By Mike Caggeso
When Dean Foods Co. (DF), the biggest U.S. dairy producer, reported this week that its fourth-quarter profits were slashed by 55%, the culprit was a 47% jump in the price of milk, a key dairy commodity.
Conversely, soaring demand for natural-resource commodities including coal has generated tremendous business opportunities for DryShips Inc. (DRYS), a company that owns and operates dry bulk carriers around the world.
Commodity prices of all types have been on the march over the past several years. From a business standpoint, those price increases clearly cut both ways, helping some companies and hurting others.
For investors, the challenge is figuring out which commodities are continuing their surge and which ones are enduring a price reversal. For every commodity on earth – from milk to gold – there are specific catalysts that influence supply and demand. And that's the best way to explain why some commodities have fallen from highs in 2007, while some continue to soar into 2008.
Sometimes it's tough to tell just who's winning and who's losing: While gold mining companies are rejoicing over gold's leap past $900 an ounce, high prices are to blame for overall demand dipping 17% in the fourth quarter.
Soft Commodities: Buying the Farm
When it comes to so-called "soft commodities," the powerful pricing trends that arose last year have carried through into this year, with a number of soft commodities posting record highs:
- Wheat futures hit a record of $11.53 a bushel on Feb. 11, but have since fallen below $9.80. However, analysts are saying this is just a pullback, as wheat's price doubled last year.
- Soybean futures hit a record of $13.745 a bushel on Feb. 8. Overall, they gained 72% last year.
- The average January 2008 price for cotton (74.33 cents a pound) was the crop's highest in 46 months.
- Corn futures are at $5.07 a bushel as of yesterday (Thursday), their highest levels since 1996.
"We're in something like a gold boom, a wool boom," Brett Stevenson, a forecaster for AgRisk, told Australia's ABC News. "We're in extraordinary territory."
The emergence of China and India – and the increasing use of biofuels – has driven up demand across the board for commodities. At the same time, droughts, floods, and the conversion of farmland into residential property because of soaring land values, have all combined to crimp the supply of the commodities from farmers.
Historically, supply and demand has fluctuated wildly at times. But there's been one constant: People always had to eat.
If nothing else, that one fact will help make soft commodities a relatively safe long-term bet.
Black and Gold
Metals also posted record highs last year. While some have skidded from those highs in the New Year, others have continued their ascent:
- On Jan. 28, gold hit a closing high of $927.10 an ounce – and that's after it gained more than 25% last year – but has since slipped down to $909 an ounce.
- Platinum hit a record high for its eleventh day in a row yesterday, reaching as high as $2,025 an ounce. After its 37% gain last year, the metal has already jumped 33% this year, Reuters reported.
- The price of coal is up about 37% already this year, with power-station coal prices reaching $125.48 per metric ton for the week ended Feb. 8. It marked the third straight week of record-high coal prices.
- On Feb. 12, silver peaked at its highest price [$17.60 an ounce] since the metal set its all-time high of $49.45 an ounce in 1980. And this isn't news – the metal has made remarkable annual gains every year since 2003.
- Futures for crude oil were $94.63 a barrel as of yesterday. Oil eclipsed $100 in January but remains lower on concerns that economic growth would dampen demand.
The supply-demand equation for these commodities isn't as simple as that of soft commodities.
Take gold, for example. It's seeing a rush of new investors because of the falling dollar and plans to cut U.S. interest rates even further. To them, gold is the epitome of investment security.
However, soaring prices mean that jewelry costs more. And you know the price is getting too high when fourth-quarter gold sales fall 64% in India – a country that accounts for about one-third of the world's retail demand, The Wall Street Journal reports. But even in that country, gold isn't worth overpaying for.
Coal is different. Nobody personally wants to buy it, but all countries need it. And the chief catalyst behind the fossil fuel's record run is demand from such emerging nations as China and India that have undergone a rapid economic and industrial expansion.
"All over the world, everyone is looking for coal because all economies are developing … so they need energy … that's why we are in this situation," Exxaro Resources Ltd. (OTC: EXXAY) Chief Executive Officer Sipho Nkosi told the Daily Dispatch.
What is Jim Rogers Buying?
Famed commodities guru Jim Rogers – who predicted the global commodities boom we're experiencing more than a decade ago – recently conveyed his views to Yahoo! Finance.
The bottom line: Rogers is backing away from precious metals right now, mainly because he fears the U.S. economy is headed for a recession.
"If the largest economy in the world goes into a recession, that's going to affect people. That's going to affect the demand of everything. So I'm not sure I would buy metals right now."
However, he's "buying agriculture [commodities] as we speak."
"As other parts of the world grow, they like to eat more," Rogers said. "There are 3 billion people in Asia. That's billion with a ‘B.' In America, we have 300 million. There are 10 times as many people over there, so I see good things happening in agriculture." [To see how you can obtain a free copy of Jim Rogers' just-released bestseller, "A Bull in China: Investing Profitably in the World's Greatest Market," please click here.]
But how does one invest in agriculture? With gold, you can buy coins, or bullion. But the typical individual investor can't buy a bushel of corn or soybeans, and then find a nice dry and safe place to store them and wait as they appreciate.
Deutsche Bank's PowerShares Agriculture Fund (DBA) is intended to reflect the performance of four commodities in the agriculture sector – soybeans (31.13%), wheat (28.87%), corn (23.43%) and sugar (16.58%). These include some of the key commodity plays that Rogers advocates.
Another is Van Eck's recently launched Market Vectors Agribusiness ETF (MOO). Like the PowerShares Fund, this reflects the agriculture industry, albeit in a different way. Instead, the ETF's holdings reflect returns seen from agriculture chemicals (34%), agriproduct operations (33.5%), agriculture equipment (24.3%), livestock operations (5.6%) and ethanol/biodiesel (2.3%).
News and Related Story Links:
- New York Times:
This Year, Commodities Are on a Rockier Road
Dean Foods Profit Falls 55% on Soaring Milk Costs
High prices dampen fourth-quarter gold demand
- ABC News (Australia):
Demand for soft commodities drives agricultural mini-boom
- Money Morning:
Outlook 2008: Gold Investments Will Continue to Glitter in the New Year
Platinum hits record at $2,025
Fed stands ready to ease further, Bernanke says
- Wall Street Journal:
All the Gold in India
- Yahoo! Finance:
Jim Rogers: Commodities Picks and Pans
- Money Morning:
Wheat's Forecasted Price Drop Highlights Profit Plays in Commodities