Ag Still Looks Bullish Long Term

By Aaron Levitt | February 15, 2012 AAA

Population growth across the emerging world is driving natural resources demand to historically high levels. Aside from the vast amounts of energy and materials needed to support our growing planet, feeding people has taken on paramount importance. As population growth continues to surge unchecked, the agricultural sector promises to deliver long-term gains to patient investors. Recent data from a variety of organizations is helping underscore that bullish trend. For investors, overweighting the Ag sector could be exactly what a portfolio needs to succeed throughout the year. (For related reading, see How To Invest In Commodities.)

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Rising Prices
The rising global population is having a dramatic effect on food prices. According to the United Nations' Food and Agriculture Organization (FAO), global food prices rose 1.9% in January. This was the biggest gain in nearly 11 months, as the prices of critical agricultural commodities such as dairy and cereals, increased. Overall, the group's index of 55 food items rose to 214.3, up from December's measure of 210.3. China alone saw its food inflation surge 10.5% throughout the month. A combination of bad weather in certain prime growing areas, coupled with rising demand due to returning global growth, is to blame.

Extremely hot and dry weather in South America is reducing oilseed and corn production for the region. Argentina is the world's second-largest exporter of corn, while Brazil is forecasted to be the top soybean producer this year. Due to the poor weather conditions in the two nations, the USDA cut its forecasts for worldwide soybean inventories by 5%. Investment bank Goldman Sachs (NYSE:GS) expects the weather and tightening supplies to further raise prices.

Goldman predicts that corn prices will surge 9.2% over the next six months to $6.90 a bushel, as U.S. stockpiles will shrink further. Soybeans are also estimated to climb 5% to $12.90 a bushel. Poor weather in the Ukraine has also hampered wheat production. Reuter's reports that traders within the nation have agreed to limit wheat exports to 4.8 million tons. This is below the 6 million tons forecasted by the USDA.

However, the bullish news doesn't stop there. Livestock-related commodities continue to see price rises as well. Cattle futures have now hit their highest levels in almost three weeks, as there are fewer animals available in spite of high demand for beef. Prices have risen 6.4% this year and are nearly 14% higher versus a year ago. (For more information, see Learn To Corral The Meat Markets.)

Playing Ag's Continued Rise
While some analysts predict robust plantings in the U.S. will help stem some of the supply problems this year, the overall trend for agriculture and food prices is up. For investors, the sector has plenty of room grow over the long term. Now could be a great time to capitalize on the sector's promise. The Market Vectors Agribusiness ETF (ARCA:MOO) has been the top choice for many investors for adding exposure to agricultural equities.

However, the new iShares MSCI Global Agriculture Producers (ARCA:VEGI) could be a better choice. Cute ticker symbol aside, the ETF provides access to 147 different Ag firms, such as CF Industries (NYSE:CF) and Archer-Daniels Midland (NYSE:ADM), while undercutting MOO on fees. While the fund is brand new, given iShares leadership in the ETF space, it shouldn't have trouble gaining assets or trading volumes.

Given the already tight supplies of several key Ag commodities, any additional "supply" shocks could send prices much higher. The PowerShares DB Agriculture (ARCA:DBA) provides access to 11 different futures contracts including wheat, cotton and sugar. The fund has returned roughly 4.25% annually since 2009. For investors looking to profit directly from corn and soybeans rise, issuer Teucrium offers both a Corn (ARCA:CORN) and Soybean (ARCA:SOYB) ETF.

The Bottom Line
As the world's population continues to grow, food production remains a hot-button issue. Already, global demand is having its way with food prices, and the future will hold more of the same. For investors looking to add a dose of agriculture to a portfolio, this could be a great long-term play. The previous ETFs, along with the PowerShares Global Agriculture (Nasdaq:PAGG), make ideal selections. (To learn more, check out How To Pick The Best ETF.)

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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