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Agricultural Commodities Bull Market

Commodities / Agricultural Commodities Jul 24, 2009 - 08:46 AM GMT

By: Uncommon_Wisdom

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleSean Broderick writes: World cereal prices hit record highs in 2007 and in the first half of 2008. Consequently, food prices spiked, which in turn triggered riots in dozens of countries along with a series of food export bans. Since then, prices have fallen due to a good harvest in 2008.

So does that mean we don’t have to worry about the global food supply anymore? Not by a long shot!


In fact, if current trends hold, we could be gearing up for another crisis as soon as 2010. So you might want to start stocking up now … not on food, but on the stocks of companies that’ll help solve future food crises and make a hefty profit at the same time.

I’ll get to those in a bit. First, here are some facts …

  • According to the UN’s Food and Agriculture Organization (FAO), the number of chronically hungry people in the world — that is people suffering from perpetual and severe hunger — has risen to an unbelievable one billion! In addition, as many as two billion more people live in perpetual food insecurity — missing some meals and often not knowing where their next meal will come from. In the U.S., the richest nation on Earth, about 36 million people suffer from food insecurity.
  • The FAO also reports that at least nine nations — Kenya, Ethiopia, Nigeria, Somalia, Sudan, Afghanistan, India, Republic of Moldova and Argentina — are all facing crop failure.
  • The U.S. could become the Saudi Arabia of grain. We’re already the world’s biggest food exporter. But even we aren’t immune to bad weather or bad luck. Recent USDA numbers show corn development progress is 23 percent behind normal, and there’s an 18 percent lag in soybean blooming.
  • Drought in Texas has led to an estimated $3.6 billion in crop and livestock losses. And despite recent rains, Texas still has the most land in the worst stage of drought in nearly a decade.

To be sure, agriculture prices aren’t on a one-way trip higher. In fact, grain prices plummeted during last year’s financial crisis and took a hit again in May and June on forecasts for bumper crops.

During the last few months, the prices of agricultural commodities have tested their lows from last year’s collapse. Now they seem to want to go higher. One exception is wheat, which is getting creamed on news that the Commodity Futures Trading Commission (CFTC) is “looking very closely” at phasing out waivers that allow index traders to exceed position limits. Traders worry this will suck the wind out of the wheat futures market, even though studies show it should have little effect.

I think this is a great chance to buy grains before they make another run at the highs they hit in the 2007-2008 global food crisis. While the USDA and many analysts expect a bumper crop this year, those expectations seem to be based on things going just right — and agriculture is an area where things often go wrong.

Add in the climactic troubles that should affect harvests around the world, and there’s plenty of room for a surprise to the downside in crop yields, and a surprise to the upside in potential profits.

And the long-term trend is bullish as a Kansas stock yard …

The Malthusian Curse

Short-term, the world seems well-supplied with grain. Longer-term, the world will struggle to meet the demand.
Short-term, the world seems well-supplied with grain. Longer-term, the world will struggle to meet the demand.

According to the FAO, world food consumption of cereals is likely to keep pace with population growth and increase by 1.2 percent, to 1,042 million metric tonnes in 2009/10. The International Grains Council says that grain production is going to increase, too, but says that any increase in production would be absorbed by increased ethanol demand.

In the short-term, the world seems well-supplied with grain. Longer-term, the world is in a precarious balance between supply and demand. If droughts in Argentina, Canada, the U.S. Southwest and Australia worsen, supplies could be hit hard when demand is going up.

And demand will go up as long as there is food available. Thomas Robert Malthus pointed this out in his “Essay on the Principle of Population” in 1798.

“The power of population is indefinitely greater than the power in the earth to produce subsistence for man,” he wrote. “This implies a strong and constantly operating check on population from the difficulty of subsistence.”

Human population, Malthus observed, increases at a geometric rate, doubling about every 25 years if unchecked, while agricultural production increases much more slowly. Therein lay a biological trap that humanity could never escape. It’s called the “Malthusian Curse.”

Looking down the road, world food supplies would have to double in the next 40 years to feed a population of nine billion. At the same time, farmers must cope with climate change, soaring oil prices and new plant and animal diseases.

I don’t think we’re going to add another three billion people to the planet … I do think, however, we’re going to hit a wall and prices are going to go sky-high!

Climate Change: The Agri-Weapon of Mass Starvation

Global Warming could spark food wars.America and Europe are having cooler-than-normal summers. We better enjoy it, because the general trend is warming, as climate change pushes temperatures higher and higher.

We can talk ourselves to death debating whether global warming is a natural cycle, man-made, or both. But for whatever reason, the Earth is getting warmer.

Most climate change is subtle … so slow it’s barely noticeable. But in the summer of 2007, a large portion of Arctic sea ice — about 40 percent — simply vanished. That wasn’t supposed to happen. As recently as 2004, scientists had predicted it would take another 50 to 100 years for that much ice to melt. Yet there it went. Now, scientists say that permanent (as opposed to seasonal) ice in the arctic may disappear by 2013.

The problem is that ice isn’t just disappearing in the Arctic. Himalayan glaciers that now provide water for a billion people in China and India, as well as their farms and livestock, are melting quickly and could vanish completely by 2035 … that is, unless, like the Arctic ice, the Himalayan ice disappears even faster than forecast.

Melting glaciers could mean less water for Indian rice farmers
Melting glaciers could mean less water for Indian rice farmers.

Realize that ice is very important because it takes approximately 1,000 pounds of water to grow one pound of wheat; the ratio is similar for other grains. No glaciers means no water for much of Asia. No water in those parts of Asia, and about one-fifth of the world’s population suddenly becomes very hungry and thirsty. And the next phase of the world’s resource wars could ignite like a drought-fueled bush fire!

For the record, the first global resource war was over resources including lumber and sugar, what we call “The French and Indian Wars.” The second, ongoing resource war is over oil, with its latest battleground in Iraq. Anyone who thinks the armies of the world won’t march to battle over food and water needs to bone up on history.

El Niño could worsen global droughts. One reason we may be having drier, cooler weather this summer is the reappearance of the “El Niño” weather pattern in the Pacific. El Niño, Spanish for the “Christ Child,” is the term for when the eastern Pacific’s water temperatures rise above average. This rise in temperature changes global wind patterns and ocean water circulations.

El Niño has some good effects — fewer tropical storms in the Caribbean. But it also can have bad effects. And one thing El Niño will probably do is make areas that are already going through dry spells — Australia, South Africa, parts of the U.S., Argentina — even drier. It just fits the historical pattern. And it could be bad news for farmers in the affected areas.

Prolonged and severe “megadroughts” are projected to occur in places as diverse as West Africa, North China, and California. While a ten-year drought is occurring in Australia with drastic effects on its agriculture.

And then there are large portions of the world already suffering severe droughts or worse. According to the University College of London’s Global Drought Monitor, 351 million people have lived in exceptional droughts — the most severe level — during the last nine months as shown below …

Crude Oil Weekly

Source: University College of London

Is There Hope? Yes!

The Agricultural ‘Moon Shot’. The good news is that the modern farmer grows a much higher yield–per-acre than his forefathers did. The bad news is that the rate of crop-yield increase is slowing while population growth keeps rising!

From 1950 to 1990 the world’s grain farmers raised the productivity of their land by an unprecedented 2.1 percent a year. This was slightly faster than the 1.9 percent annual growth of world population during the same period. But from 1990 to 2000 annual productivity dropped to 1.2 percent. Now, grain yields are rising at about 0.7 percent, scarcely half that of the preceding decade and far behind world population growth.

Now for the really good news: Agriculture scientists are on the brink of their own version of a “moon shot” — one that could increase yields while making plants more drought and pest resistant.

Plant breeders now know the sequence of nearly all of the 50,000 or so genes in corn and soybean plants and are using that knowledge in ways that were unimaginable only four or five years ago. Biotech is already making it possible to breed crops with beneficial traits from other species. This will lead to new varieties with higher yields, reduced fertilizer needs, and increased drought tolerance.

But this breakthrough comes with a hefty price tag … companies like Monsanto focus their research and development on traits that increase farmers’ dependence on proprietary chemicals.

'In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing.'
Farm equipment manufacturers should do well as farmers boost crop production to satisfy swelling demand.

Farmers can also boost their crop yields another way — by using more fertilizer. And that’s good news for select fertilizer makers.

Meanwhile, makers of tractors and farm tools are also poised for growth.

So all in all, I’m pretty bullish on the agriculture sector.

How You Can Play This Trend …

The boom in agriculture is part of a rebound in commodities. If you want a fund that gives you a stake in all kinds of commodities — corn, wheat, aluminum, oil, and more — consider the PowerShares DB Commodity Index Tracking Fund (DBC).

And for a fund that focuses specifically on agriculture, consider the PowerShares DB Agriculture Fund (DBA). It tracks a basket of futures contracts on some of the most liquid and widely traded agricultural commodities — corn, wheat, soy beans and sugar. With the price of wheat beaten into the dirt, now might be a good time to take a long-term position in the DBA as long as you have a stomach for risk and an appetite for potentially big gains.

Are there individual stocks I’d recommend? Absolutely! In fact, I’m putting together a list of my five favorite individual stocks and two red-hot ETFs in a special, limited-edition report that’ll come out on August 3 (a little more than one week from today!).

These will be my best picks … the hottest stocks … the power-packed funds. These are the picks that can help you reap bushels and bushels of gains over the next 12 to 18 months.

I’ll be offering my report, “Harvest of Gains” — including three follow-ups — for $198. I think it would be cheap at triple the price. But if you call us at 1-800-814-3047 and pre-order the report, and mention my name, you can reserve your copy for the low pre-publication price of just $99.

You can also order the report online by clicking here.

That way, I can rush you a PDF copy of the report so you can jump on the recommendations just as soon as they come off the press.

Yours for trading profits,

Sean

P.S. Call 1-800-291-8545. Just say you want “Harvest of Gains,” plus all my follow-up reports on all my picks. Or CLICK HERE.

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.

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Comments

Coimbra Maher
31 Jul 09, 16:18
stem rust and other pathogens

Worth noting that the major barrier to protecting against stem rust disease is not scientific but economic and logistical. There are effective and higher-yielding varieties of wheat now available to replace the wheat that is vulnerable to stem rust. If the policy world increases its investments in multiplying new rust-resistant seed and systems to deliver it in the countries most at risk, then the expected impact of the disease may not be what you project. This global replacement process has taken place before at the urging of Nobel-Prize winner Norman Borlaug. No reason why it should not happen again, with so much at stake. Hoping that some of those who are interested in investing their money based on threats to food security might consider using at least part of it to address the plight of the poorest nations. We know that the civil unrest that grew out of our most recent food shortages could spread beyond national boundaries and affect all of us. It's the job of science to strenghten our crops agains stem rust and other diseases; our job is to resist greed, a pathogen that can cause as much harm to the food supply, and misery to the people who have the most to lose.


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