The Breakfast Trade Is On!

by Aaron Levitt | February 12, 2013 11:02 am

The past year has been a doozy for the agricultural complex. Thanks to last summer’s historic drought in the critical Midwest growing region, corn, soybeans and other foods saw smaller yields and steeper price increases. With a majority of America’s heartland affected by the massive drought, total crop production was the worst in several years. And the rain hampered not only crops, but livestock[1] as well.

With both grains and livestock already up big in 2013, investors might think the opportunities in agriculture are already over and done with … but they would be wrong.

While continued drought-like conditions[2] could make the grains a continued winner in 2013, plenty of other agricultural commodities could be winners in their own right.

For investors, the “breakfast trade” is unquestionably on.

Coffee & Sugar

While corn, wheat and soybeans get the bulk of investor’s attention, some of the lesser-followed ag commodities could be great plays in the upcoming year. In this case, we are talking about coffee, sugar and more.

Just like many grains, these foods are benefiting from some of the same supply and demand dynamics, with emerging markets leading the way.

The United Nations Food & Agricultural Organization estimates that the world’s population will increase by 2.3 billion people by 2050. That’ll put the global total at around 9.1 billion humans. Using that data as a framework, the FAO predicts that global food production[3] will need to grow by 70% to keep up with that population growth. However, these estimations don’t even take into consideration the change in diets of the emerging global middle class, which under some conservative estimates will reach 3.5 billion people in that time frame.

As people get “richer,” diets change — and right now, they are changing quite rapidly.

Take sugar for example. As both China and India have grown their middle classes, both have seen increased demand for processed foods with high sugar content. Exchange-traded fund sponsor ETF Securities estimates that India’s sugar consumption will double by 2030 and Chinese consumption will surpass that of the EU by next year. Overall, long-term sugar demand will rise by as much as 50% in the next 20 years based on these two nations’ changing diets.

Another example can be found in your morning cup of joe. Despite the prominence of Red Bull energy drinks and sodas, coffee remains the No. 1 way the world gets its jolt — and that number seems to be growing, too. The International Coffee Organization forecasts that demand for “inferior” robusta coffee beans will grow 6% annually through 2015[4], while consumption of arabica beans is estimated to rise by 1% a year.

Again, emerging markets are leading that growth. Driven by students returning from abroad and a newly emerged Chinese international business traveler, analysts predict China’s coffee consumption will grow at 15% to 20% annually. Currently, Chinese citizens only drink an average of three cups a year, well below the world’s average of 240. A similar story is happening in Latin America, where Brazil’s rapidly increasing coffee demand is expected to grow by 5% this year.

Yet, despite recent record coffee harvests, supplies of the bean remain tight. Hubert Weber — president of global coffee for Kraft’s (NASDAQ:KRFT[5]) international spin-off Mondelez (NASDAQ:MDLZ[6]) — said recently in an interview with Reuters[7], “If we talk about total coffee availability, in 10-15 years we will have an issue of total supply.” Weber based his thesis on the lack of good farming techniques.

Higher long-term emerging market demand can be applied to a variety of agricultural commodities — from orange juice to oats.

Betting on the Ag Sector Beyond Corn

It’s a heaping helping of good news for investors: The overall long-term ag picture looks rosy, and there are plenty of ways for individual investors to add the breakfast trade to their portfolios.

Keeping with our “simple ETFs are best”[8] theme, the ag-based PowerShares DB Agriculture (NYSE:DBA[9]) offers investors a chance to take part in agriculture without having to navigate the complications of actually trading futures contracts. The fund tracks contracts on 11 different breakfast foods, including coffee, lean hogs, cocoa and wheat. The broad focus gives retail investors the biggest bang for their buck. Add in the fund’s swift trading volume and an expense ratio (0.85%) far lower than actually owning a managed futures account, and you have a recipe for success. So far, the fund has managed to outperform the S&P 500 since its inception back in 2007. However, DBA is currently down about 2% this year, so it might be a good candidate for investors looking for a small bargain.

Perhaps one of the biggest opportunities on your breakfast table could be in your java. Coffee prices recently have been ground lower as global supplies of arabica beans remain abundant amid current soft demand and large harvests in Brazil and Colombia. That has caused the iPath Dow Jones-UBS Coffee Total Return ETN (NYSE:JO[10]) to tank about 37% during the past year, mirroring the fall in Arabica futures. Given coffee’s projected growth in long-term demand, as well as potential future supply issues, buying JO today could lead to massive gains over the next few years.

If you prefer your coffee sweet, the iPath Dow Jones-UBS Sugar Total Return ETN (NYSE:SGG[11]) also has fallen about 17% during the past year.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

  1. livestock:
  2. continued drought-like conditions:
  3. global food production:
  4. will grow 6% annually through 2015:
  5. KRFT:
  6. MDLZ:
  7. in an interview with Reuters:
  8. “simple ETFs are best”:
  9. DBA:
  10. JO:
  11. SGG:

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