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Editor's Note: This is the 14th Installment of an Ongoing Series Highlighting the Global Investing Outlook for 2008.
By Don Miller
In the agricultural-commodities arena last year, grains put on quite a show. And while we have seen signs of corrections in some commodities in recent weeks, we continue to believe that the long-term trends are highly promising.
Before we look forward, let's consider some of the events that played out in the grain markets last year:
- Corn skyrocketed to its highest-ever level on the Chicago Board of Trade yesterday (Monday) – rising the maximum allowed by the exchange – fueled by speculation that global demand for biofuels and feed will exceed supplies for the seventh time in eight years, Bloomberg News reported. That grain-based commodity advanced for the third straight year in 2007 – gaining 17 % — after soaring 81% in 2006 and 5.4% the year before. Continuing diversion of corn to ethanol production continues to crimp supplies, helping prices soar 49% in the past five months.
- Wheat hit a record of $10.095 a bushel on the Chicago Board of Trade on Dec. 17. Even though it has backed off since then, the price still surged more than 70% last year. Droughts in Canada [the world's largest producer] and Australia [the No. 2 producer] reduced exports from both countries.
- Soybeans hit a 34-year high on December 29. Continued strong demand from China [the world's largest consumer of soybean oil], a drought in Argentina, and reduced plantings by U.S. farmers fueled the record high.
Other agricultural commodities are showing similar strength, including coffee, cotton, cocoa, cattle and milk.
And it's not just 2007 – commodities seem to be locked in a long-term upward trajectory. Last year was just icing on the cake – the Dow Jones Commodity Index was up a respectable 11% over the past 12 months, but has risen a whopping 65% in the last five years.
What's driving this trend?
"We are now watching a fundamental structural shift in commodities markets," says Jim Rogers, a noted financial analyst and investor. "We're talking a long-term bull market in commodities."
There's good reason to believe what Rogers says. He's one of our favorite investment gurus. In 1970, Rogers and partner George Soros started the Quantum Fund, a hedge fund that's often described as the first truly global investment fund. Over the next decade, the duo guided Quantum to a 4200% gain – demolishing all the indices, and outpacing every other fund in existence.
Rogers has since "retired," traveled the world as a self-proclaimed "adventure-capitalist," and penned several best-sellers – including his latest: "A Bull in China: Investing Profitably in the World's Greatest Market." He recently moved to Shanghai, where he is watching the commodities bull – up close and personal.
[Editor's Note: To learn how to obtain a free copy of Rogers' latest book, "A Bull in China," please click here].
China: Consuming Grain Supplies at Record Rates
Rogers believes grain prices can only increase over the long haul. And he cites the simplest of reasons for the upswing – dwindling supplies and increasing demand.
And the biggest reason for this demand-supply imbalance? Rogers attributes it almost all to China – which he says is "a nation that will be consuming extraordinary supplies of all kinds of commodities for years to come."
The fact is, China is the proverbial elephant in the room – the driving force behind growing grain shortages and skyrocketing prices worldwide. With 1.3 billion people overall, rising incomes, and an emergent consumer class that's growing in size, China's appetite is advancing, too: It will soon become the world's largest net importer of grains.
After a remarkable expansion of grain output from 90 million tons in 1950 to 392 million tons in 1998, China's grain harvest has plummeted – dropping 70 million tons in 2003, alone. For some perspective, consider this: A drop of 70 million tons exceeds the entire grain harvest of Canada for a year.
The Chinese government stepped in with cold, hard cash, which turned things around. China's grain producers got $6.9 billion (51.4 billion yuan) in direct subsidies in 2007, up 66% from a year earlier.
As a result, China produced more than 500 million tons of grain in 2007, the fourth consecutive year of growth. But production still fell short of demand.
China just won't say by how much.
That's one reason the recent price increases – as jarring as they seem – may actually only be the tremors that come before the real quake. China has covered its harvest shortfalls of recent years, but it's done so by drawing down on its once-massive inventories of grain. But those inventories have now been depleted – forcing the government to cover the shortfall with imports.
China will import 7.2 million tons of corn in 2008, 60% of which will supply state-owned trading firms. Wheat import quotas have been set at 9.64 million tons, 90% of which will supply state-owned firms. And rice imports will hit 5.32 million tons.
The shortages are being driven by the addition of 11 million newborn babies each year – and by fast-rising incomes in China's afore-mentioned middle class, now 300 million strong, and growing.
As members of China's new "consumer class" earn more, they move themselves up the food chain, buying and eating more grain-fed livestock products such as pork, poultry, eggs, beef and milk.
No Easy Answers
Don't look for some new miracle technology to suddenly appear and solve this long-term problem. When supply-and-demand in raw materials gets so seriously out of whack, even the emergence of a new technology won't necessarily restore the balance all that quickly.
As Rogers says: "Computers or robots may do amazing things, but they cannot find oil or copper where there is none, or make sugar, cotton, coffee, or livestock grow faster than nature allows."
Clearly, this bull-market in commodities is set to continue for years to come. So how do you cash in?
Most investors shy away from actually trading futures, but the facts suggest you might want to take a closer look. If you do your homework and remain rational and responsible, you can invest in commodities with perhaps less risk than playing the stock market. Indeed, some research demonstrates that there's actually been more volatility in the NASDAQ Composite Index in recent years than in any commodities index.
The Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX) and Commodity Exchange Board (COMEX) all offer educational materials, broker certifications, and other resources that new traders will find helpful.
But commodity futures can turn upside down in minutes on rumors or facts. Unlike the stock markets, a trader who lacks an effective stop-loss exit strategy can get stuck with a trade that spirals out of control.
For example, a drought-busting rain in Argentina might send soybeans down the daily limit for several days in a row. An unwary speculator might not be able to exit the trade until the volatility subsides. By then, his account could lose thousands of dollars.
Still, these kinds of hair-raising events can be minimized with options and other strategies. If you do decide to trade futures, Rogers currently likes cotton, sugar and coffee. For now, he says, stay away from wheat, as he feels it is overdue for a correction.
If you don't have the time, patience or risk tolerance to trade commodity futures themselves, Deutsche Bank's Power Shares Agricultural Fund (DBA) is intended to reflect the performance of commodities in the agricultural sector – soybeans (31%), wheat (28%), corn (23%), and sugar (16%).
Looking for a different approach? Consider Van Eck's recently launched Market Vectors Agribusiness ETF (MOO). This fund reflects the infrastructure of the agriculture industry, focusing on chemicals (34%), agri-product operations (33%), equipment (24%), livestock operations (6%), and ethanol/biodiesel (2%).
For a more-focused, yet still-global approach, you might want to look at companies with broad exposure to China, specifically such "Global Titans" as PepsiCo Inc. (PEP), McDonald's Corp. (MCD) or YUM! Brands Inc. (YUM), which has such strong global brands as Taco Bell, Pizza Hut and KFC [formerly Kentucky Fried Chicken].
How are these global commodity plays? They all rely on such commodities as sugar, wheat, beef, coffee, and soybeans. They're benefiting from the rising incomes and soaring growth in such markets as China, Russia, India and Latin America. And, as expertly managed ventures, they know how to balance such factors as commodity costs, market share, overseas growth and product pricing to maximize their profits – as well as the price of the shares in their companies that you hold in your portfolio.
Any or all of these might help you "grow" your investment portfolio in 2008.
Editor's Note: Guest Writer Don Miller has previously covered such Outlook 2008 series topics as China, Uranium and Housing.
Money Morning's "Outlook 2008" series last covered the Takeover Market. Next up: Asia.
News and Related Story Links:
- Bloomberg News:
Corn Soars to Record as Demand for Feed, Fuel May Exceed Output.
- Bloomberg News:
Wheat Futures Climb as Agricultural Commodities Vie for Acres.
- Money Morning News:
Investing Guru Jim Rogers Predicts "Worst" U.S. Recession in Years; Urges Investors to Shift Into Commodities.
- Money Morning News:
Jim Rogers Warns of Fallout From Fed Cuts; Says to Seek Profits in Commodities, Asian Currencies.
- Money Morning Investment Analysis:
(Jimmy) Rogers and Me: The Latest Wisdom From a Global Investing Guru.