The Next Great Bull Market of the Decade

Wednesday, January 19, 2011 - 1:00pm

by Tom Hutchinson

The world is undergoing massive changes at a torrid pace. The pace and magnitude of these changes is greater than humanity has ever known. With these changes come great opportunities and great challenges that will have to be confronted.

Perhaps the greatest challenge of all is the most basic -- feeding ourselves.

Rising world populations and increased urbanization are creating a huge strain on the world's food supply. As standards of living continue rising in the world's most populated areas, like China and India, so does the demand for a wider variety of food. In fact, the World Bank is projecting that worldwide demand for food will increase 50% from current levels by 2030.

At the same time, fresh water and arable land are becoming increasingly scarce. The dynamics are producing upward pressure on food prices as well as the urgent necessity to develop technological advances that will produce more and better food supplies.

What does all this mean for agriculture stocks? 

While long-term fundamentals are in place, the Daxglobal Agribusiness Index (a worldwide index of agriculture stocks) has posted a negative return in the past three years. But things are changing fast. The index has caught fire and soared more than 50% just since July.

Agricultural commodity prices have absolutely taken off. Corn and wheat have surged because of bad weather adding to already tight supplies, as well as currency devaluations and a weaker dollar. However, while short-term price fluctuations can be fickle and affect prices either way, several factors will contribute to what should be a huge bull market in agriculture stocks in the next decade.

Emerging markets
Growing emerging market populations with increasingly Westernized appetites are the primary driver of worldwide food demand. Consider this: an increasing percentage of world food consumption is meat, which exponentially increases grain demand (it requires at least seven pounds of grain to produce one pound of beef protein.)  In China alone, annual per capita meat consumption has increased 150%, from 44 lbs in 1980 to 110 lbs in 2007. In fact, The World Bank estimates that worldwide meat demand will increase by 85% from current levels in the next 10 years alone, putting enormous pressure on the world's grain supply.

Biofuels
Biofuel production (which can include corn, maize, sugar cane or vegetable oil) has increased in recent years. [See Game-Changing Stocks editor Andy Obermueller's recent article about profiting from biofuel] This use of food to produce energy has put further pressure on the world's food supply. Many experts believe that placing energy markets in competition with food markets for scarce arable land will inevitably result in higher food prices. A 2008 World Bank research paper concluded that "...large increases in biofuels production in the United States and Europe are the main reason behind the steep rise in global food prices"

Inflation
Food and agricultural inputs (including seeds and fertilizer) are tangible goods that should maintain value during times of inflation. In addition to all the other dynamics in agriculture's favor, the sector is also an excellent hedge against inflation and falling dollar values.

How to profit
There are several ways for investors to play agriculture. The PowerShares DB Agriculture Fund (NYSE: DBA), which buys futures contracts of agricultural commodities including corn, wheat, sugar and soybeans is a way to play agriculture as a commodity and take advantage of rising prices. Other plays involve companies that are in the business of agriculture. The Market Vectors Agribusiness ETF (NYSE: MOO) holds 47 positions in some of the largest agricultural companies in the world. Top positions include Canadian fertilizer and feed producer Potash Corp. of Saskatchewan (NYSE: POT), seed and pesticide giant Monsanto (NYSE: MON), and farming equipment maker Deere and Co. (NYSE: DE).

Action to Take --> Supply and demand factors as well as a weaker dollar are creating the perfect storm for agriculture stocks. The raging bull market has already commenced and will likely continue for the rest of this decade -- and perhaps beyond. However, agriculture stock prices have moved up so fast in the past several months that investors should wait to buy the ETF or individual players on the next pullback in the sector.

P.S. -- We've just identified six surprising events that could break your portfolio wide open in 2011. Knowing these pivot points in advance lets you focus your investing strategy like a beam of light in the dark... and make a lot of money in a hurry. Get them free by simply watching this video presentation.

Tom Hutchinson does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.