Agricultural Commodities: Playing an Acknowledged Theme

"It's tough to make predictions, especially about the future." - Yogi Berra

Just like a trying to see a lighthouse on a foggy day, trying to clearly envision the future can be tough. However, making out the likely shape and dimensions of those things you are trying to avoid, or aim towards, will likely speed you safely on your journey.

It's like that in investing too. Picking out the broad trends to aim for, or avoid, can help elevate your portfolio returns.

Agricultural commodities are one big, broad, theme going forward. The popular press has recently jumped all over this, pointing to food unrest around the world. While the "contra the herd" crowd would suggest that any trend reaching the front cover of your favorite pop magazine or newspaper is, most likely, nearly played out, they would probably be not so certain that this trend has.

Examination of the underlying factors suggest that this trend is likely to continue for awhile. Here are the factors, as I see them:

• Continued global population growth - check, this is still ongoing and unlikely to stop for several decades.
• Continued use of food stocks for bio-fuels - check, this is still ongoing. In the US, about 30% of the corn crop is going towards bio-fuel, compared to around 10% in the early 1990's. Given the presidential candidates' positions to date, and the strength of the lobbying industry in the US, this appears unlikely to diminish any time soon.
• Diet - a meat-centric diet is a huge consumer of grains for animal feed (it takes anywhere from 5lbs to 18lbs of grain to produce 1lb of meat (depends primarily on meat type)). With a rising middle class in China and India turning away from a formerly mostly vegetarian diet, this will continue to pressure grains. Check, this factor remains in play.
• Arable land is decreasing - decades of industrialization, and of water course management, have reduced the amount of quality arable land available. Growing desertification is also a factor too. Check, this factor remains in play.
• Climate change - long known by scientists to be likely to reduce yield in several ways. Humanity continues to pump out voluminous greenhouse gases, suggesting this factor will only intensify in the future. Check, this remains a factor.

Of course, against those trends, you have to consider the possibility of opposing trends occurring. I see those potentially as:

• Potential reduction in bio-fuel use - a possibility, but with the opposition of vested interests, unlikely within a 10 year window.
• Change in diet - again a possibility, the increasing cost of a meat-centric diet may reduce the volume of meat consumed in some areas. Yet, with this burgeoning middle class in so much of the world, it feels unlikely to occur without some support from government and the people's own conscience. Overall, it is unlikely to happen within a five year window.
• Finally, the potential for increased production of foods, due to farmers using more fertilizers and bringing all available land into production. This, I consider very likely. However, this may very well be offset by the declining yields associated with climate change.

On balance, I'd say that the current trend isn't anywhere near played out, and that agriculture remains a major investment theme going forward. If you agree, then you may very well want to stuff your portfolio with agricultural-related investment products, something I believe will fuel investment returns for a very long period of time.

Full disclosure: Long JJG, MOO, & COW (TSX exchange).

Comments

[me3tv]

I think you are absolutely right - long term. However, the dollar is about to gain some strength over the next year and a lot of forward expectations of exports may get pushed back. So , both commodities and farm machinery could easily fall back for a spell or at least reduce the vertical price climb.

[Rikiki]

If indeed the climate is warming, the amount of land in the extremes of North and South of continents will come into production. They will be growing more grains in heretofor unfarmable land in Alberta, Alaska, Siberia, Chile, New Zealand, etc.

Availablility of water irrigation is critical. Israelis "made the desert bloom" as we have done in the US in the San Joaquin valley, the Coachella Valley, Rio Grande Valley and others. The San Fernando Valley was desert before water was brought down from the north is the 20s and 30s. Humongus areas here in Texas are desert because we cannot move fresh (desalinated) water from the GOM 200 miles inland. There is really little if anything with the water delivery capability of the Central California Water Project or the Colorado River Project in the entire world.

Crop yields have grown considerably in the past 20 years.. Due both to use of fertilizer and genetic selection.

The urbanization factor in land use will mitigate itself as the tiime and cost of commuting become become unbearable for the vast majority of people who cannot handle the burden. People will resign themselves to living in European "stacked boxes". Perhaps some remote housing deveopments might even revert to farm land. Not a lot of people will commute daily from Tracy, Manteca, Gilroy and from Patterson, CA to San Jose any more.

It is the price of energy sources and human population grown which are the real limiting factors for the standard of living level around the world. Both have to be controlled to ensure adequate food supplies and quality of life for humans.

Rikiki

[rbblum]

The US is proving to be its own worst enemy. What will be said and by whom when the issue is articulated that infidels are taking food (corn) from the mouths of the worlds' starving people and driving their monstrous luxury-laden SUVs (with bio-fuels).