As investors look to diversify their portfolios away from traditional asset classes like stocks and bonds, commodities are becoming more prevalent. Broad-based commodity futures funds like the iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG) or equities funds like Market Vectors RVE Hard Assets Producers ETF (NYSE:HAP) have become big hits with investors. These types of funds provide inflation fighting benefits and portfolio diversification in a neat package.

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However, not all commodity prices move in the same way, at the same time. Most broad products often have heavy allocations to energy commodities. The iShares GSG currently has a 70% weighting towards energy futures. While this heavy tilt may not be a bad thing long term, it does over expose a portfolio to just one area of the market. Investors could be missing out on other opportunities.

Cereals, Not Just for Breakfast
One such opportunity may exist in the grain market. As a diverse mix of commodities, grains offer an uncorrelated asset class that can be beneficial to portfolios as the future challenges of global warming and declining water supplies make themselves known. After all, we can replace our dependency on oil, but replacing wheat, corn and soybeans as food sources is almost impossible. In addition, population growth in emerging markets will contribute to robust long term demand. Over the past 15 years, crop yields have only risen by 1.2%, even with advances in agricultural fertilizer and irrigation methods. But demand has surged, outpacing supplies.

There is direct correlation between grains and population growth. Expansion of the middle class in China and India is creating huge demand for food. As populations swell and become wealthier, new sources of protein are wanted. For example, beef and chicken consumption in China is rising by approximately 20% a year. At today's meat demand, nearly 67% of the world's grain production goes into animal feed. It roughly takes 10lbs of feed grain for every pound of meat desired. Combining this with China and India's poor water resources and growing conditions and you can quickly see how they are net importers of grain.

Finally, increase use of bio-fuels such as ethanol, are causing increasing pressures on supply. Both the grocery store and the refinery are competing for the same output of grains.

Grains in a Portfolio
Investors wanting to add long term gains in grains to portfolio do have several avenues to pursue. The popular Market Vectors Agribusiness ETF (NYSE:MOO), which covers the complete agriculture equities spectrum, is a good starting point for grains investing. From seed manufactures to direct futures contracts, Wall Street has provided investors different strategies to play the commodity.

Both Monsanto (NYSE:MON) and Syngenta (NYSE:SYT) are two of the largest seed producers in the world. Drought and pest resistant are two hallmarks of genetically modified movement, as populations rise and water becomes scarcer, demand for their engineered seed products should see continued increase. Both companies will profit over the long run as their crops produce more with less.

As the world's largest grower of soybeans, United States total crop was valued at $31.8 billion in 2009. Corn was valued at nearly $50 billion. Investors wanting to bet on the individual prices of grains can do so with the iPath DJ-UBS Grains ETN (NYSE:JJG). The exchange traded note follows a basket of soybean, wheat and corn futures.

A similar note, the ELEMENTS MLCX Grains Index ETN (NYSE:GRU) adds soybean oil to the futures mix, while the ELEMENTS MLCX Bio-fuels Index ETN (NYSE:FUE) adds others such as barley and rapeseed.

The Bottom Line
While over the short term, grain pricing is affected by numerous factors such as weather; over the long term, demand from emerging markets will only help to see their pricing rise. Increased protein-rich diets coupled with dwindling water resources are a recipe for portfolio gains. Investors wanting to participate in this market place can do so with the seed purveyors including Dow Chemical (NYSE:DOW) or by directly betting on the futures pricing via the various exchange traded notes.

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