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Msg  789 of 795  at  3/29/2009 6:34:23 PM  by


Five Reasons to Invest in Agriculture

1. “Quantitative Easing”

US government finally began its “Quantitative Easing” (printing money to buy treasures and other bad assets) process last Wednesday. No wonder SPDR Gold Shares (GLD) holdings rose to a record 1,084-tons last week, up 37% from eight weeks ago. As the world becomes less and less secure in normal investment classes, and people lose faith and confidence in paper money, people turn to hard assets and commodities such as Gold, oil, and agriculture, etc. If GLD and United States Oil (USO) can be up 30% over the last few months, there is no reason why PowerShares DB Agriculture (DBA) was only up 9% from its low.

2. The Consumer Is Back
Last Friday the Commerce Department reported that consumer spending edged up 0.2 percent in February, which follows a huge 1 percent jump in January. Consumer spending accounts for about 70 percent of US economic activity. This seems to be a good sign for recovery. It is easy to free credit because the Fed can always pump in more money (the sky is the limit). However, it is much more difficult for people to spend.

3. Increased Demand from Developing World
Changes in global demand resulting from population growth and changes in standards of living will no doubt push up agriculture price. As Kevin Phillips, author of American Dynasty and American Theocracy, pointed out in his new book Bad Monday, in the US, food represents 14% of the consumer price index, but the ratio is much higher in China (33%) and India (46%). In other words, China and India spend much more of their income on food than the US. Even in a recession, people have to eat.

4. “Agflation”
Two economists at Merrill Lynch coined the term “Agflation” in Spring 2007. It means an increase in the price of food that occurs not only from increased demand from human consumption, but also from its use as an alternative energy resource. As oil stands over $52 now, demand from the biofuels industry should also help demand for agricultural products. Also, “peak oil” means the price increases for grain, soybean, and corn may be more long-lived.

5. Other Unpredictable Factors

Any unpredictable surprises will push up agriculture's price, such as adverse weather conditions, farmer planting decisions, government farm programs and policies, even the occurrence of plant disease, etc.

There are quite a few ways to play with Agriculture. You can buy related industries such as the Agricultural Chemicals industry. Monsanto (MON) is the biggest player in this field, with market cap of $48 billion. It produces corn, soybeans, canola, cottonseeds, vegetable and fruit seeds as well as provides agricultural products for farmers. Potash Corp. of Saskatchewan (POT) is the 2nd largest, with market cap of $26.4B.

The other direct related industry is Farm Products industry. Archer-Daniels-Midland (ADM) is the biggest one, with market cap of $18.6B. It procures, transports, stores, processes, and merchandises agricultural commodities and products. Bunge Ltd. (BG) is a distant 2nd, with market cap of $7.2B.

Agriculture business is capital intensive in nature. In today’s credit crunch market, limitations on access to external financing could adversely affect companies’ operating results. These companies require substantial capital to maintain and upgrade their storage facilities, processing plants, refineries, mills, ports and transportation to keep pace with technological development, regulation requirements and safety standards in the industry, just to name a few.

I chose DBA instead. It is composed of futures contracts on some of the most liquid and widely traded agricultural commodities such as corn, wheat, soybeans and sugar. It jumped 1.71% on 03/19/09 in more than five times average volume.

As you can see from chart below, over the last 2 years (since its inception), DBA’s (in blue) performance mirrored both Agricultural Chemicals and Farm Products industries.

Source: Yahoo Finance as of 03/27/09.
If history is any guideline, you might as well choose Agricultural Chemicals industry such as MON or POT, since they over-performed DBA by more than 50% over the last 2 years. But look at volatility in the chart above, which conservative investors can’t stand.

After all, even US CPI is using “core” measurement that excludes food and energy because of their “volatility”.

Disclose: I have a long position on DBA and owner of This was original published in

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