The world is undergoing massive changes at a torrid pace. The
pace and magnitude of these changes is greater than humanity has
ever known. With these changes come great opportunities and great
challenges that will have to be confronted.
Perhaps the greatest challenge of all is the most basic -- feeding
Rising world populations and increased urbanization are creating a
huge strain on the world's food supply. As standards of living
continue rising in the world's most populated areas, like China and
India, so does the demand for a wider variety of food. In fact,
theWorld Bank is projecting that worldwide demand for food will
increase 50% from current levels by 2030.
At the same time, fresh water and arable land are becoming
increasingly scarce. The dynamics are producing upward pressure on
food prices as well as the urgent necessity to develop
technological advances that will produce more and better food
What does all this mean for agriculture stocks?
While long-term fundamentals are in place, the Daxglobal
AgribusinessIndex (a worldwideindex of agriculturestocks ) has
posted a negative return in the past three years. But things are
changing fast. Theindex has caught fire and soared more than 50%
just since July.
Agriculturalcommodity prices have absolutely taken off. Corn and
wheat have surged because of bad weather adding to already tight
supplies, as well ascurrency devaluations and a weaker dollar.
However, while short-term price fluctuations can be fickle and
affect prices either way, several factors will contribute to what
should be a hugebull market in agriculture stocks in the next
Growing emerging market populations with increasingly Westernized
appetites are the primary driver of worldwide food demand. Consider
this: an increasing percentage of world food consumption is meat,
which exponentially increases grain demand (it requires at least
seven pounds of grain to produce one pound of beef protein.)
In China alone, annual per capita meat consumption has increased
150%, from 44 lbs in 1980 to 110 lbs in 2007. In fact, TheWorld
Bank estimates that worldwide meat demand will increase by 85% from
current levels in the next 10 years alone, putting enormous
pressure on the world's grain supply.
Biofuel production (which can include corn, maize, sugar cane or
vegetable oil) has increased in recent years. [See
editor Andy Obermueller's recent article about profiting from
biofuel] This use of food to produce energy has put further
pressure on the world's food supply. Many experts believe that
placing energy markets in competition with food markets for scarce
arable land will inevitably result in higher food prices. A
2008World Bank research paper concluded that "...large increases in
biofuels production in the United States and Europe are the main
reason behind the steep rise in global food prices"
Food and agricultural inputs (including seeds and fertilizer) are
tangible goods that should maintain value during times ofinflation
. In addition to all the other dynamics in agriculture's favor, the
sector is also an excellenthedge against
and falling dollar values.
There are several ways for investors to play agriculture. The
PowerShares DB Agriculture Fund (NYSE:
, which buys
contracts of agricultural commodities including corn, wheat, sugar
and soybeans is a way to play agriculture as acommodity and take
advantage of rising prices. Other plays involve companies that are
in the business of agriculture. The
Market Vectors AgribusinessETF (NYSE:
holds 47 positions in some of the largest agricultural companies in
the world. Top positions include Canadian fertilizer and feed
Potash Corp. of Saskatchewan (NYSE:
, seed and pesticide giant
, and farming equipment maker
Deere and Co. (NYSE:
Action to Take -->
Supply and demand factors as well as a weaker dollar are creating
the perfect storm for agriculturestocks . The raging
has already commenced and will likely continue for the rest of this
decade -- and perhaps beyond. However, agriculture stock prices
have moved up so fast in the past several months that investors
should wait to buy the
or individual players on the next pullback in the sector.
-- Tom Hutchinson
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Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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