When housing prices were high, it made sense for farmers to sell
their land to real estate developersâsuch profits outpaced the
money they could expect to earn from farming.
Now, however, the tables have turned. Land prices have fallen
nearly 70 percent since mid-2006, while U.S. cropland values have
risen almost 20 percent, according to a Wall Street Journal article
this week that cited the Lincoln Institute of Land Policy and the
U.S. Department of Agriculture.
If farmers themselves arenât buying back the land, theyâre
being hired by real estate developers to work the land.
So what does this mean for your portfolio? A couple of
For one, the influx of new crops will eventually drive prices
down until it is no longer profitable for newcomers to enter the
That said, itâll be a long time before supply catches up to
demand, but itâs unlikely that such an imbalance will go
Noted commodities trader Jim Rogers has been singing this song
for yearsâin July, he predicted that farming salaries will
eventually outpace the salaries of financial professionals, and
exhorted financial analysts to take up farming.
Iâm personally not about to switch careers, but I can see his
pointâas long as the need for food continues growing, so too will
the need for crops.
Rising demand results in higher prices, which will spur supply
increases. The world population is growing quickly, implying that
demand will continue to rise, but at some pointâand especially if
finance majors start switching over to agricultureâsupply will
What Goes Up . . .
Currently, 31 agriculture ETFs are on the market that investors
can use to profit from what remains of the more than decade-long
boom in commodities. To hear Rogers talk about it, this boom is
likely to last longer than he originally foresaw, particularly as
it relates to agricultural commodities.
ETFs such as the PowerShares DB Agriculture Fund (NYSEArca:DBA)
or the United States Commodities ETF (NYSEArca:USCI) are two
future-based, multicommodity funds that are designed to manage the
forces of contango and backwardation.
To review, contango is when the next-to-expire futures contract
is cheaper than contracts that expire in later months. That means
that fund managers lose money when they roll into the newer
contracts to maintain exposure.
Backwardation is the opposite of contango, when front-month
contracts are more expensive than later-month contracts. When a
commodity is in backwardation, the fund manager will make money
when he sells the front-month contract at expiration and buys the
When commodity spot prices start their next downward trend, that
could make it cheaper to roll contracts over, and could even result
in a positive roll yieldâbackwardationâwhich could help cover
the fall in spot prices.
. . . Must Come Down
As I said, there will come a day when crop supply finally
catches up to demand.
While you could short USCI or DBA when that day comes, there are
also two inverse agriculture ETFs on the market designed to profit
when crop prices fall.
Those are the PowerShares DB Agriculture Short ETN
(NYSEArca:ADZ) and its double-inverse cousin, the PowerShares DB
Agriculture Double Short ETN (NYSEArca:AGA).
For now, though, the bull market in commodities is intact, even
it seems like global capitalism is unraveling one European country
at a time.
More Farms Mean More Jobs
Another important product of increased investment in farmland is
a healthier economy. As more farms spring up, more farmers will be
needed to tend to crops, which should bring down the unemployment
Converting unused land into farmland should also increase U.S.
GDP, as we increase production levels, and decrease the trade
deficit as well.
All the factors that are already coursing through the economy
are making U.S. equities very attractive.
In particular, the PowerShares Dynamic Food ' Beverage Portfolio
(NYSEArca:PBJ) is poised to benefit from cheaper agricultural
Companies focused on consumer cyclicals are also likely to do
well, which will keep ETFs such as the Vanguard Consumer
Discretionary ETF (NYSEArca:VCR) rising in value as our economy
Itâs inviting to see some good come out of the economic
malaise weâre in, but it remains to be seen how many farmers will
take advantage of cheap land and pricey commodities.
But, like the piece in the Wall Street Journal made clear, the
incentives seem to be there.
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