Playing the Food Boom for Huge Profits
Commodities / Agricultural Commodities May 15, 2008 - 12:07 PM GMT
Larry Edelson writes: I'm long 5,000 bushels of corn in the futures market. I bought the contract at $6.22 (a bushel), near corn's record high price.
Why? Because I'm expecting the price of corn to more than double in the next 18 months, to well over $12 a bushel. And I'll be adding more corn to my portfolio when I see the next buy point.
I plan on buying soybean futures, too. Currently trading at just under $13 a bushel, I expect soybean prices to eventually climb to more than $25 a bushel, doubling in price.
And that's just the beginning!
Other foods on my radar screen include ...
- Cocoa, which has enormous upside potential as hundreds of millions in Asia start to drink cocoa, and eat chocolate.
- Coffee, which like cocoa, has huge demand growth ahead.
- Sugar, the same picture here. Sugar prices could easily quadruple in the next two years.
- Cattle, hogs, pork bellies, all facing intensified demand and consumption, while supplies will not be able to keep up.
Am I talking about the food crisis? You bet I am. In fact ...
Food and Agricultural Prices Are Just Finishing Act I of their New Bull Markets
Act II could begin any moment, and that's where prices will shock everyone, doubling ... tripling ... quadrupling ... and even quintupling in the years ahead.
Back in 2005, I was one of the first analysts to predict that food prices would rise sharply. Since then ...
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| As wheat prices skyrocket higher, farmers in the American Heartland are watching their fields of green turn to gold. |
- Wheat has almost quintupled, to as high as $13.49 per bushel.
- Corn has jumped more than 238% to a high of $6.48 per bushel.
- Soybeans have tripled in price, soaring from $4.98 to $15.86 per bushel — a record high.
Taken together, food prices are now at their highest levels since 1845 — that's 162-year highs — according to the widely respected Economist magazine and its food price index.
At the heart of rising food prices is the same phenomenon I've been talking about for years now and that is affecting the price of oil, gold, gas, copper and practically everything under the sun: The Federal Reserve's determination to devalue the U.S. dollar and inflate the economy.
So in large part, the weak dollar is why food prices are soaring. Wheat, corn, soybeans and even meat products are priced and traded in dollars, so when the dollar falls, the prices of these commodities typically rise in value to compensate for the weaker dollar.
But the weak dollar is not the only reason food prices are rocketing higher. Not by a long shot ...
Exploding World Population Is Driving The Unprecedented Demand for Food!
We've already seen this dynamic in many other natural resources — oil, gold, silver, copper, uranium. Now we're seeing it in food products. And like other natural resources, the strongest demand for food is coming from Asia.
Consider China, for example:
Although China still maintains its one-child-per family policy in the cities, it's not illegal to have more children, provided the family effectively pays its own way for education and other social services.
And with the increasing wealth in the urban areas, many more couples are opting to do just that.
Result: The overall fertility rate in China has been rising, now approaching two children per family. And China expects its population to increase by 300 million to 1.6 billion by 2050.
Meanwhile, domestic supplies of food in China have been shrinking: China's grain harvests, including wheat, corn and rice, have declined in four of the last five years. Why? Because ...
- China's arable land is shrinking at the rate of 2.47 million acres a year. Construction is eating up land once used for growing crops.
- Aquifers have been dropping rapidly, reducing irrigation water supplies.
- Farmland, especially near urban centers, is being converted from grain production to higher value crops like fresh fruits and vegetables.
- Urban migration is depleting the countryside of able-bodied field workers.
So increasingly, China has been turning to imports for its grain supplies.
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| Demand for basic foodstuffs is exploding across India, whose already burgeoning population is expected to swell by another 300 million over the next 15 years. |
And the same thing is happening in India, the world's second most populous country.
Over the next 15 years, India is expected to add another 300 million people to its current population of one billion. That's the equivalent of adding the entire current population of the United States!
And also like China, India is experiencing mass migration to urban centers like Mumbai, Calcutta, and Delhi. That means fewer farmers, and more urban sprawl.
And although China and India are by far the biggest consumers of grains and soybeans, they are not the only sources of burgeoning demand for agricultural goods ...
By 2030, there will be 1.4 billion MORE new mouths to feed from other corners of the globe!
Sub-Saharan Africa is one of the demographic hotspots. Population growth there is going to explode from 642 million today to 1.4 billion in the next 25 years.
Bottom line: A rapidly growing population translates into increased demand for food. Period. Combined with weather problems and supply disruptions due to droughts, as a proportion of total production, the world's reserves of grains are now at their lowest levels in recorded history.
Given the fact that there was a record global harvest as recently as 2006, it's almost certain that not only is population growth affecting food prices, but something even more fundamental as well ...
Changing Diets Around The World Are Also Forcing Food Prices Higher
China and India's appetite for oil, coal, iron, copper and more are major driving forces behind the natural resource boom. But now, along with rising incomes in these countries, food habits are changing rapidly.
According to the Rural Industries Research and Development Corporation, by 2020 demand for meat and dairy in 12 Asian countries — representing more than half the world's population — will soar: Beef consumption will increase by 50% ... pork 30% ... chicken 40% ... and dairy 55%.
Already, since 1985, per capita consumption of animal protein calories in China has more than doubled, rising from 20 kg (44 lb) to 50 kg (110 lb). But China isn't alone. Combining all of Asia with the other developing economies around the word, demand for meat has doubled in the last 20 years.
It would be one thing if demand for meat was rising as demand for other foodstuffs such as seafood, grains, even rice, were falling. But that's not happening. Demand for all foods is rising across the board.
Moreover, and especially as meat intake rises, upward pressure on grain prices actually intensifies. For instance, it takes about two kilograms of feed grain to produce one kilogram of chicken. For pork, it takes three kilos of grain, and for beef, eight.
All told, the anticipated rise in meat demand over the next 13 years will require as much as a 30% increase in global grain production to meet demand.
Clearly, food prices have all the fundamental ingredients that are combining to create a massive, long-term bull market. Stagnant and unreliable supplies ... massively increasing demand ... a shifting of world food habits ... and a falling dollar.
And my technical indicators agree, showing that grain prices especially, could rise up to 500% in the next two years. As we prepare for Act II of the great bull market in food and agricultural commodities go through the roof, one-after-another, you may be left wondering ...
What's The Best Way to Play the Food Boom?
I think the best, general, all-around agriculture investment is the new PowerShares Agriculture Fund (DBA), an Exchange Traded Fund (ETF) devoted to tracking the prices of the major food groups, especially grains. This fund allows you to effectively invest in agricultural commodities, but without having to go into the futures or options markets.
For more powerful leverage and profit potential, you'll want to consider select food conglomerates ... and agribiz companies.
Plus, you'll want to look at companies working in the area of water irrigation. Lack of water and antiquated irrigation infrastructure is another major reason why food prices are soaring.
Best wishes,
Larry
P.S. To get specific buy-and-sell instructions for agricultural commodities and other natural resource sectors, including follow-ups and flash alerts, consider my Real Wealth Report .
The May issue publishes tomorrow and covers the food crisis in detail. It includes three of my hottest recommendations (plus two other companies that pay 5%+ dividends) .
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