According to the U.S. government, our corn and wheat surpluses are going to be larger-than-expected this year. Normally, that increased supply would lead to a decline in prices. But that’s not happening this time and, in fact, grain prices are acting darned bullish.
Take a look at the iPath DJ-AIG Grains ETN (JJG). The fund tracks a basket of three commodities traded on U.S. exchanges: Soybeans, corn and wheat. As you can see, it recently broke out to the upside, and I think it could shoot up to $55, and perhaps even higher.
One reason for the rally is that other grain suppliers around the world haven’t been as successful as the United States this year. For example, while our winter was warm, one of Russia’s key growing regions was hit so hard with frost that big sections of it may be replanted. Meanwhile, drought is damaging crops in South America and withering fields across Europe.
You also have to take into account the other side of the equation. U.S. supplies may be rising, but so is demand, especially from China. Last year, China replaced Canada as the largest importer of U.S. agricultural products, bringing in $95 billion worth. That was up from just $12 billion in 2001, a year-over-year increase of 30% for a full decade.
China imports a lot of corn and beef from the U.S., but the No. 1 seller is soybeans. Last year, 60% of all U.S. soybean exports went to China and, this year, that number could be even higher.
But it’s not just China. There are now more than 7 billion people in the world, and many of them want to eat more and better food. The United Nations’ Food and Agriculture Organization confirms that food prices are rising, and will continue to rise.
If you combine all these forces, it paints a picture of higher prices going forward. Luckily, that may prove to be a positive development for America. Heck, we’re the Saudi Arabia of grain exporters, so higher prices should help our trade balance.
There are plenty of ways to invest in this sector, in everything from tractor and seed manufacturers to funds that track agricultural commodities and industries. But make sure to do your own due diligence before investing in anything.
