Ukraine is Europe's most important actor in agriculture. And the Russian standoff over the Crimean region is creating a number of concerns for Europe's breadbasket.
Ukraine also feeds North Africa, and social unrest over food prices in nations like Egypt and Tunisia will heat up again if grain prices continue to soar.
Today, Ukraine is one of the top six exporters globally for both corn and wheat, and it's renowned for having some of the best soil in the world. The world's largest grain-trading companies have strategic ports and processing facilities in Odessa and Mariupol, and expansion has surged in recent years.
But Ukraine's current situation is part of a broader perfect storm for agricultural investors.
Four major stories happening right now are driving grain prices to new heights and will make this summer a "hot time" for those who know how to invest in global agriculture.
Here's a quick breakdown.
The Four Factors Driving Grain Prices Higher
- China is buying everything. The country's sovereign funds have been gobbling up grain-trading houses, port terminals, and farmland. COFCO, China's largest grain trader, might even purchase Noble Group's agricultural arm, which would deepen China's reach in South America, South Africa, and Ukraine. There are more than 1 billion people in China, and they're doing all they can to feed their rising middle class.
- The winter weather in the United States probably won't affect a possible record harvest. But the longer this cold snap goes on, the more uncertainty it will cause. California's drought is part of a broader story on how weather can cause greater volatility for the road ahead in the grain markets.
- Argentina and Ukraine, two of the world's leading agricultural producers, have serious currency problems that are not going away. Both nations have seen their currencies contract in massive price swings this year. And when that happens, farmers hold their grains off the market as long as possible as a hedge against rampant inflation and political risks, creating steep supply concerns like the one that caused a spike earlier last week.
- Brazil will face protests this summer over the World Cup. Brazilians are outraged that the government spent billions to host a soccer tournament but continues to do very little about education and poverty. Ukraine's uprising happened during the Olympics, when the whole world was watching. And that's going to happen again this summer when 32 teams meet in Brazil. Expect disruptions in the nation's commodity markets at ports and on roads and possibly even massive strikes across the nation.
All four of these trends create supply concerns. And when supply concerns rise, so do prices.
The road ahead for agriculture is full of volatility, but it's going to be a great time for long-term minded investors.
Here's how to get started...
How to Invest in Global Agriculture in 2014
First, pursue a fund that is diversified across a variety of agricultural commodity categories.
For that, nothing beats ELEMENTS Rogers International Commodity Index - Agriculture exchange-traded note (ETN) (NYSE Arca: RJA). RJA is the most diverse ETN for the sector and includes 20 different agriculture commodities.
That provides broader exposure to the global markets, which is ideal for the more conservative investor. The top holdings include wheat (20%), corn (14%), cotton (12%), and soybeans (9%).
RJA is up more than 11% so far this year, with a lot more room to run as the summer heats up.
Another good option in this category is the PowerShares DB Agriculture Fund (NYSE Arca: DBA), which Money Morning Global Resource Specialist Peter Krauth just recommended today. This exchange-traded fund comprises 17 agricultural commodities futures contracts and gives investors diversified exposure to coffee, sugar, soybeans, live cattle, and more.
Says Krauth, "So far this year, DBA has gained nearly 19%. On a technical basis, the chart looks way overextended and ripe for a pullback. Look for a drop perhaps down to the $26 level, which is close to the 50-day moving average and could act as new support."
Second, if you're willing and know how to invest in preferred shares, consider CHS Inc. (Nasdaq: CHSCP) as an income play.
The company is the largest U.S.-based cooperative. It's more of an energy company than anything else, with 79% of EBIT coming through its fuel services division.
However, its agricultural arm is growing.
Approximately 90% of its revenue comes from the United States, but CHS is expanding around the world through joint agricultural ventures and outright purchases across Brazil, Argentina, Australia, Japan, and Israel.
CHS has deep pockets and an aggressive strategy, allowing it to make strategic moves around the globe with political unrest or currency concerns in mind.
It also pays a juicy dividend of 7%.
Remember that these are preferred shares, and these stocks do not behave the same way that typical equities do. They are more comparable to bonds and carry some risks. That said, there are also many advantages, like the fixed income.
Finally, there's one play for investors able to purchase stocks on the Toronto Stock Exchange.
Crop storage group Ag Growth International (TSX: AFN) will march into the fire and maintain plans to conduct a "significant amount of business" in Ukraine despite the current crisis.
Ag Growth's foreign business is surging. The company, which sells midstream services to global grain handlers, reported a 29% increase in foreign sales, with more than half of its total record sales in the former Soviet Union.
Despite concerns about credit and receiving payments on time, analysts don't expect the uprising to impact spring grain harvests.
It's a bit of a contrarian play for those confident enough. The company is up more than 50% since last May and offers a strong dividend of more than 5%.
Next: Commodities tend to perform best in the latter part of a cyclical bull market, which is where we are now. And this sector rally spells huge profits...
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.