jason Hamlin]

Isn't in morally indefensible to speculate on a food etf, when you are in effect contributing to the increase in food prices. Speculating on DBA creates an artificial price bubble that makes food less affordable to masses of people across the globe and increases the amount suffering and death. Am I wrong? I mean, I am all for a profitable investment, but not at the expense of innocent human life. There are better ways to make money.