Playing the Next Big Trend in Commodities

by Mitchell Clark, B. Comm.

I’m a big believer in investment themes and creating a portfolio of stocks to reflect those trends in the global economy that are most positive and most likely to be receptive to institutional investors. The commodity price cycle is a trend unto itself and, while I believe strongly that the prices of oil and gold will increase over the coming quarters, I can’t escape a gut feeling that agricultural commodities will be some of the strongest performers over the next several years. Perhaps the next decade.

There are many ways to play the potential price trend in agricultural commodities. You can trade the futures themselves, own a managed futures fund, or buy a commodity index. There are also some well-known large-cap agricultural companies in the marketplace. Some of the big conglomerates in agriculture include Archer Daniels Midland Company (NYSE/ADM), Agrium Inc. (NYSE/AGU), and Monsanto Company (NYSE/MON). Companies like these have multi-faceted operations, such as seed production, grain handling, and ethanol production, and some pay a dividend.

The great thing about stronger agricultural prices is that, when a farmer makes money, he or she almost always reinvests those profits back into their business. The money stays local. So, if you believe that grain prices will rise, you can even invest in Deere & Company (NYSE/DE) if you think farmers will buy new farm equipment.

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There’s one specific trend in the agricultural marketplace that I think deserves close attention over the next two to five years. My research suggests that there is going to be a surge in the price of fertilizer and there isn’t anything farmers can do about. So, if you think the price of food is going to go up because of price inflation in the economy, the effect will be much more pronounced, because the input costs for agricultural production could skyrocket.

One of the biggest players in the North American agricultural market for fertilizer is Potash Corporation of Saskatchewan Inc.
(NYSE/POT). This company is the world’s largest fertilizer business, producing the three primary plant nutrients: potash; phosphate; and nitrogen.

Last year, fertilizer prices went through the roof and, in some areas, the price per-ton increased fivefold. Soaring oil and natural gas prices were a large part of the reason for the price increase, because making fertilizer requires the use of a lot of natural gas. Because of the enormous price increase, farmers cut back on fertilizer use and fertilizer stocks rose. Currently, those fertilizer stocks are running out and there is going to be a substantial demand increase for fertilizer as supplies dwindle. A farmer can cut back on fertilizer use, but, eventually, he or she has to put the nutrients back into the land or yields start to go down.

So, there is a fundamental supply/demand imbalance that’s coming in the fertilizer market. I’m usually early in my predictions, but in 2010/2011, the price of fertilizer could soar as part of its own supply imbalance and as part of general price inflation in agricultural commodities.

So, there are lots of ways to play the commodity price cycle in agriculture. Not everyone can afford to go out and buy productive farm land, but you can always consider an agri-business that trades on the stock market.