"Food" Smells Like "Oil"

We think Agriculture commodities are likely to deserve standalone designation in some asset allocations.

We expect food supplies to become less predictable and more expensive in the coming years because of the many trends we've highlighted (Food Prices, Continued and Allocation and Agriculture and elsewhere), such as increasing demand for grains and grain-intensive meat, biofuel demand, worsening water scarcity, higher fuel prices, soil conservation problems, climate changes and erratic weather, and other issues. When ag prices settle down, another circumstance or crisis will force them back up again, much as we've seen with oil prices in the past five years. We think new acreage and science will help solve the problem, so we're focused on some of the companies that should help (like Monsanto and Syngenta).

But even new capacity and science probably won't prevent a bullish multi-year trend in ag prices. Another update in the FT today regarding rice prices highlights the severity of the issue. Nations that are short rice supplies will be more assertive in procuring grain supplies from other sources, and that will keep an upward bias to food prices.

From the FT ("Rice jumps as Africa joins race for supplies")

• Rice prices rose more than 10 per cent on Friday to a fresh all-time high as African countries joined south-east Asian importers in the race to head off social unrest by securing supplies from the handful of exporters still selling the grain in the international market.

  The rise in prices – 50 per cent in two weeks – threatens upheaval and has resulted in riots and soldiers overseeing supplies in some emerging countries, where the grain is a staple food for about 3bn people.

  The increase also risks stoking further inflation in emerging countries, which have been suffering the impact of record oil prices and the rise in price of other agricultural commodities – including wheat, maize and vegetable oil – in the last year.

  Kamal Nath, India’s trade minister, said the government would crack down on hoarding of essential commodities to keep a lid on food prices. “We will not hesitate to take the strongest possible measures, including using some of the legal provisions that we have against hoarding,’’ he said on Friday.

  Thai medium-quality rice, a global benchmark, traded at about $850 a tonne on Friday, up from $760 a tonne last week, while the price of less representative top-quality aromatic rice broke the $1,000-a-tonne level for the first time, traders said. They added that the grain was being sold to African destinations.

  In Chicago, US rice futures hit an all-time high of $20.45 per 100 pounds.

  Although only a small amount of the grain is traded internationally, the rise in Thai prices signals the trend for the global market and also for domestic prices in countries where local production is enough to meet demand.

  The price jump came as leading exporting countries, including Vietnam, India, China and Egypt, banned foreign sales. Hanoi extended its ban for two extra months until June.

  Food aid officials said consumption could rise further because record food prices are forcing families to move from a diversified diet to just one staple.

  Farmers delaying their harvest and middleman hoarding stocks are also contributing to the crisis, said governments and traders.

  In the past weeks, traders and diplomats have warned that many West African countries, where rice is a staple, had yet to purchase the grain this year, leaving them subject to record prices now.

Tax-sensitive investors will look at ETNs rather than ETFs. Two of them are iPath Dow Jones AIG-Agriculture ETN (JJA) (and the narrower JJG - Grains) and ELEMENTS Linked to the Rogers International Commodity Index - Agriculture ETN (RJA).

We recognize that asset allocators will often want to inflation-hedge using TIPS, which hedges against broad CPI inflation. But we also think Ag prices could outrun CPI for years, and that Ag commodities will grant more robust inflation protection.

Of wider interest to asset allocators is the extent to which ag commodities are both signifying and creating greater risks to global equity and bond market returns. This increases the importance of owning commodities or commodity-linked securities in a high-performing optimal portfolio.