Three Reasons to Invest in Agricultural Commodities Now
Agricultural commodities surged in 2007. The S&P GSCI agricultural commodities index rose 31% in 2007, its best performance since 1981. Wheat and rice prices, for example, hit record highs as a result of low inventories. Soybean prices soared to a 34-year high while corn prices jumped to an 11-year high.
In comparison, U.S. stock markets had relatively modest returns in 2007. The S&P 500 index returned 3.5%, the Dow Jones Industrial Average rose 6.4% and the Nasdaq was up 9.8% for the year. The huge differences in performance returns between commodities and stocks in 2007 serve as a reminder to investors of the value of diversification.
Benefits of Diversifying with Commodities and Stocks
Commodities and stocks have a negative correlation, which means that when stocks go down, commodities tend to move up and vice versa. Thus, if a portfolio is diversified with stocks and commodities, it will likely experience less volatility than a portfolio that is comprised of only stocks. That’s because as one asset class underperforms, the other asset class can outperform to offset the volatility.
Why Invest In Agricultural Commodities?
Many factors affect the price of agricultural commodities. A huge factor is low global supplies and growing demand, but there are other variables that affect prices such as weather, natural disasters, world wide growth, changing world diets, currency exchange rates and the development of alternative energy sources.
While there are many reasons to invest in agricultural commodities, I will focus here on the three most important macro factors that I believe support a continued bull market in this sector. 1) rising global demand from emerging economies and low worldwide supplies, 2) shifts in world diets 3) greater demand for alternative energy.
Growing demand for commodities from fast developing economies, such as China and India, together with low global supplies, have been a huge factor in pushing the prices of commodities higher. Energy and metals indices have risen greatly over the last several years, while agricultural commodities more recently have appreciated. Rising incomes in emerging economies and western influences are likely to trigger changes in worldwide food consumption. It’s expected that populations around the globe will demand more vegetables, fruits and proteins, such as meat and dairy products, to supplement staple foods such as rice and noodles.
The demand for agricultural commodities is unprecedented at a time when supplies are very low. Not only is there greater consumer demand for protein foods, such as meat and poultry, in Asia, Latin America and the former Soviet Republics, there is increasing demand for agricultural commodities in the global biofuels industry.
Many countries are in the process of decreasing their dependence on petroleum-based energy primarily due to rising oil prices. They are seeking alternative energy sources. Bioenergy is estimated to be the fourth largest energy resource after coal, oil and natural gas. Bioenergy is stored in resources such as plants, energy crops such as sugar and corn, agricultural crops and animal wastes. Corn and sugar, for instance, have become energy commodities as they are used to produce ethanol, a clear fuel that can be used to power energy-efficient vehicles. Over 55% of the world’s ethanol is produced from sugar alone.
Of course, there are factors that could counter the trend in rising commodities prices. For instance, an outbreak such as mad cow disease could reduce world demand for meat and poultry, which could also reduce demand for feed grains. Or, political factors could adversely affect agricultural trade.
Just as with stock investing, there are many factors to take into account when investing in commodities. The big picture and long-term trends, in my opinion, are the most important factors to focus on. Global demand and low worldwide supplies are the key factors supporting the ongoing commodities bull market. Many analysts believe we are in the beginning of unprecedented future prices increases for agricultural commodities.
Do-It-Yourself Commodities Investing
The bright outlook for agricultural commodities, and commodities in general, is exciting news especially when you also consider that investors now can invest in commodities in low-cost and easy ways that have not been available before. Today there are easily accessible ways for both individuals and institutions to invest in commodities that were not available during the last commodities bull market.
Mary Rivas is passionate about teaching. She has over 16 years of experience working in the investment management industry, and is the author of Power Path To Money, which is available at www.powerpathtomoney.com. She wrote this book to teach people 1) how to use low cost ways to easily invest in commodities and 2) how to invest in themselves to achieve maximum success. Her book reflects her philosophy that successful investing is achieved by being knowledgeable about investment opportunities and by developing one’s inner power.