I would like to introduce you to a long-time friend of Weiss Research, Kevin Kerr. Kevin Kerr’s reputation as commodity expert is so good it has caused the financial media to beat a path to his door! He has been a regular contributor to Cavuto on Fox, Kudlow & Company on CNBC, Nightly Business report on PBS Fox Business News, NBC, ABC, CNN, and many more. What most people don’t realize is that Kevin’s expertise goes far beyond just commodities. For today, though, consider his latest views on the subject he’s best known for. |
For a very long time in America we’ve enjoyed a seemingly endless, cheap, and abundant variety of foods from all over the globe.
Although for many of us, our understanding of food supply and what it takes to get it all on the grocery store shelves is very limited. Somehow, it just magically appears!
The problem: Like so many of our other natural resources, we have simply taken for granted the costs associated with producing, harvesting, packaging, and shipping the items we have come to expect at the market each day.
But with fuel prices and other costs surging, we are seeing …
The End of Cheap Food
Today, in emerging markets such as India and China, there is exponential growth and a new middle class that is demanding things they’ve never had before. Millions of cars, better housing, electronics, and above all … better foods.
Demand has surged for things like meats, better quality grains, soft commodities including coffee, cocoa, and sugar. This huge increase in demand is rapidly outstripping supplies of many key resources, and putting a strain on an already overloaded agriculture system.
On top of the global surge in demand we are seeing a decline in quality agricultural acreage and arable land in many regions, mainly due to an increase in poor farming methods. In China for example, poor hillside farming techniques are quite common. And antiquated farming equipment is often still the norm.
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| China is about the same size as the U.S., but they only have about 11 percent arable land compared to 26 percent in the U.S. |
In addition, much of the once abundant younger rural population has fled the farms for the chance of a better life and increased pay in the larger cities and factories. This migration has left behind an elderly and dying rural population that simply will not be able to sustain the growing food demand.
Meanwhile, China has been racing to secure arable farmland anywhere it can, gobbling up land in South America, Europe, and especially Africa. China has made huge investments in parts of Africa and has secured vast amounts of arable land, mining resources, and even a new built-in workforce. China’s influence is so widespread that many people are now referring to parts of the Dark Continent as Chafrica.
The Chinese leadership realizes the dire situation they face if they don’t secure long-term supply lines for food and other raw materials for their people. The widespread unrest this year in the Middle East in places like Egypt, Tunisia, and Libya, in large part was ignited because of surging food and fuel costs. This is very worrisome to the Chinese leadership, as civil unrest in China could be uncontrollable once ignited.
More Hungry
Mouths to Feed
According to the U.S. Census Bureau, the current world population of close to 7 billion is projected to exceed 9 billion by the middle of this century. To put those numbers in perspective, in 1950 there were only 2.5 billion people.
As global population explodes demand for food, fuel and land will increase at a frantic pace as nations work to secure long-term supplies from all corners of the Earth.
High Costs Going
Much Higher
Of course higher prices for agricultural products help farmers, but at the end of the day their input costs have soared as well. Costs for things like fertilizer, equipment, irrigation, seed, and most of all, fuel.
Farming is a very energy intensive business, and as diesel and other fuel costs soar those increased prices roll downhill to the consumer in the grocery aisle. And energy costs don’t just impact the growing process … it also significantly increases the cost of packaging and certainly transport.
As food prices climb, along with everything else, those costs are hitting Americans in the wallet — hard. In fact many people are being forced to make extremely difficult choices. Things have gotten so bad right now that we have over 44 million Americans on food stamps, a grim new record high, according to the latest data from the U.S. Department of Agriculture (USDA).
While surging food and gas prices are hitting Americans with a one two punch, those same prices are even more devastating for poor and developing nations, and often can often become a matter of life and death.
This is only expected to get worse …
According to a June 17, Organization for Economic Cooperation and Development Report, “Cereal costs may average 20 percent more and meat 30 percent more over the next decade than in the last one.”
2011 has been a rough year so far, as widespread natural disasters have caused major crop delays and damage around the globe. Flooding in much of the U.S. has virtually wiped out many farmers’ chances of getting any crops in the ground this season. And those who have gotten crops in the ground, risk a very hot, dry summer which may kill corn and other crops that were planted late.
In addition, many farmers are now worried that because they got the crops in late they may risk an early freeze before they can harvest.
Simply put: 2011 is setting up to be a very expensive year for agriculture and potentially a very profitable one for those who are invested in it.
Do I Think Commodities
Are in a Bubble? No Way!
Seems these days that everywhere I go, investors and fund managers are concerned about the rising costs of commodities. They’re always asking me if this is a commodities bubble and when it will burst, and when will prices return to the cheap levels we are used to.
My answers are always the same: This is not a bubble, and the chances of prices falling by any significant amount are slim to none.
Even now, we still have the die-hard dollar bulls coming out and claiming that we really don’t have inflation and the commodities markets are simply speculator driven and the worst for the dollar is over. I strongly disagree.
I believe a small move up in the dollar will continue a bit longer as the euro seemingly crumbles because of Greece.
However, longer term I think the same problems that drove the dollar into the ground will persist, and even worsen. The Fed has dug a hole that is too deep to climb out of, no matter how much funny money they decide to print.
Sure, speculation is a part of this picture. But to lay the blame on the farmer’s doorstep or to say it’s all speculators and hedge funds causing the run-up is a sad mistake.
Real physical demand and the weak U.S. dollar policy are two of the biggest reasons. And I don’t see demand for commodities going anywhere but higher longer term.
One thing you can count on is that everything from milk to yogurt and steak to eggs is going up in price — and not just a little, a lot!
That’s why as consumers and investors, we must look for ways to hedge ourselves against those costs we all are facing in the grocery aisle.
Grow Your Profits!
I believe one of the best ways right now to take advantage of the rising agriculture market is by using commodity ETFs. And if you like extra leverage, you can use ETF options. Some potential opportunities I like are:
PowerShares DB Agriculture ETF (DBA) — An unleveraged ETF with broad exposure to agricultural commodities including soybeans, cattle, sugar, corn, coffee, cocoa, hogs, wheat and cotton.
PowerShares DB Agriculture Double Long ETN (DAG) — A 200 percent leveraged long ETN focused on wheat, corn, soybeans and sugar.
iPath Dow Jones-AIG Grains Total Return Sub-Index ETN (JJG) — This exchange traded note is solely focused on the three primary grains: Wheat, corn and soybeans. It uses futures contracts to establish the positions in these grains, the same approach as the PowerShares ETFs.
But before you jump into a trading strategy for the rising food and fuel markets, always get advice from an expert who understands the resource markets inside and out … these markets can be very fast paced indeed.
Yours for resource profits,
Kevin
Kevin Kerr has successfully traded commodities professionally for the last 22+ years. He a regular contributor to news outlets including CNBC, CNN, FOX News, CBS Evening News, and Nightly Business Report.
{ 10 comments }
Great article!
… and if we can get the U.S. gov. to stop paying mega-agra to not farm their land, we can reduce the deficit, increase food supply and decrease the trade surplus at the same time. America is the bread basket of the world. Why would we limit it’s capability to produce? Just get rid of the entire Department of Agriculture. Bye bye. Not a panacea, but a good start.
reduce China’s trade surplus with us, that is.
David you make some good points, however, the days of paying farmers to “not plant” are long in the past. In fact for the past several years, farmers have to plant in order to participate in USDA programs.
Also, the reason for paying farmers to not plant years ago was so that the soil would be fallowed with a crop which farmers were not allowed to harvest, but would add fertility to the soil. In addition, when a farmer accepted those payments, he agreed to allow USDA to control the amount of acres and type of crop he was allowed to plant. Essentially, the government was ensuring that the food supply which the general population needed would be available as opposed to farmers planting the crop which made them the most money.
Does Dr. Wiess recommend purchasing the three EFT funds in Kevin Kerr’s report?
You imply that PowerShares DB Agriculture ETF (DBA) is a good investment here, however your Weiss Watchdog ratings just lowered DBA to a D+ rating. Which is it?
Our ethanol policy shifts acreage from producing food to making energy. It’s inefficient, expensive, bad for the environment, and puts upward pressure on food prices. In addition, like David X suggests, stop paying farmers not to grow, too. I’d like to see what happens to food prices when we eliminate these corporate giveaways. And as for the unfortunate farmers facing floods or bad weather, quit gambling and buy insurance!
Being ‘paid not to grow’ is not for the farmer’s benefit, it is for conservation purposes. Hunters and environmentalists push for this program, not the farmer. Also, we do buy insurance, $2000 for our paltry 100 acres of corn. I have harassed my legislators for years to end farm subsidies. They will never do that, because then the true cost of production would be borne at the retail level, which many could not afford, and those that could would have hissy fits because their food bills would be taking money away from their leisure and recreation budget. Hence, we have ‘subsidies’ to hide the true cost of your food production. The US is a net importer of beef and dairy products, and has been for many years now. I’ll be exiting the dairy business in less than 20 years, by then I believe the people in this country will know hunger. This will cease to be a productive farm. I am not raising a new generation to replace me. Farmers subsidize the consumer just by being in the business. I do not hire cheap illegal alien labor, I am on the job 24/7/365, and am compensated at 1/4 of what my college friends in private or public employee make. I do not encourage young people to aspire to this life.
The US can’t import enough to feed US hunger, and in not too short a time will lack the capacity to maintain domestic production. When I cease to produce for sale to others, I will still maintain the capapcity to feed myself. What will those of you who depend on someone else to produce your food do?
Many good points Connie.
Connie, the subsidies distort supply/demand signals to the markets. Why is American GMO seeds and American corn cheaper to import into Mexico than for Mexican farmers to grow their fantastic and tastier and healthier different varieties of corn? It’s solely because of the US government subsidizing.
We have a major problem here in the world’s economy. It involves big government, big business and special interests lobbying in DC to steal free money from the US taxpayer and US and worldwide savers holding their savings in US Dollars.
This will get a lot worse before it gets better. The US government has been heavily interfering in the agriculture sector and disrupting market sectors since Lincoln formed the USDA around the Civil War. FDR’s agriculture programs to pay farmers to let crops die and support the Keynesian ideal of beneficial higher prices and the programs of the 60s and 70s along with the Ethanol Tax Credit have set things up for enormous long term train wreck.
But I guess that can be said about a lot of things now, unfortunately…