NEW YORK (
) -- Food prices are lagging commodities like copper and oil, but there is good reason to believe that may change.
From a demand perspective, overall world population growth is positive, and higher incomes are starting to boost consumption. Additionally, changes in eating habits in the developing parts of the world will likely increase demand for meat and dairy products. As this happens, demand for water, land and animal feed like corn will also increase. Corn prices will also be supported by higher demand for ethanol.
Things look bullish from the supply side, too. El Nino-like weather conditions have resulted in droughts in India and Argentina, while typhoons in the Philippines have placed a damper on production.
To add to supply woes, inventories of many grains are low and continue to decrease. According to the U.S. Department of Agriculture, stockpiles in corn and rice will drop before the 2010 harvest, and the supply of sugar is expected to drop to its lowest level in nearly 15 years. Total global production of rice has lagged demand in four of the past eight years, and increasing consumption is anticipated to erode stockpiles by more than 40%.
Stockpiles of nonfat dairy milk, a staple product in baked goods, have fallen to less than half of what they were six month ago because production is down both domestically and internationally. In the short term, supplies of most agricultural products are likely to fall short of demand, which will push prices higher. If these trends continue, production and output will have to significantly increase to keep up with increases in global consumption.
Some equities that have already started to benefit from these trends include:
PowerShares DB Agriculture Fund
, up 18% from its March low of $22.50 to close at $26.61 on Monday.
Market Vectors Agribusiness ETF
, up 83% from its March low of $24.20 to close at $44.22 on Monday.
iPath DJ UBS Grains Subindex Total Return ETN
, which is up 18% from its October low of $34.51 to close at $40.85 on Monday.
When investing in these commodity-based ETFs, it is important to keep in mind the inherent risks and volatility involved. A good way to mitigate these risks is through the use of an exit strategy. According to the latest data from
, an upward trend in the previously mentioned ETFs could come to an end at the following price points: DBA at $25.86; MOO at $42.39; JJG at $39.12. These price points change as market conditions fluctuate and updated data can be found at www.SmartStops.net.
-- Written by Kevin Grewal in Laguna Niguel, Calif.
Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.