A leading commodities guru says that the world is a few years into a bull market that will see almost all commodities, including grain and oilseeds, leap in value before 2015.
This view may strike farmers as a little odd, considering the pain they’ve been feeling from the markets for more than a year.
But Jim Rogers, a successful and famous investor, author and the one-time partner of billionaire currency speculator George Soros, said big money will be made in commodities in the next decade and farmers will not be left out.
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If he’s right, the stock market will go nowhere for the next decade or so because the boom in commodities prices will hammer at the earnings power of most companies.
Those putting their money into stocks will probably spend the next decade frustrated. Those putting it into commodities will probably make a lot more money, if they invest widely enough.
Which brings us to farmers, who invest large amounts of money in producing low value commodities.
The world grain markets may seem to be glutted with agricultural commodities, but any substantial upsurge in demand will throw a harsh spotlight on a steadily improving supply and demand situation for farmers, Rogers said.
“The amount of acres cultivated for wheat has been going down for three decades or so. If you all of a sudden need to produce a lot more wheat, it won’t be easy, as it would be for some things,” Rogers said.
The world has become accustomed to big crops, so a large weather event like back-to-back droughts in a major production region could shock the markets.
As well, farmers are already getting the most out of the richest farmland around the world. Unlike a factory that can add a second or third shift, a farmer or country can’t easily double acreage to take advantage of high prices.
“The wheat acreage now is the best wheat acreage,” Rogers said.
“If you doubled the amount of acres (dedicated to wheat), you’re bringing in marginal land. The marginal land is what you keep out of production.”
Marginal land is less productive, so even extra acreage won’t quickly correct a sudden supply-demand imbalance.
That sets the stage for a huge increase in grain and oilseed prices.
“Who knows how high the prices will go,” said Rogers, who operates a commodities investment fund called the Rogers International Commodities Index Fund.
For farmers, the “who knows” part of that statement is the vexing one because surviving from year to year has been difficult and an explosion in the price of wheat and soybeans in 2011 won’t mean much to a farmer forced out of the business in 2008.
Rogers has been encouraging investors to put their money into commodity index funds such as his as a way to grab onto the bull market. No one knows exactly when a commodity will suddenly surge, but by owning a large and diversified index of all the world’s major commodities, investors will benefit from an overall commodities rise, he said.
Rogers said the problem facing farmers is that they cannot know when a tight supply and demand situation is going to suddenly tip over into a big price rise, and since any one farmer produces only a small range of commodities, they are unlikely to experience the more even rise of the commodities ocean.
Ideally, a farmer could store his grain and simply wait for a price surge.
“If I’m right, and it’s better to sell next year than this year, and three years from now rather than now, I guess you could store the grain,” Rogers said.
“But most farmers don’t have that kind of cash flow. If they could figure out a way to have the cash flow to do it, they’ll make a lot more money if I’m right.”
Agricultural price rises can be spectacular, as many farmers remember from the 1970s, which Rogers considers another commodities bull market, lasting from 1966-82.
Sugar prices surged from 1.4 cents per pound in 1966 to 66.5 cents per lb. in 1974. They then fell back to 2.4 cents by 1986, after the bull market ended. Corn didn’t rise as spectacularly in the early 1970s, but it tripled, making a pretty penny for anyone sitting atop a pile of the stuff.
Is there really a long-term bull market occurring in commodities, as Rogers argues? He’s sure of it, and surging prices for everything from steel to oil to gold to industrial metals over the past five years don’t undermine the theory.
Do many other investment gurus agree with him?
“Not many,” Rogers said.
“There are 70,000 mutual funds in the world for stock and bonds. There are four for commodities.”
