Trend: Food prices will rise as food production will not keep up with demand in the next few years.
Jim Rogers recently said that farmers will be the next wealthy class. The May 2009 issue of Scientific American lists a number of significant trends for a food shortage in the future. Benson at Prudent Investor Newsletters says that government intervention in financial markets, countering the natural deflation cycle with money creation, creates inflation that will show up in food prices (and gold) soon. Seeking Alpha recently evaluated six ETFs that provide exposure to agriculture futures.
ETFs that might gain if this trend gains traction include:
PowerShares DB Agriculture ETF (DBA)
iPath Dow Jones AIG-Agriculture ETN (JJA)
ELEMENTS Linked to the Rogers International Commodity Index – Agriculture ETN (RJA)
iPath Dow Jones AIG-Grains ETN (JJG)
ELEMENTS Linked to the MLCX Grains Index ETN (GRU)
ELEMENTS Linked to the MLCX Biofuels Index ETN (FUE)
Link: Food Shortages, Scientific American, 2009-05.
In the May issue of Scientific American, Lester Brown discusses how food shortages could be the weak link that brings down civilization. In this feature article, “Could Food Shortages Bring Down Civilization?” Brown reveals that the biggest threat to global political stability is the potential for food crises in poor countries to cause government collapse. Those crises are brought on by rising demand and ever worsening environmental degradation.
“In the twentieth century, dramatic rises in grain prices resulted from poor harvests. They were event driven and short-lived,” Brown says. “In contrast, the recent escalation in world grain prices is trend-driven, making it unlikely to reverse the rise in food prices without a reversal in the trends themselves.”
Demand side trends include the addition of more than 70 million people to the global population each year, 4 billion people moving up the food chain—consuming more grain-intensive meat, milk, and eggs—and the massive diversion of U.S. grain to fuel ethanol distilleries. On the supply side, the trends include falling water tables, eroding soils, and rising temperatures. Higher temperatures lower grain yields. They also melt the glaciers in the Himalayas and on the Tibetan plateau whose ice melt sustains the major rivers and irrigation systems of China and India during the dry seasons. Without a massive intervention to reverse these three environmental trends, Brown argues, more and more states will fail, ultimately threatening civilization itself.
Link: prudent investor newsletters: Four Reasons Why ‘Fear’ In Gold Prices Is A Fallacy.
...this episode of intensive money printing on a global scale will have a tremendous impact on food prices!!! If the boom in financial markets in emerging markets does extrapolate to “reflation” then there will be a tidal wave of demand to be met by insufficient supplies!! The next crisis may even be a food crisis!
In addition, the inelasticity or poor or lagged response from the price action, possibly due to overregulation, subsidies, import tariffs, etc… , suggests of a prolonged supply side response; as I earlier noted -the boom in food prices in 2007 didn’t translate to a meaningful supply side adjustment.
So those obsessing over the “deflation” bogeyman will most likely be surprised by a sudden surge of Consumer Price Index especially when food prices hit the ceiling.
This is equally bullish for gold.
Moreover, for governments and those fearing deflation who are in support of policies operated by the printing press, it seems to be a case of “be careful of what you wish for!”
Link: Which of the 6 Agriculture ETFs is Best? -- Seeking Alpha.
PowerShares DB Agriculture ETF (DBA) – The ETF has been around a little over one year, the most of any of the ETFs on this list. Four equally weighted commodities make up the base allocation for DBA: corn, soybeans, sugar, and wheat. The expense ratio for all ETFs on the list is 0.75%. DBA is the most liquid of the ETFs by far, but the concentration in only 4 commodities does put the risk at above average.
iPath Dow Jones AIG-Agriculture ETN (JJA) – The ETN is a little more diverse than DBA, with 7 commodities. The largest allocation is in soybeans (31%), followed by wheat (20%), and corn (16%). Since it began trading in October 2007 the ETN is up 28% versus a gain of 36% for DBA. The liquidity is more than enough for investors and the only issue is 1/3 of the ETN in one commodity, soybeans.
ELEMENTS Linked to the Rogers International Commodity Index – Agriculture ETN (RJA) – For starters, do you think they could have come up with a longer name for their ETN? Second, keep in mind this is an exchange-traded note [ETN], versus and ETF. Most investors will never know the difference and I will not go into the intricacies in this article. RJA is the most diverse of the group, with 20 different agriculture commodities represented. The top holdings include: wheat (20%), corn (14%), cotton (12%), and soybeans (9%). With more diversity among commodities, the upside potential will be less than the previous two ETFs, but the downside will also be less. For example, the ETF is up only 20% in the same time frame as the other two above, thus lagging. During the one-week pullback in mid January of the agriculture ETFs, DBA lost 9%, JJA 7%, and RJA was only down 5%. This ETF is perfect for the more conservative commodity investor.
iPath Dow Jones AIG-Grains ETN (JJG) – The grains are considered a sub-sector to the agriculture and consequently there are not nearly as many to choose from when building a grains ETN. JJG is composed of only 3 commodities: soybeans (46%), Wheat (30%), and corn (24%). Recently it has been okay to be concentrated on three very hot commodities; since late October the ETN is up 31%. The two problems with JJG are the low average daily volume resulting in large spreads and the risk of being over concentrated.
ELEMENTS Linked to the MLCX Grains Index ETN (GRU) – The newly introduced ETN from the company that brought you RJA began trading this week and has yet to bring in the volume needed to get rolling. That being said, it is an alternative to JJG because it offers a similar strategy. The major difference is where the money is allocated. The top holdings are: wheat (47%), corn (36%), soy meal (10%), and soy beans (8%). If wheat is your game, go with GRU. If soybeans get you more excited, JJG is there for you.
ELEMENTS Linked to the MLCX Biofuels Index ETN (FUE) – This ETN may not sound like it should be included in this list, but after I share with you the allocation you will understand. The top holdings are: soybeans (32%), sugar (25%), corn (21%), and soy bean oil (13%). FUE is very new as well and has yet to attract the volume and therefore spreads could be an issue. Other than that, the one issue I have with FUE is the absence of wheat. Because wheat is not considered to be used in biofuels it is not included. I want to have exposure to wheat, therefore choose one of the other five candidates.
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