The Age of Austerity’s Quickly Moving Back to the Land

agriculatural stocksThe commodity price cycle is in full swing and, make no mistake, price inflation is coming down the road and it could be significant. Currently, the commodity price cycle is at the beginning of a new wave of inflation in the agricultural sector and all you have to do is ask your local baker about the effects already. We had a good run in oil and precious metal prices and now the last remaining sector — agriculture — is starting to feel the effects. This particular sector hasn’t had a sustained run in prices for quite some time. Going forward, farmers are likely to become much wealthier than they have been over the last several decades. It’s well-deserved, but it’s going to hit consumers squarely in the pocketbook. In fact, it already has. The price of coffee and sugar has been very strong and all indications are that these commodities will continue to keep going up in price. Soybeans and wheat prices are next.

The price of agricultural commodities is always affected by weather conditions and, this year, we’ve had a unique combination of drought and flooding in the world’s major growing regions that is contributing to rising prices for these raw materials. Crop yields just aren’t up to expectations and prices are going up. Just like in equity markets, commodity price trends are subject to the bandwagon effect. Very often, price momentum is even more pronounced in commodity futures than in other capital markets.

The timing is right for a sustained price move in raw agricultural commodities and, given the growing appetites among developing nations like China and India, the fundamentals are supportive. Add in very accommodative monetary policies at most of the world’s central banks, and the large increases in global money supplies will soon contribute to commodity price inflation across the board.

As an investor, you can benefit from this trend by speculating in related futures and equities markets or you can own productive farmland. Both have their risks, and it all comes down to price.

My favorite investment analyst, Jim Rogers, continues to advocate very seriously that Wall Street bankers should quit their jobs and learn how to drive tractors. It’s a bold economic prediction and, while Rogers is usually quite early in his calls, he’s almost always right.

If a hugely successful speculator like Rogers is saying that investment bankers should learn how to farm, then you know he’s bullish on the price of eggs, not semiconductors. That means that his outlook for the global economy isn’t great. It’s a very bold call on global monetary policy, corporate profits and even the outlook for domestic housing prices.

The price of food is going up and there’s nothing that consumers can do about it. As investors, the time to make some moves in the last remaining beneficiary of the commodity price cycle is quickly running out.