Play the Next Long-Term Commodity Trend

10/27/2011 1:33 pm EST


John Stephenson

President and CEO, Stephenson & Company

John Stephenson, author of The Little Book of Commodity Investing, discusses what he sees as the long-term trend in commodity prices, and several ways investors can participate, in this exclusive interview with

John, tell us, if investors want to play the commodities market, what is your best advice for them?

I would say for most retail investors, you’re better off to buy the stocks of the commodity producers.

Obviously, there are several ways you can play it. You can play the commodities themselves, which means buying futures. I think that’s, quite frankly, beyond the scope of most average investors. I think that’s a dangerous way.

One other way is to play ETFs. That’s certainly another way to do it, where you’re buying commodity futures through the ETF or playing the equities themselves. I believe that if you’re in a commodity bull market, which I believe we will be, and are in, and will continue to be for a decade or more, this is going to be your best opportunity.

One of the most interesting things, at least from my perspective, being a researcher and an author on this book, was to learn that these cycles are long dated. They’re 20 years on average in length. And when commodities are doing well, generally speaking, equities and bonds do poorly.

I think we’re going back to a period like the 1970s, when commodity investing was all the rage and stocks and bonds went essentially nowhere. I don’t know if bellbottoms and disco music are coming back, but I think commodity investing is.

So what particular areas then, within commodities investing, are worth a look?

Well, I think right now certainly gold and precious metals; absolutely, that’s a no-brainer.

Energy is very attractive right now. I think people don’t realize that their oil in particular is a miracle fuel. There really is no substitute, and while people complain about $4 a gallon oil at the pump, the reality is that it’s cheaper than orange juice on a volumetric basis. So, it’s still a pretty good bargain…and you can’t do without it.

I think another area that looks very, very attractive is the grains right now. I think that’s an area that’s very attractive.

And certainly copper. In the next 14 years, China will have ten cities the size of New York. That’s going to require a lot of electricity to fire up and keep those buildings lit at night and throughout the day and air-condition them, and that’s going to be creating a huge demand for copper.

Now, if people are interested in grains or copper, which you just mentioned, what steps should they take to make some purchases?

I think the first step for anything is education…Then I think, you know, depending on where you sit, and where you view commodities, you can open up a commodities futures trade account.

Now, that’s not my recommendation, but I think I would start educating myself about a specific sector where you believe the fundamentals look good. But I think the precursor to making money is education.

So you mentioned a couple of sectors that do look good right now. Any names within those or particular ways to play this right now?

Sure. Within the grains sector, I think the really simplest way is the most direct way, which is through the fertilizer companies. So, Mosaic (MOS), Agrium (AGU), Potash Corp (POT). And the reason is simple: fertilized food grows twice as fast as unfertilized food.

The demand is coming from Asian developing worlds for virtually all commodities—in particular, China. This demand, it cannot be satisfied by small plots with individual tenant farmers with one acre, which is predominantly how China farms right now.

Eventually, it will go to large-scale commercialization, just like in the US. That’s good for the equipment manufacturers like John Deere (DE). So, those are names to look at and consider. I think those are smart ways.

You can also play the individual grains through ETFs and I list a whole bunch of the ETFs on my Web site,

And do you own any of the names that you just mentioned?

I own every single name. I believe that you’re into this long-term theme where agriculture food prices are here to stay.

Clearly it’s a big component of CPI and really the developing world. Certainly it’s three-quarters of the CPI number that you’re seeing out of China right now.

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