Why Agricultural Commodities May Be A Good Investment

For investors in the United States, 2013 has been the year for buying stocks. So far, the Dow Jones Industrial Average is up a little over 22%, and prospects are that it will keep on rising at least through the end of the year. However, there are increasing noises from concerned investors about whether or not stocks are starting to become overvalued – and what the effect on stock prices is going to be when the Fed starts to taper quantitative easing. The question is where else investors should look for growth in an era where credit union CD rates are hovering around 1%.

Cattle, US drought, Indiana
Cattle, US drought, Indiana

One sector that may be well worth considering is agricultural commodities. While it has been a less than stellar year for agriculture this year, with the S&P GSCI Agriculture Index down about 15% for example, some of the fundamentals for agriculture look relatively favorable in the longer term. Of course, no one is suggesting that you go out and buy 10-year wheat contracts – even if they existed – but the point is that the trend in agriculture prices may well be up, in the medium to long term. Other factors point to increased volatility, which of course significantly increases risk but delivers profit opportunities at the same time.

The first and most obvious reason why agriculture may be attractive is something that is in the headlines on an almost daily basis – climate change. If the scientists are to be believed, global warming is going to result in more severe weather – droughts, floods and natural disasters such as hurricanes. While no one wants to profit from other people’s misery, the truth is that these often provide excellent buying opportunities for investors. You only have to look at the US drought of 2012 to see this – between the beginning of June and the end of July, agricultural commodity prices in the US rose over 40%. As these types of disruptions become more common, the opportunity to make short-term profits are only going to increase.

This second reason that agricultural commodities are likely to be more in demand can be found in the changing global political and economic landscape. Countries such as China and Brazil are experiencing growth rates far in excess of western economies, and as this continues – and it will for the foreseeable future – demand from higher-quality and more diversified foodstuffs, as well as basics such as corn, wheat and soybeans, are only going to continue from these nations. Even where emerging economies have a strong agricultural base – such as the beef industry in Brazil – demand for other types of agricultural products is going to increase. In other words, there is going to be new competition for agricultural commodities, which is going to drive up prices and provide new export opportunities for farmers in places such as America and the European Union. This in turn means that prices will go up in domestic markets, as well as overseas.

It will also be interesting to see what the ongoing effect of gas and oil production is likely to be in places such as the United States. Although fracking is set to turn the United States into a net exporter of oil and gas by 2030, that does not necessarily mean that demand for biofuels is going to drop. For example, a recent report indicated that while the United States and Latin America are likely to produce excess ethanol for the foreseeable future, Europe and Japan taken together are predicted to have a shortfall of 2.4 billion per year by 2015 – with that number continuing to grow over time. Again, this starts to open up export markets, leading to continuing upward price pressure on commodities such as corn.

agriculture commodities
Why agriculture commodities may be a good investment

For investors who are looking to take advantage of shorter-term movements in the agricultural commodities markets, the most common approach involves trading commodity futures. These are well suited to volatile market conditions – since investors can drive profits both in rising and in falling price conditions. However, for investors looking to take a longer term position, stocks of companies in the global agribusiness are an attractive approach. While these stocks are notoriously volatile – in many ways mirroring the volatility seen in agricultural commodities themselves – for investors who have the ability to hang on for the long-term, they offer strong rates of return. For example, the S&P Global Agribusiness Index has risen nearly 170% in the last five years, significantly outperforming the S&P 500, which has risen around 125%.

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