Grains Will Make a Comeback

03/12/2009 11:14 am EST

Focus: ETFS

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, warns that droughts and shortages will eventually push grain prices higher again.

I'm convinced that we remain in a long-term bull market for agricultural commodities. This historical trend began in 2006 and remains extremely powerful as population growth exceeds arable food supply combined with unpredictable weather patterns attacking supplies and causing droughts.

Leading up to last July, when inflation peaked for this cycle, food inflation was at its most acute since the 1970s, especially in the emerging markets. Food riots ran wild in many developing countries as the price of grains and other foodstuffs went through the roof, coupled by record low harvests in 2007.

Then came the credit panic and by late 2008, impressive harvests and crop yields in Ukraine, Australia, and the United States following a dreadful 2007. From their highs in 2008, wheat prices have crashed 56%; soybeans are down 42%; corn is off 53%; oats are off 58%; sugar prices are down 16%, and Brazilian coffee is down 39%.

In addition to rising population growth, especially in Asia, persistent droughts will damage output and the endgame at some point will be spectacularly high agriculture prices that might have to be subsidized by government to avert another food panic.

In Northern China, a massive drought is getting worse and has scorched the most arable land in fifty years. Australia has been marred by an unrelenting drought for almost five years. Over 41% of Australia's agriculture continues to suffer from the worst drought in 117 years.

California, virtually bankrupt, also is in the middle of a gut-wrenching drought. The current drought is the worst since 1977 as thousands of acres of crops have already been fallowed. [Meanwhile,] the worst drought in almost 50 years has turned Argentina's once-fertile soil to dust while throwing the country into a state of emergency.

[So], why aren't grain prices much higher?

First, if not for the credit crisis and the near unraveling of the financial system last fall, grain and other foodstuffs would be trading much higher. This entire deflation episode has attacked all assets, including food and food consumption trends.

Also, the big speculators in these markets have been knocked out by margin calls on de-leveraging. When commodities finally broke in July, the party ended. Hedge funds bailed.

As the global financial system gradually heals, commodities will recover. I think it's very important for every investor to buy PowerShares DB Agriculture (NYSEArca: DBA).

This ETF is almost equally weighted in wheat, corn, soybean, and sugar futures. It's the purest way to speculate in these important commodities without the associated risk of futures or options trading. DBA stands 44% off its all-time high. Buy up to $26.50. (It closed above $23 Wednesday-Editor.)

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