Glenn Rogers writes:
Food is again in the news, big time. The stunning collapse of the Tunisian government and the abdication of the country's virtual dictator was triggered in part by food riots in Tunis and other centres. Although its government remains in place for now, neighbouring Algeria has also experienced street demonstrations against the rising cost of staple foods. In India there is unrest over, of all things, onions.
This may be just the beginning says Philippe Chalmin, an economics professor and adviser to the French government. He was quoted in Business Week earlier this month, warning that social turmoil could become widespread this spring as grain prices soar due to the floods in Australia and a drought in Argentina.
The situation is becoming so critical that it is expected to be addressed by a special meeting of agriculture ministers at the next G20 session, according to a report in Friday's Globe and Mail.
It's been almost three years since I last wrote about the agriculture sector, April 2007 to be exact. Back then I recommended a basket of stocks which included John Deere (NYSE:DE), Potash Corp. (NYSE:POT), and Monsanto (NYSE:MON). Monsanto is the only one left in the portfolio. Given recent events, it's time to revisit the opportunities in the sector.
For starters, I would definitely suggest that you continue to hold Monsanto. The shares were originally recommended at US$60.30 and it has been a wild ride since. MON peaked at US$135 a year after I recommended it, then dropped down into the US$40 range before starting a very strong recovery. It closed last week at US$70.11, well above where it was when I initially recommended it three years ago at US$60.30 but down about $5 from a year ago at this time. So much for buy and hold! However, if you have owned it all this time you may as well reap the benefits from what looks to be another run to the previous high.
I started selling off my precious metals holdings particularly gold and silver late last year and began to rotate into the soft commodities like grain, cotton, soybeans, etc. I also went back into a number of the fertilizer companies like Potash, Agrium (GU), and Mosaic (NYSE:MOS), which has been in the news lately.
As well, I bought a basket of agriculture-related stocks in an ETF called Market Vectors Agribusiness with a great symbol (MOO). This ETF holds most of the companies mentioned above. I almost concluded that the sector was too overbought to write about because for some of these names the performance has been extraordinary. But I believe there's still upside potential for the following reasons:
First, this whole area has become a strong momentum play. We all know how important momentum is in driving stock prices, up or down, so momentum investors who haven't taken positions should get on board.
Second, natural disasters like the floods in Australia and a drought in Russia which led to wheat export bans have had an adverse effect on supply and have been driving up prices in soft commodities around the world. This has created demand for more fertilizers and farm equipment.
Third, and most important, improving economies around the world, particularly in developing countries, have led to a dramatic increase in demand for higher quality foods and proteins. This growing demand is the main reason I continue to like the agriculture sector and why I think there could be another year left in this trade. Strong demand is the mother's milk of corporate profits and the main driver of increasing stock prices over time.
I've already mentioned a number of ways to play this sector but there are some lesser-known securities that will give you direct exposure to the soft commodities that I mentioned. Many of these, such as cotton, have more than doubled in price in the past year which will ultimately cause manufacturers who use them to raise prices. Ultimately, that will show up as inflation, driving up interest rates and destroying the bond market in the process, which we have started to see already. But that's what the Fed has been gunning for this past year and that's a story for another column. I mention it only because inflation is good for commodities. We have been seeing that in most of the metal stocks but since that sector has been overheated until recently I decided to zero in on some soft commodity opportunities that may be slightly less stretched.
One I especially like is the Elements Rogers International Commodity Agriculture ETN (NYSE: RJA). It is named after the famous Jim Rogers who was co-founder of the Quantum Fund with George Soros and the creator of the Rogers International Commodities Index (RICI) which this ETN (exchange traded note) is broadly designed to emulate. Actually, it tracks the agricultural components: wheat, corn, cotton, sugar, orange juice, rice, etc. There is a sister ETN, which I also own, that is linked to his complete commodities basket symbol (NYSE: RJI). It gives you exposure to a broader base of commodities including those I have mentioned plus crude oil, aluminum, copper, natural gas, etc. - pretty much every commodity you can think of and then some.
Jim Rogers is a legendary commodities trader and the author of a number of entertaining books including The Investment Biker: Around the World with Jim Rogers and Venture Capitalist: The Ultimate Road Trip. They are well worth a read, particularly for those who are motorcycle enthusiasts. He was acknowledged by the Guinness Book of World Records for traveling 100,000 miles across six continents on his bike after cashing out of the Quantum Fund, which he could afford to do since over 10 years the fund's portfolio increased 4,200% while the S&P advanced only 47%.
By the way, if you are wondering what the difference is between an ETN and an ETF, Investopedia defines ETNs as "structured products that are issued as senior debt notes by Barclays, while ETFs represent a stake in an underlying commodity".
I think the best way to play this sector right now is through a combination of MOO and RJA. MOO closed on Friday at US$54.38 and my target is US$62. RJA finished last week at US$11.09 and I am looking for US$14.
Because this sector is so volatile right now, I suggest proceeding with caution. Decide how much you want to invest and buy half the desired position now. If the shares pull back significantly, buy the rest.
Action now: Buy MOO and RJA but take only half positions at this time. This trade is suitable for aggressive investors.