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Shidlo: Invest Like Soros and Beat Food-Price Inflation

By Gil Shidlo   |   Thursday, 20 Jan 2011 08:01 AM

Adecoagro, an agriculture company based in Luxembourg, recently announced that it plans an initial public offering (IPO) that could be worth more than $400 million.

This news is an opportunity to look at what one of the world’s most astute billionaire investors – George Soros – is sinking his cash into these days. One of Soros’ affiliates owns 34 percent of Adecoagro, which owns vast quantities of farmland in South America.

Soros was one of the original founders of Adecoagro in 2002, with the objective to buy farmland in Argentina after the peso crash. In addition to farmland in Argentina, Brazil and Uruguay, Adecoagro also owns sugar-cane crushing facilities in Brazil. With the IPO proceeds, it intends to double this capacity as well as build a sugar-cane processor and a sugar mill in Brazil. Soros’ early entry into farmland (and by investing in growing coffee, soybeans and other commodities) proves how shrewd he is.

Although the Federal Reserve claims that there is low inflation, any person that goes to a supermarket or eats at a restaurant can see food-price inflation. The American Farm Bureau Federation recently released its fourth-quarter Market Basket Survey, an informal survey that showed the total cost of 16 food items was up about 2 percent compared to the third quarter. Bacon, eggs, whole milk, sliced deli ham and bread increased the most in dollar value compared to the previous quarter.

If one looks at global food costs, one should really be very worried.

The FAO (the United Nations Food and Agriculture Organization) calculated that the index of world food prices rose 32 percent during the second half of 2010. This sharp rise in food prices is due to several factors: droughts and floods in some food-producing countries (Australia, Brazil and South Asia) and record demand for wheat, corn, soybeans and sugar by Chinese consumers.

Food prices are only expected to continue rising because of the general unexpected weather driven by the La Nina effect.

According to the FAO, Western countries’ grain stocks are expected to decline 25 percent in the 2010-2011 crop year. In addition, a rise in oil prices will increase the demand for ethanol by more than 5 percent in the U.S., which will increase corn prices.

In 2011, the USDA expects food inflation of 2 percent to 3 percent, which is much higher than 2009. Food-price increases are still not a major expense for the average American who spends a bit below 10 percent of disposable income on food, which is one of the lowest averages in the world but might catch up in the future.

How can the average investor protect oneself from food inflation?

One option is to invest in farmland either by directly living and managing it or buying land and leasing it.

Another option is to invest in food commodities like sugar, coffee, pork bellies, corn, wheat and soybeans via exchange-traded funds, or ETFs, or the more-risky and aggressive leveraged ETFs.

Another alternative, if one doesn’t want to invest in a specific commodity, is to invest in diversified agriculture commodity ETFs, like the grains ETF (AIGG), or JJA (a subindex exchange-traded note, or ETN), which includes soybeans (38 percent), corn (37 percent) and wheat (25 percent).

The agriculture ETF DBA is more diverse and includes 11 commodities, from livestock to soybeans, corn and wheat.

Another possibility is to invest in shares of companies that are in the agro-business.

Another of Soros’ top holdings is in Monsanto, which is listed on the NYSE (MON) and which provides agriculture products for farmers in the U.S. and around the world. There are also global fertilizer companies such as CF Industries (CF) and Syngenta (SYT).

One also can either invest directly in companies such as John Deere (DE) and Archer Daniels Midland (ADM) or diversify by purchasing the Market Vectors Agribusiness ETF (MOO), which comprises of 47 companies in agribusiness.

Although ETFs are a good way to diversify your portfolio, you should be aware, especially in commodity ETFs, of factors that affect their prices.

Novice investors might think that they will profit linearly to the price of commodities — for example, if they see price of soybeans go up 10 percent, they expect the corresponding ETF to go up roughly the same and this isn’t the case.

What isn’t clear to most is the method in which these ETFs operate — they in most cases roll so–called front-month future contracts from month to month. This gives exposure to the commodity but subjects the investor to risks involved in different prices along the way.

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Adecoagro, an agriculture company based in Luxembourg, recently announced that it plans an initial public offering (IPO) that could be worth more than $400 million. This news is an opportunity to look at what one of the world s most astute billionaire investors George...
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2011-01-20
 

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