Commodity investing has been a difficult space to navigate over the past year. Though this asset class is known for its volatility, the last year has been plagued with unprecedented market instability, making commodity trading an incredibly frustrating venture. It is estimated that as many as 90% to 95% of investors lose money in the commodity space and last year’s returns likely only inflated that figure. That being said, there are still incredibly lucrative opportunities that exist. Gold, for example, finished up approximately 10% on the year though it was up much higher when its prices were sitting around $1,900/oz. Other notable wins included brent oil and live cattle while cotton and natural gas were among the worst performers. But what may be the most surprising to investors, is which commodity outperformed them all; milk [see also How To Lose Money Investing In Commodities].
Yes, you read that correctly. Milk outperformed in the commodity space by posting gains of nearly 36% in 2011. That more than triples the performance of gold, yet milk’s rise flew relatively under the radar being that it is not nearly as popular of a trade as the popular precious metal. To clarify, milk futures do not refer to the gallon jugs one can buy in a supermarket. Instead, milk futures are “for a class of milk that is typically powdered or condensed and used in production of other products such as cheese. That class of milk makes up just more than half of the 195 billion pounds of milk produced in the United States annually” writes Chris Isidore [see also Invest Like Jim Rogers With These Three Agriculture Stocks].
For now, consumers haven’t felt a significant pinch, with liquid milk prices rising by just under 10% in the previous year. But the more important question to ask is why powered milk was able to outperform some of the most powerful commodities in the world. The answer likely lies in the export market. While liquid milk is perishable and therefore difficult to export, powered milk has a much longer life span and is in high demand around the globe. With a number of countries around the world struggling to meet dairy demands, they have turned to our exports to help them get by. Through the first 10 months of last year, milk exports jumped 26% to roughly $1.3 billion. The U.S. has long been one of the top exporting nations for milk with the majority of our productions going to Canada and Mexico [see also 12 High-Yielding Commodities For 2012].
How To Invest
So now the question remains, how exactly does one invest in milk? There are several options that are available, ranging from indirect plays on the agribusiness sector all the way down to milk futures.
- CME Futures: There are actually a wealth of futures and options to play milk including class III and IV milk, international skimmed milk powder, and even non-fat dry milk futures and options. There are also a number of other dairy futures offered on this exchange
- Dean Foods (NYSE:DF): Dean Foods distributes a number of dairy-based products around the US. As a stock, DF has a relatively small market cap of just $1.97 billion though it has a hefty average daily volume of 2.3 million. DF will not be a direct play on the commodity, but may indirectly benefits from milk’s gain.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.