Grain gains: Best bets in agriculture

In my opinion, the solid long term fundamentals for commodities mean that today�s off-peak prices are creating an excellent buying opportunity.

The most promising commodities now are the major crops, nearly all of which have performed well for several years. In a hungry world with an expanding population, I think agricultural commodities will continue to outpace many investments � including precious metals.

In addition, there are other major factors that are pushing up agricultural prices:

• Increasingly affluent people throughout the world are adding more animal protein to their diets. Because it takes 30 pounds of grain to make a pound of beef and 12 pounds of soybeans to make a pound of pork, it is easy to see the impact the expanding demand for protein will have on grain supplies.
  
  
• The world is running out of phosphate and potash for fertilizer, neither of which can be manufactured. Rising fertilizer costs always push grain prices up.
  
  
• Crop production is also highly dependent upon oil, another rising cost that will boost prices.
  
  
• Many agricultural pests and pathogens are becoming resistant to antibiotics and poisons. Crop losses to diseases and bugs will have an increasing influence on prices.
  
  
• Farm productivity growth is slowing dramatically and is close to what many experts believe to be its practical limits. That means the supply of food is unlikely to keep pace with increasing demand.
  
  
• The amount of economically viable agricultural land is not increasing significantly. Water shortages are actually decreasing the amount of usable land in many of the world�s bread baskets.
  
• Climate change is causing severe disruptions to food production in many parts of the world. Australia, Russia, and the U.S. have been experiencing droughts and floods, sometimes going from one to the other from year to year.

The bottom line is, agricultural prices should rise significantly over the long term, and so should the prof- its of its most efficient producers.

Most investors overlook agricultural commodities because there has not been an easy or low-risk way to trade them. The traditional method has always been to take positions in the futures market, which for most investors can be like jumping into a pool of sharks.

However, futures are no longer the only way to invest in commodities. In recent years, several commodity exchange traded funds (ETFs) have been introduced that make it easier, and safer, for individual investors to trade them. Millions of shares in popular ETFs are traded each day.

To avoid big price swings due to a low daily trading volume I think you should avoid small, highly- specialized ETFs.

Unless you have a cookie jar full of antacids, I also think you should avoid �ultra� and �double short� funds that double the size of the price changes the ETFs track.

Your best bet is to invest conservatively in long range commodity trends. Although prices can swing widely near term, I believe long range investments in agriculture will be very profitable.

For the broadest position in agricultural commodities, I recommend the large and diversified PowerShares DB Agriculture Fund (DBA).

This ETF tracks corn, wheat, soybeans, sugar, coffee, cocoa, cotton, cattle, and hogs � all of which are used in most regions of the world. If you want to own only one agricultural commodity fund, DBA should be your choice.

However, I think you will do better over the next few years if you focus just on the grains, for which demand is rapidly rising.

In my opinion, the most attractive ETF that tracks the price of corn, wheat, and soybeans is the iPath Dow Jones Grains Total Return Index (JJG). As its name suggests, the fund mirrors the performance of the popular Dow Jones Grains Index.

The iPath fund is currently correcting after the most recent of two large advances it made over the past four years. Perhaps the price will continue to weaken over the near term. Longer term, however, I expect to see the grains and the fund rebound.

For a diversified investment in companies (as opposed to the commodities themselves) that benefit from rising grain prices, I recommend the Market Vectors Agribusiness ETF (MOO).

In addition to following the leading grain producers and processors, this fund also tracks the two leading fertilizer companies: Mosaic (MOS) and Potash (POT).

The fund has done very well in recent years, and it continues to look strong. I expect to see excellent long term profits from what many investors call �The Moo Fund.�



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