Betting on the farm
With shortages looming in everything from coffee to cotton, agricultural commodities are ripe for the picking.
(Business 2.0 Magazine) -- Maybe you missed the big move in oil or were too slow to catch uranium on the way up. Don't worry: There's still time to cash in on commodities before the pork bellies leave the barn.
Unlike shares of public companies, which can swing wildly depending on financial performance, interest rates, and even rumors, commodity prices mostly reflect a simple supply-and-demand equation. Sure, hedge fund jockeys can move prices a bit, but if Brazil wants more lead than today's lead mines can deliver, the price is going to go up.
"Commodities are still underinvested if you look at the infrastructure and the growth in developing markets," says David Burkart, senior portfolio manager and strategist at Barclays Global Investors.
How to choose the right commodities: Investor Jim Rogers, who founded the Quantum Fund with George Soros, has been making big bets in commodities and thinks there's still a lot of room to make money ahead. "We are in a bull market in commodities," Rogers says. "And if you look at history, it's got at least another decade to go."
But as in any type of investing, the last thing you want to do is chase a hot market. With energy and metal prices already sky-high, Rogers thinks now is the time to focus on agricultural commodities.
"The number of acres devoted to wheat is the lowest since 1972," he says. "Corn, cotton, coffee - the supply hasn't kept up with the demand.
And it takes a long time to bring new supply into the market - say, an orange plantation, if yours has been wiped out by a freeze - to meet that new consumption demand."
Corn, for instance, has been on a price tear lately. It's up 75 percent since 2005, as the market anticipates more demand for corn-based ethanol. But as farmers plant more corn, there's less land for growing wheat and soybeans, which in turn constrains the supply of those commodities. Rogers likes cotton because of the high price of oil, a key ingredient in synthetic fabric.
How to invest: Most investors don't go out and buy pork bellies by the 20-ton lot. Some get into the game indirectly by buying shares in companies whose business involves the commodity in question - say, a mining outfit. But that puts you at the mercy of the company's management and doesn't directly reflect the commodity's value.
The most popular way to make a direct bet in the commodities market is through an index fund. The two largest are the Goldman Sachs commodity index and the Dow Jones-AIG commodity index.
Commodity futures contracts are another investment option. They can be leveraged, however, which can work for or against you. Bet correctly and the returns will earn you bragging rights at cocktail parties for the next year. But if you buy on margin and prices go the wrong way, you can lose all the money you invested and more.
Still, if you're going to bet on any commodity right now - whatever form your investment takes - bet on the farm.To send a letter to the editor about this story, click here.