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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Investing in Agricultural Commodities Inflation Mega-Trend

Commodities / Agricultural Commodities Apr 16, 2010 - 02:39 AM GMT

By: Nadeem_Walayat

Commodities

Best Financial Markets Analysis ArticleThe following is an excerpt form the Inflation Mega-Trend Ebook Page 48-49 (FREE Download) on investing in the agricultural commodities inflationary mega-trend.

Stocks and Commodities have boomed following the March 2009 lows, but grains have NOT ! They are STILL trading near the lows and therefore the grains are presenting one of those once in a life time mega-trend buying opportunities right now ! Read on....


Population Growth

The world population now stands at 7 billion, an increase of 50% over the past 50 years and is expected to increase again by another 50% over the next 50 years towards a target of 10.5 billion. However the forces that are expected to drive food and commodity prices ever higher are even more notable when one considers the growing size of the middle classes of emerging market countries such as India and China that will demand a similar standard of living to that enjoyed in the west that will result in the doubling of the worlds middle class within much shorter space of time and therefore resulting in a far greater impact on commodity prices than which is implied by the overall rate of population growth.

Whilst the population growth will continue to drive the price for all scarce commodities inexorably higher (allowing for seasonal variations), however the agri-food's sector in particular is expected manifest the inflationary mega-trend to a greater degree over the coming years, as no matter what happens to the worlds economies during the next decade as recessions come and go, an overall growing and more affluent world population will continue to increasingly favour a more varied and costly food diet. This therefore brings my first focus of the inflation mega-trend to agri-food's. Especially as wages tend to be far more sensitive to food prices than that for other goods and services, therefore world government's are expected to adopt inflationary responses to any future food crisis which will continue to feed the overall long-term wage / food price growth spiral at a higher velocity especially for the developing countries which is a strong contributory factor towards the inflation mega-trend.

Global Warming Mega-trend

The earth is not only warming but it has ALREADY increased by an average temperature of 1 degree ! a near unprecedented rate that continues to accelerate, this mega-trend is being borne out by changing weather patterns and severe impact on agriculture right across the world as deserts expand. Global warming is showing itself in rising foods prices. What this suggests is that the inflationary mega trend can be strongly exhibited in near across the board annual food price rises and therefore agri-food's should form an important part of the inflationary mega trend investing for the next decade.

On top of the global warming impact on commodities, we have the inflationary impact of increasing natural disasters as we witnessed with Hurricane Katrina, as government's respond to $100+ billion disasters by printing money as the world moves into a new generation of super storms more powerful than Cat 5.

Methane Hydrates Ticking Time Bomb
Whilst I in no way claim to be a climate scientist, however the threat posed from the release of methane hydrate deposits (mostly formed from dead plankton) situated around the world that is 20 times more potent a green house gas that co2 does require the world to sit up and take notice of the serious risks that Man made global warming could trigger a release of at least some of these methane deposits that could at the very LEAST DOUBLE the temperature increase upto that point as the gas is only stable at low temperatures.

However I cannot resist the being intrigued by the investment opportunity from a Natural Gas supply point of view, with the methane hydrate deposits situated right across the worlds coastal regions, especially clustering in Siberia, North and Central America, as well as to the North of Britain, which could literally supply Natural Gas for at least another thousand years.

Agricultural Commodity Trends

Therefore the expectations of continual year on year increase in demand against the extreme difficulty of expanding supply supports the view that the food sector will be most likely to experience significant inflation over most other commodity groups. On top of demand for human consumption we are also witnessing existing food production being increasingly utilised towards the production of bio fuels such as ethanol, which further supports my mega-trend view that this is one of the key sectors that will experience serious and sustained price inflation.

Most of the soft commodities (cocoa, coffee) production occurs within developing countries that are more prone to supply side problems due to weather, and internal stability than Agricultural commodities the production of which is concentrated across the developed world. The implications of which are that soft commodities are more prone to price spikes and greater volatility than agricultural commodities, the supply of which is better able to respond to changes in demand and thus resulting in less volatile price trends. Which therefore suggests investors should concentrate on accumulating positions in agricultural commodities as part of the inflationary mega-trend over soft commodities as whilst soft commodities present opportunities more for traders that are able to take advantage of the greater volatility.

Whilst cyclical bear markets will come and go as speculators jump onto seasonal trends across the agricultural commodities, however the underlying long-term trend for virtually all commodities is for prices to continuously ramp higher towards new all time highs. Therefore a good long-term accumulation strategy is to take the view that the further a commodity falls from its all time high the better the long-term investment accumulation opportunity it presents.

How to Get Exposure to Food Price Inflation

In my opinion, the easiest and safest way for investors to gain exposure to the long-run food price inflationary mega-trend is via ETF's of which the number available is constantly growing. However I would first concentrate on ETF's that give exposure to a wide basket of Agri-food's so as to iron out short-term price volatility in any particular commodity as is often the case especially where the soft commodities are concerned.

One of the largest and most liquid ETF's is the Power Shares DB Agriculture Fund (DBA) which covers a basket of food commodities including Cattle, Cocoa, Coffee, Corn, Cotton, Lean Hogs, Soybeans and Oil, Sugar and Wheat. The commodity price collapse as a consequence of the financial crisis of 2008 has been followed by sharp rises in the metals, and oil commodities, but has yet to be experienced in the majority of the Foods as the following graph of the DBA ETF illustrates.

Chart courtesy of StockCharts.com

Whilst DBA is one of many ETF's that you could use as a starting point for their own research. However I should warn readers to ensure they steer clear of leveraged ETF's that are extremely high risk where investors can lose money even if the underlying commodities move in the right direction as I elaborate upon in a later section on Natural Gas. Also to steer clear of small, illiquid ETF's and ETN's.

For UK Investors who may not be able be to invest in some U.S. ETF's, alternatives are available such as AIGA which tracks the DJ-AIGCI commodities index and has shown a similar performance to the DBA, again when selecting ETF's ensure to check the actual performance of the ETF against the underlying index and ensure that the ETF is liquid.

In conclusion, as mentioned earlier and in the context of a long-term investment, the grains in my opinion are presenting just as good a opportunity to buy now as the metals and stocks were during early 2009. Now I am not saying that they will immediately rocket higher, and may even not respond for the whole of 2010, BUT they will at some point over the next few years PASS their all time highs.

Download the full 100 page Inflation Mega-Trend Ebook for FREE (only requirement a valid email address) which includes precise forecasts trends for major markets for many years :

  • Interest Rates
  • Economy
  • Inflation
  • Gold & Silver
  • Emerging Markets
  • Stock Markets
  • Stock Market Sectors and Stocks, including ETF's
  • Natural Gas
  • Agricultural Commodities
  • House Prices
  • Currencies
  • Crude Oil

Source: http://www.marketoracle.co.uk/Article18687.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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