A Growing Problem: Commodity Investment Strategies Amid Food Price Inflation

by Kevin Kerr | March 7, 2011 4:51 am

The recent events in the Middle East and soaring food price inflation in Asia, Africa and elsewhere underscore a “growing” problem for agri commodities investors and the stock market. Rising food prices are adding to the volatility and instability of the markets, and fueling social unrest. Consider that violent uprisings in the oil producing nation of Libya are largely behind the recent crude oil price surge that sent the energy source back over $100 a barrel.

High oil prices, and as a result high gasoline prices, could wipe out even small signs of recovery from the global economic meltdown.  Some experts are saying this could most certainly lead to a double dip recession. I tend to agree.

So what is an investor to do?  Let’s face it; prices for everything from food to fuel are hitting consumers hard in their wallets.  And it’s not just a problem in the Middle East or third World either.  In the U.K. food prices have soared. According to a report by UBS, “UK food prices are rising more rapidly than most other OECD (Organisation for Economic Co-operation and Development) economies’ food prices, and have significantly outstripped food retailers’ cost inflation.” U.K. food prices are up about 4.9% compared to the U.S. at 1.5% year-over-year.

Planting Profitable Seeds for Your Portfolio

Rather than just see more money go out the door every visit to the supermarket investors need to be proactive about food price inflation.  So how can an average investor take advantage of the situation and try to profit from the higher global food costs?

After the 2008 derivatives debacle and stock market crash, investors have begun to seriously look at commodities resources as a viable alternative to traditional investments. The crisis has created a new approach for investors who want to get back-to-basics and many of those investors are adding agriculture plays to their portfolios as a way to sort of counteract rising food prices.

Investing in the agricultural commodities like corn, wheat, and soybean futures are certainly not without risks and volatility in the markets. After all, trading tangible agricultural commodities is a big change for many investors who may only be used to purchasing the latest tech stocks or buying blue chips or mutual funds. But there is risk in every investing realm.

So what is an investor to do?

As an alternative to actually trading the futures on the corn, wheat and soybeans, investors can also acquire strategic agriculture stocks like Deere & Company (NYSE: DE[1]), Syngenta AG (NYSE: SYT[2]), Monsanto (NYSE: MON[3]) or even Caterpillar Inc. (NYSE: CAT[4]). These are some of the most direct ways to invest in agriculture via equities. Deere makes farm equipment, and so does Caterpillar to a lesser degree. Syngenta and Monsanto deal in agricultural chemicals like pesticides and fertilizer, as well as seeds and feeds.

Take Syngenta. SYT is on the front lines of combating crop rot  problems for farmers by creating seed treatments that help seed that may be exposed to too much moisture in early Spring and could destroy the seed. This is a huge opportunity as the world demands more food to offset a shortage and bring down prices.

Another ag sector that continue to do amazingly well is fertilizer.  Potash (NYSE: POT[5]), Agrium (NYSE: AGU[6]) and others continue to perform very well for investors for the same reason. Fertilizers increase crop yields, so are in demand.

Even if futures markets may not be your cup of tea, options on futures may be.  Now it’s still a big switch for many investors but there are many limited risk opportunities however.  However, be sure to understand all the risks involved.

I like buying options on futures because I know my full risk up-front is limited to the premium, or cost of the option, plus fees and commissions. I cannot lose anymore than that.

Of course, all investment in these types of speculative plays always should be done with risk capital.

In these uncertain times it’s always important to find opportunities with good potential return and a limited pre-determined risk.  As food prices surge around the World, simply consider it “food for thought” when making your next trading decision.

Kevin Kerr is the Editor of Kerr Commodities Watch[7], a weekly trading newsletter that focuses on top quality commodity option plays and select resource equities. As of this writing, he did not own a position in any of the stocks named here.

Endnotes:
  1. DE: http://studio-5.financialcontent.com/investplace/quote?Symbol=DE
  2. SYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=SYT
  3. MON: http://studio-5.financialcontent.com/investplace/quote?Symbol=MON
  4. CAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAT
  5. POT: http://studio-5.financialcontent.com/investplace/quote?Symbol=POT
  6. AGU: http://studio-5.financialcontent.com/investplace/quote?Symbol=AGU
  7. Editor of Kerr Commodities Watch: http://www.kerrtrade.com/

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