Monday, February 27th, 2012
By Mitchell Clark, B.Comm. for Profit Confidential
Precious metals and oil have proven that commodities are in an upward price cycle. If you believe in the commodity price cycle like I do, you’ve got to have some exposure to the group as part of a balanced investment portfolio. Within the group, there are three main sectors for consideration: precious metals, energy, and agriculture. Precious metals and oil have already been big winners. Like all commodities, they’ve experienced substantial price corrections, but their price cycle over the last 10 years has been very significant and is still looking good. Now the commodity price cycle is moving into agriculture and, while this is inflationary for consumers (just ask your local baker), it’s a great opportunity for investors.
I still like precious metals like gold and silver, but I believe we’re on the cusp of another major new price cycle trend. If the U.S. economy gets better, precious metals will improve. If we have another recession, gold and silver precious metals shouldn’t go down very much. Precious metals, oil, and agriculture have the same primary price cycle trend—rising demand, stagnant supply.
Agricultural land prices are going up in virtually all Western countries and especially in the U.S. Cash crop farmers, after decades of little to no income growth, are now making some money from their land. Agriculture futures have now broken a decades’ long price cycle of mediocrity. Of course, it is difficult for the average investor to go out and purchase good arable land and cultivate it, but an individual investor can invest in this new price cycle just like they do in precious metals, oil, and gas. There are stocks, mutual funds, ETFs, futures funds, individual futures trading, etc. There are even funds now that purchase large plots of agricultural land for cultivation (but they aren’t advertising).
One benchmark stock that I follow regularly is Bunge Limited (NYSE/BG). This $10.0-billion agribusiness is based in White Plains, NY, transporting and processing agricultural commodities with global operations at the wholesale and retail levels. The company, a well-known player in global agribusiness, has approximately 32,000 employees in more than 30 countries. It does everything from selling fertilizer to milling wheat and corn to crushing oilseeds for the livestock and foodservice industries.
In a recent report by Reuters, the Government of Singapore Investment Corporation, which is one of the world’s biggest sovereign investment funds, took on a five-percent stake in Bunge. The fund bought over 7.3 million shares of the company over time, spending just under $500 million for the investment.
What is slowly happening among large institutional investors is a migration away from big holdings in global financial institutions, which have proven to be not that well-managed. Big funds now own precious metals, whereas they never used to consider them before. With the commodity price cycle very evident in precious metals and oil, I believe agricultural commodities are the next group in the overall trend. (See Debt Crisis Aside—Let’s Get Down to Business with the Real Numbers.) How can they not be with stagnant global supplies of food raw materials, rising demand, and the devaluation of the U.S. dollar?
I think any reasonable investment portfolio should have exposure to precious metals for the hedge, oil because it’s in everything, and agriculture because the industry is about to embark on a new, long-run upward business cycle after decades of being in the doldrums.
Agriculture has always been an industry with a long-term time horizon for investment. But, the futures markets have not. With spot prices for many agricultural commodities well up from their historical trends, farmers can expect a positive return in their investments, which means they’ll buy more “John Deere” tractors, pickup trucks and plaid shirts. It’s one of the best things going in the Main Street economy today. It’s a new, long-term price cycle that I believe in.
|Total 2012 per share earnings for 30 stocks in the Dow Jones Industrial Average:||$900|
|Dow Jones Industrial Average Price/earnings multiple:|
|Dow Jones Industrial Average Dividend Yield:||2.4%|
|10-year U.S. Treasury Yield:||2.17%|
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