By John Gray March 27, 2008 Investors looking for the latest way to play the global commodity boom might suspect it's time to forget $100 oil or $1,000 gold and start thinking about wheat, corn, soybeans and other agricultural products. Over the past year, farmed goods have outperformed both energy and metals, with prices for wheat and soybeans reaching record prices this month. Even the prospect of a global economic slowdown doesn't seem to be taking much steam out of the prospects of the new "it" sector. "Even with a slowing U.S. economy," says Derek Burleton, head of economic studies at TD Bank Financial Group, "people have to eat."
Agricultural commodity prices have soared 56.7% over the past year, compared with 41.6% for oil and gas and just 8.5% for metals and minerals, according to a recent Scotiabank report. In February, dry conditions in Australia, Canada, Russia and Ukraine sent Canadian wheat prices soaring to more than $812 per tonne before falling back to trade at around $607. (Those prices, however, are still substantially above historical norms of between $220 and $235 per tonne in the last two crop years.) Sagging Chinese production recently pushed soybean futures to their highest level ever. And though several other commodities -- such as sugar -- have retreated from recent highs over concern the market is overheated, there is still evidence that a prolonged period of higher agricultural prices is just beginning, as the sector joins the commodities super-cycle that has gripped the metals and energy sectors. "Structural changes...may keep prices above historic equilibrium levels during the next 10 years," predicts the Organization for Economic Co-operation and Development in its latest global agricultural outlook.
That forecast comes with some pretty steep assumptions. To believe the boom will continue, you also have to believe fuel and fertilizer costs will remain high, the U.S. dollar will remain low, growing conditions will disappoint and -- perhaps most importantly -- increased demand from India and China, as well as the nascent biofuel markets, will not be hurt by a slowdown in the global economy.
How to get rich in farming Farm aid Golden harvest Subscribe to Canadian Business! Investors appear to have taken those assumptions to heart, pouring money into vehicles looking to cash in on the boom. The Claymore Global Agriculture Exchange Traded Fund (COW.TO) launched in December but has already attracted more than $175 million in assets, says Som Seif, president and CEO of Toronto-based Claymore Investments Inc. "This has been one of the most successful launches of an ETF I have seen in Canada," he adds. The Claymore fund invests in agricultural company stocks, such as global agrifood giant Monsanto Canada Inc. and farm equipment manufacturer Deere & Co. Two other holdings, fertilizer makers Potash Corp. (POT.TO) and Hanfeng Evergreen Inc. (HF.TO), have seen stock prices more than double over the past year. Such companies will be well positioned to capitalize on the prolonged bull market in agriculture, says Seif, even if actual commodity prices fall from recent highs.
If you're thinking of buying the cow and not the tractor, so to speak, then keep in mind that investing directly in the commodity futures markets is difficult, expensive and very risky. Investors looking for more direct exposure than a fund or service company offers, however, can invest in the PowerShares DB Agriculture Fund (DBA.N), an ETF traded on the American Stock Exchange and managed by Deutsche Bank. It invests directly in futures contracts for ag commodities and has risen nearly 60% in the past year. As well, stocks in companies that play in the commodity game directly have posted impressive gains. Shares of Montreal-based Rogers Sugar Income Fund (RSI.UN.TO) are up nearly 25% over the past year, while the price of Saskatchewan Wheat Pool (VT.TO) shares are up more than 50%.
The boom comes at a good time for long-suffering investors in agriculture companies, who have seen the sector hammered in recent years by poor harvests, avian flu and mad cow disease. It might also be good for the Canadian economy, says Burleton. After all, agriculture accounts for more than $6 billion -- roughly 10% -- of Canada's trade surplus. For investors and farmers alike, that's no chicken feed.
