Three Ways To Gain From Grains

Tony Sagami

I have talked about inflation, especially rising food prices, several times this year, and while I don’t want to sound like a broken record, the evidence continues to mount AND the opportunity to make to a lot of money is growing.

What happened last week in the grains market is especially telling.

First, let’s deal with the definition of the “grains” market. Most people think of wheat when they think of grain, but the investment and agricultural definition includes barley, sorghum, rice, corn and soybeans.

There was big news about the grains market last week from China.

China increased its grain imports to 60 million metric tons in 2010, according to the U.S. Department of Agriculture (USDA). That’s the biggest on record.

How big is a metric ton?

A metric ton is equal to 1,000 kilograms or 2,204 pounds.

The 60 million metric tons mentioned in the above statement translates into 66 million American tons.

Out of the 60 million metric tons 54.8 million metric tons were soybeans, according to the Chinese Ministry of Agriculture. More impressively, that is roughly 60% of global soybean production in the entire year.

In case you're wondering, most of those soybeans were used for animal feed — cow, pork, and poultry — not tofu and soy sauce.

China also imported 1.57 million metric tons of corn and 1.2 million metric tons of wheat.

Demand Is Not Slowing

Like a squirrel preparing for winter, China is importing all those gains to beef up reserves to protect its population against a food shortage.

“Some 200 million tonnes of grain are now in storage,” said Chen Xiwen, the director of China Central Committee’s Leading Group on Rural Work.

And there are no signs of that Chinese demand slowing down.

For the week ending March 17 (the most-recent data), China bought an additional 116,000 metric tons of grain from the United States. That is the most for any week since July 2005, according to the USDA.

With all that buying pressure, it is no surprise that grain prices have surged. Over the last 12 months, the price of grain has jumped by 56%.

To be fair, some of that price increase is because of a severe drought in Russia (which temporarily banned grain exports) as well as floods in Canada and Australia.

But make no mistake that most of the price increase is from rising global demand, especially in China.

All that grain purchasing is even more staggering when you realize that China itself produced 115.1 million metric tons in 2010, according to statistics from the China National Grain and Oils Information Center.

Historically, China has largely been able to feed itself. In 2010, China produced 546 million metric tons of grain, a 2.9% year-on-year increase, and it was the seventh year in a row the country increased its grain harvest.

That is changing because China is rapidly converting its farmland into homes, office buildings and factories. Limited available arable land, scarce water resources and rapid urbanization will make it difficult if not impossible for it to meaningfully expand its grain production.

China is currently able to meet about 95% of its grain needs, but I expect it to import more in the coming years.

The U.S. Grains Council recently forecast that China will import 2.5 million metric tons of corn in 2011 — the largest amount in 15 years.

As a result, corn futures came close to breaking $7 a bushel last week and are up by 90% in the last year.

China, by the way, is the world's second-largest corn producer.

Even though grain prices have soared, I have ZERO doubt that they are headed much higher.

Three Ways To Play
The Grains Market

Here are three ways to invest in grains, wheat, soybeans, corn and other agricultural products:

Option #1: Futures: You can buy futures contracts on wheat and other agriculture commodities. Investing in futures is complicated, requires knowledge of the futures market, and extremely risk. Futures are inappropriate for almost all investors.

Option #2: Exchange Traded Funds. There are several exchange traded funds (ETFs) and exchange traded notes (ETNs) that should profit from rising agricultural commodity prices.

  • PowerShares DB Agriculture (DBA) actually holds futures contracts on wheat, corn, soybeans, sugar, and other agricultural commodities and is a very direct way to profit from rising food prices.
  • iPath Dow Jones UBS Grains Total Return (JJG) is the closest you can get to investing in wheat without actually buying grains (wheat, soybeans, and corn) futures.
  • ELEMENTS MLCX Grains Index (GRU) is similar to JJG but includes soybeans and soy meal.
  • Elements Rogers Intl Commodity Agriculture (RJA) mirrors the performance of the Rogers International Commodity Index, which represents the value of a basket of 20 agricultural commodity futures contracts.
  • iPath Dow Jones UBS Agriculture Total Return Sub-index (JJA) is an ETN that holds seven agriculture futures contracts: Wheat, corn, soybeans, cotton, soybean oil, coffee and sugar.
  • Market Vectors Agribusiness (MOO) invests in stocks of U.S. and foreign companies that derive at least 50% of their revenues from agriculture business.

Option #3: Agriculture Stocks. You can invest in companies that sell agriculture equipment, seeds, crops or fertilizer such as:

  • John Deere (DE). Most people know Deere as the company that sells farm equipment like tractors, but they also provide combines and other harvesting equipment, seeding equipment, sprayers and even agriculture software.
  • Bunge (BG) is the largest soybean distributor in the world and is involved in several other agri-business related products.
  • Potash (POT) and Mosaic (MOS) are huge fertilizer — and other agriculture products — producers.
  • AGCO (AGCO) sells farm machinery.

I'm not suggesting that you rush out and buy any of these ETFs, ETNs or stocks today. You need to do your own homework and decide whether any of them are appropriate for your personal situation and financial goals.

And as you know, timing is everything when it comes to investing so you should wait for these to go on sale before jumping in. However, if feeding the world's growing appetite is a sector that you want to include in your portfolio, the grain business is something that is very worthy of your attention.

Best wishes,

Tony

P.S. If you are looking for more specific buy/sell recommendations on my favorite Asian stocks, please consider a subscription to my Asia Stock Alert for only $199 a year. I think it may be the best investment you'll ever make.


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Posted 04-01-2011 11:58 AM by Tony Sagami