Why The Agriculture Sector Shows Renewed Promise

One of the most promising investment sectors around is the agriculture area. I’ve written about this previously — last fall, to be specific — but the sector is well worth re-visiting for its continued bullish potential.

That’s because even though the world’s population is growing, the world’s quantity of arable land (a.k.a. farmland) is not. This logic, plus commodities bullishness in general, drove a major bull market that ran from 2006 to 2008.

It didn’t last forever, though. From this chart of POT (Potash Corporation of Saskatchewan – NYSE) you can see that the bust was nearly as spectacular as the boom…

Of course, POT isn’t the be-all and end-all of the agricultural sector. But it is the world’s largest fertilizer enterprise and produces the ‘big three’ primary plant nutrients: potash, phosphate and nitrogen. It’s a pretty good bellwether stock for the sector as a whole.

Besides the 2006-2008 bull (and the crash in the latter half of 2008 which involved most every stock on the market) what else can we see about this chart of POT? Well, it’s beginning to surge back again, and it’s rising at a far more sustainable rate than the mania days of 2007 to early 2008.

The Investment World Is Definitely Taking Notice Of Agricultural Stocks Again

Why might this be?

Most likely because the supply and demand situation hasn’t changed for the better. Even though the World Resources Institute claims that we’re steadily producing more food per capita over time due to improved technology, the supply differential is staggering. There are simultaneously 1 billion overweight people and yet also 800 million undernourished people in the world.

There have been food riots in Africa and other impoverished areas, consumer protests in Europe over food prices and food hoarding as well. What’s more, it’s safe to say that things are not going to get a whole lot better as the economy is not likely to recover soon. Governments seeking to exert ever greater control over their populaces are more likely to worsen the problem, not enact solutions that actually work.

To make things worse, the sun is entering the dormant period of its sunspot cycle — this has historically led to cooler temperatures, more droughts, lower crop yields and higher crop prices. In fact, solar magnetic activity is currently at an all-time low (including records dating back as far as 1844)…

The new sunspot activity lows on that chart suggest that we’re in for a difficult time, agriculturally.

So what can we do as investors?

Look for solid investments in the agricultural sector, obviously. The combination of rising demand, lowered stockpiles (but imminent hoarding) and falling production (due to sunspot cycles) makes for a very compelling argument for a renewed multi-year bull market.

A Quick Comparison of Key Agricultural Investments

I quickly compared several big-name stocks in the agricultural sector with the two best-performing agricultural ETFs from last fall’s column which can be found here (http://oakshirefinancial.com/2009/11/24/edible-investments-for-the-future/) …

The top three performers turned out to be MOO, PAGG, and DE.

DE (Deere & Co.) is the world’s leading manufacturer of farm equipment as well as forestry equipment (it’s also a very large finance company with more than 2.4 million accounts and a managed portfolio of nearly $23 billion while providing retail, wholesale and lease financing to facilitate product sales.

PAGG (the Powershares Global Agricultural Portfolio ETF) is based on the NASDAQ OMX Global Agriculture Index, itself designed to measure the performance of globally traded securities of the largest and most liquid agriculture and farming-related companies.

MOO (Market Vectors Global Agribusiness ETF) closely tracks the performance of the DAXglobal Agribusiness Index and buys pretty much the same stocks including agriculture chemicals at 34.3% of the index, agriproduct operations (33.5%), agricultural equipment (24.3%), livestock operations (5.6%), and ethanol/biodiesel (2.3%).

The biggest holdings in both funds include Potash Corp of Saskatchewan (POT) …  Syngenta AG (SYT) … The Mosaic Co (MOS) … Monsanto (MON) … Deere & Co (DE) …  Archer-Daniels-Midland Co (ADM) … and Komatsu Ltd, although each one holds 40 stocks.

As their names suggest, both ETFs have a global reach rather than a US-centric approach. This makes them not only agricultural bets but also currency diversification bets as the earnings of their various holdings are denominated in yen, Euros and other major and minor currencies.

Deere might continue to be a top performer as a stand-alone stock, but there’s greater safety in either MOO or PAGG.

Commodity-Specific Agriculture Bets:  When Futures Aren’t Actually Futures

I also compared several sector-specific funds based on specific food/agricultural commodities such as cocoa, coffee, cotton, sugar, livestock, grains and “softs” in general. Soft commodities are normally coffee, cocoa, sugar, corn, wheat, soybean and fruit.

While “softs” once more did relatively well as a sector, sugar as a stand-alone is the clear winner again.

You could play this angle by buying the straight-up futures contract (symbol SB).

But the iPath Dow Jones-UBS Sugar Subindex Total Return ETN (SGG) is an alternative. It reflects the return of an unleveraged investment in sugar futures contracts. This allows you to buy sugar futures by proxy without actually buying or shorting futures themselves.

One More Quick Note On Precious Metals

I appreciate all the feedback on the recent two precious metals articles I wrote recently and regret that I can’t answer every question or suggestion for further precious metals articles.

After all, this is not a precious metals column but an overall investment thoughts and opinions column. Hence this week’s focus on the potential of agriculture.

However, here are a few more quick thoughts on last week’s comments …

1) Even if the precious metal markets are being rigged by certain groups or forces, that situation would describe pretty much every investment sector in these days of mega-hedge funds, multinational corporations, central banks, and increased government intervention in day to day affairs. Therefore looking at charts to pick likely buy or sell points is every bit as valid (or not) with precious metals as with other investments.

2) Again, I doubt the USD is going to perform particularly well over the long term. After a few weeks or months of pumping it’s unlikely to hold up and the precious metals will come back into their own. I’m well aware of the disastrous fundamentals with the dollar (and pretty much every other paper currency out there) but charts have been more useful than not when it comes to predicting market turning points in spite of those fundamentals. That’s what the previous two columns were all about.

3) People have been talking about massive silver short squeezes (and other sudden precious metal price explosions) for the last couple of decades now and they still haven’t happened. That’s not to say that they never will, just that betting the farm on these kinds of speculative occurrences is just not a sound investment strategy. We’re trying to make money on what we can see right now, not what might happen if a hypothetical X, Y and Z all magically line up all at once and a miracle occurs. The strong multi-year bull market in all the precious metals just doesn’t seem to be enough for some folks.

4) Some people were asking about platinum, so I did a quick check of the iShares Precious Metals ETN (JJP), iShares Silver ETN (SLV), the streetTracks Gold Trust shares (GLD), and the iShares Platinum ETN (PGM). Platinum has been the most volatile but also the most rewarding to hold until very recently when silver pipped it just this month.

(BTW, I have been using iShares products as a common comparison medium to minimize performance differences across management firms in this article. I’m not trying to tell you to buy or sell iShares products specifically as I have no affiliation with the firm whatsoever. IShares simply happened to have the greatest number of trackable products involving the assets I was comparing this week.)

Good investing,

Nick Thomas
Analyst, Bourbon & Bayonets