Hedge-fund managers and other institutional commodities traders are usually pretty skilled at making broad economic forecasts. But there's one variable they just can't seem to predict -- the weather.
Mother Nature often creates havoc on agricultural production, which can be good or bad, depending on your view. For the most part, this is an asymmetrical factor because big disruptions from bad weather carry much greater impact than getting a few extra bushels from good weather.
During the past year, searing heat wilted the Russian wheat harvest, torrential rains flooded Australia's fruits and vegetables crops, and a freak hailstorm destroyed the equivalent of 50,000 bags of South American coffee beans.
This time, drought is the culprit. Brazil and Argentina have suffered through a brutal dry spell that could erase about 7 million tons of soybean production, cutting the harvest from 127 million tons down to 120 million tons. These countries are the top two growers after the United States, so the damage (along with rising consumption) could lead to a sizeable drop in global supplies.
In fact, global soybean stockpiles are projected to fall by as much as 20% later this season from the same point in 2010 -- the steepest decline in 16 years.
And in keeping with my mission as Chief Investment Strategist of my newsletter, Scarcity & Real Wealth, I see real opportunity for investors to profit from this shortage. Here's why...
Roughly two-thirds of the world's soybean crop is used as the base for livestock feed. Another 16% is needed to make vegetable oil. It's also used in food and biofuels.
Clearly, there isn't quite enough to go around right now.
As with many other commodities, China just can't meet its soybean demand and is importing vast quantities. The country has a pork-heavy diet, and farmers are expected to bring 676 million pigs to market this year -- it takes mountains of soybeans to feed that many pigs.
Simply put, a growing (and increasingly richer) population means more pork and beef consumption. That takes more livestock. More livestock means more animal feed. And more animal feed requires more soybeans.
In fact, China's soybean consumption has tripled during the past 10 years. The USDA believes China's soybean imports will need to climb another 62% within the next decade to keep pace.
The shortfall in Latin America means foreign buyers will be placing more orders from U.S. farmers. According to Bloomberg, China bought 19.2 million metric tons of soybeans from the U.S. through mid-February for shipment in the year through August 31 -- more than Chinese farms produce in an entire year.
China accounts for about 60% of world imports, and demand continues to surge. That's one reason the U.S. Department of Agriculture (USDA) is expecting U.S. soybean exports to jump 22% this growing season to 42 million tons, a new record.
All of this has exerted upward pressure on prices. Since bottoming in December, soybean futures have rallied about 25% to touch $14.25 per bushel -- and experts expect prices to remain this high throughout this summer.
Risks to Consider: While my overall outlook for commodities is bullish over the long term, prices can be volatile, so you need to be prepared to ride out a few twists and turns along the way.
Action to Take --> Global soybean consumption has been rising at four times the general pace of population growth. The world's population will continue to rise, but there isn't any more arable land (in fact, the world loses a little more each year).
And don't expect farmers to cover the deficit by switching to soybeans from corn -- corn still nets somewhere around $130 more per acre at current prices.
I wouldn't necessarily advise anyone to run out to the nearest commodities broker to open a futures trading account. But if you'd like some exposure, consider PowerShares DBA Agriculture (NYSE: DBA). This exchange-traded fund (ETF) invests in staples such as corn, soybeans and sugar, along with smaller stakes in everything from cocoa to hogs.
I also recently told my Scarcity & Real Wealth readers that my preference is to invest in shares of fertilizer makers. Since arable land is scarce and global population growth is showing no signs of slowing anytime soon, crop nutrients are becoming increasingly important in helping farmers optimize their output.