Raw Finance

Over this past summer, I authored an article on the under-reported farming initiative announced by the Group of 8 countries (G-8).  The theme centered on the G-8’s concern over the rising rate of hunger in the world, even as the world’s population continues to rise.  A G-8 statement put it this way: “The combined effect of longstanding underinvestment in agriculture and food security, price trends and the economic crisis have led to increased hunger. Food security is closely connected with economic growth and social progress as well as with political stability.”  My conclusion then was that a long-term investing opportunity was arising in agriculture.  That theme has recently been echoed by Ambrose Evans-Pritchard, International Business Editor for the UK’s Telegraph. 

Mr. Evans-Pritchard notes that the world’s grain stocks have been declining during the current decade: “The world’s grain stocks have dropped from four to 2.6 months cover since 2000, despite two bumper harvests in North America. China’s inventories are at a 30-year low. Asian rice stocks are near danger level.” 

One would expect then that grain prices would have increased due, at least to limited supply.  However, this is one commodity that has missed out on the so-called “reflation” rally that has driven metals and oil commodity prices higher this year.  “Wheat has crashed 70 [percent] from early 2008. Corn has halved. The ‘Ags’ have mostly drifted sideways over the last six months,” said Evans-Pritchard. “This divergence within the commodity family is untenable, given the bio-ethanol linkage to oil.” 

In the July article, I recommended using agricultural exchange-traded funds (ETFs) such as Market Vectors Agribusiness (symbol: MOO) and Powershares DB Agriculture (symbol: DBA).  Mr. Evans-Pritchard acknowledges the same, “but this amounts to speculation on food.” He further stated, “There are ancient taboos against this practice.”  I anyone knows what ancient taboos he is referring to, please drop me a line at rawfinance@gmail.com.  I believe that ETFs and other participants in grain and other commodities futures markets provide needed liquidity to those markets.  So, with respect to grains, farmers can get access to financial instruments to help lock in future prices or provide a hedge against falling prices to ensure their operations may continue smoothly.  Thus, I do not have any misgivings in participating in grains futures markets.  (Now, if this ancient taboo results in the appearance of a tarantula in my bed tonight, I might reconsider that position).

As an alternative to investing directly in agriculture markets in July, I recommended certain fertilizer producers, especially since their share prices had been knocked back after a strong run, but were still well below their peaks.  Three examples provided were: Potash (symbol: POT), Mosaic (symbol: MOS), and Intrepid Potash (symbol: IPI).  However, these have since jumped higher and now appear to be richly valued.  Mr. Evans-Pritchard noted the same and offered other investing ideas: Agrium (symbol: AGU) and Bunge (symbol: BG). 

To read Mr. Evans-Pritchard’s column, please click on the following link:  Food will never be so cheap again.

[Disclosure:  The model portfolio of Trafalgar Investment Advisers LLC is long DBA]