Hedge-fund managers and other institutional commodities traders
are usually pretty skilled at making broad economic forecasts. But
there's one variable they just can't seem to predict -- the
Mother Nature often creates havoc on agricultural production, which
can be good or bad, depending on your view. For the most part, this
is an asymmetrical factor because big disruptions from bad weather
carry much greater impact than getting a few extra bushels from
During the past year, searing heat wilted the Russian wheat
harvest, torrential rains flooded Australia's fruits and vegetables
crops, and a freak hailstorm destroyed the equivalent of 50,000
bags of South American coffee beans.
This time, drought is the culprit. Brazil and Argentina have
suffered through a brutal dry spell that could erase about 7
million tons of soybean production, cutting the harvest from 127
million tons down to 120 million tons. These countries are the top
two growers after the United States, so the damage (along with
rising consumption) could lead to a sizeable drop in global
In fact, global soybean stockpiles are projected to fall by as much
as 20% later this season from the same point in 2010 -- the
steepest decline in 16 years.
And in keeping with my mission as Chief Investment Strategist of my
Scarcity & Real Wealth
, I see real opportunity for investors to
from this shortage. Here's why...
Roughly two-thirds of the world's soybean crop is used as the base
for livestock feed. Another 16% is needed to make vegetable oil.
It's also used in food and biofuels.
Clearly, there isn't quite enough to go around right now.
As with many other commodities, China just can't meet its soybean
demand and is importing vast quantities. The country has a
pork-heavy diet, and farmers are expected to bring 676 million pigs
tomarket this year -- it takes mountains of soybeans to feed that
Simply put, a growing (and increasingly richer) population means
more pork and beef consumption. That takes more livestock. More
livestock means more animal feed. And more animal feed requires
In fact, China's soybean consumption has tripled during the past 10
years. The USDA believes China's soybean imports will need to climb
another 62% within the next decade to keep pace.
The shortfall in Latin America means foreign buyers will be placing
more orders from U.S. farmers. According to Bloomberg, China bought
19.2 million metric tons of soybeans from the U.S. through
mid-February for shipment in the year through August 31 -- more
than Chinese farms produce in an entire year.
China accounts for about 60% of world imports, and demand continues
to surge. That's one reason the U.S. Department of Agriculture
(USDA) is expecting U.S. soybean exports to jump 22% this growing
season to 42 million tons, a new record.
All of this has exerted upward pressure on prices. Since bottoming
in December, soybean
have rallied about 25% to touch $14.25 per bushel -- and experts
expect prices to remain this high throughout this summer.
Risks to Consider:
While my overall outlook for commodities is
over the long term, prices can be volatile, so you need to be
prepared to ride out a few twists and turns along the way.
Action to Take -->
Global soybean consumption has been rising at four times the
general pace of population growth. The world's population will
continue to rise, but there isn't any more arable land (in fact,
the world loses a little more each year).
And don't expect farmers to cover the
by switching to soybeans from corn -- corn still nets somewhere
around $130 more per acre at current prices.
I wouldn't necessarily advise anyone to run out to the nearest
commodities broker to open a futures trading account. But if you'd
like some exposure, consider
PowerShares DBA Agriculture (NYSE:
exchange-traded fund (
invests in staples such as corn, soybeans and sugar, along with
smaller stakes in everything from cocoa to hogs.
I also recently told my
Scarcity & Real Wealth
readers that my preference is to invest in shares of fertilizer
makers. Since arable land is scarce and global population growth is
showing no signs of slowing anytime soon, crop nutrients are
becoming increasingly important in helping farmers optimize their
-- Nathan Slaughter
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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