With a lot of attention being focused on record-high prices for agricultural commodities like corn, soybeans, and wheat, Ag-Commodity expert Ned Schmidt shares with Financial Sense what’s driving prices higher, what to look out for when investing in commodity ETFs, and a few ideas for the space.
With regards to corn, Ned says, “We’re running out of corn acres, which set us up for a problem in 2014 when global consumption continues to grow. The longer term problem is just getting worse because we’re flat running out of this marginal land that we can bring in. Farmers don’t have any more and, if they do, it’s extremely expensive.”
Although ethanol is sometimes cited as a factor in raising the cost of corn, Ned says it’s really all about China. “This year China has only imported 2.5 million tons of corn because there isn’t any corn supply available from the U.S. They said already this past week that in the coming year, after the harvest, they’re going to import 7 million tons, because they simply don’t have the feed grains to feed their domestic animal herd anymore. The bigger issue than ethanol is China because they are going to be importing every year a growing amount of grains. It’s the only way they can feed their people; it’s the only way they can feed their animals. They simply don’t have the additional margin of land to bring into production, and that which they do is horrendously expensive to produce.”
After citing the costs for bringing on additional acres for food production in China and some of the problems elsewhere, Ned believes, “Arable land that we can farm is far more constrained than people believe.”
When asked what commodity looks the best right now, Ned replied, “It’s the year of the meat-producers.” He cautioned that investors don’t go right out and invest in agriculture commodity ETFs, however, without doing some due diligence. Most importantly, they should understand that there are mainly two different types of ETFs that offer exposure to this area: diversified and non-diversified. With regards to diversified ETFs Ned explains, “I would just avoid them in general unless you know that corn, soybeans, or wheat are going to explode. The diversified ETFs are all overweighted in corn, soybeans, and wheat, and they don’t own any rice or palm oil. So, the only time those commodity ETFs are going to perform is when wheat, corn, and soybeans are strong. Other than that, I would just avoid them.”
On the other hand, he says you have to be very careful with single commodity ETFs also since “it’s not like buying an IBM stock. It doesn’t have an internal organic growth rate that’s going to compound for you. The corn ETF was one to avoid and I’ve been telling people to avoid that. The sugar one might be worth taking a look at in May or June.”
At the end of the interview, Ned shared with subscribers what his four “best of class” stock picks are, noting that along with carrying a decent dividend are expected to do well this year.
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