You’ll find agricultural products in the most basic foods you have in your kitchen. These products are so familiar that we don’t even consider them a possible investment. But today, agricultural commodities are in the midst of one of their periodic bull markets.
There are 3 factors behind the current bull market in agriculture:
1. Global Money Printing
As a result of the COVID-19 pandemic, global fiscal and monetary stimulus has exploded across the world’s economies. A lot of money has hit the world’s financial markets and a growing number of investors are speculating in commodities. There is little sign the flood of money is likely to diminish soon.
2. The Impact of La Niña
La Niña refers to the periodic cooling of ocean surface temperatures in the Pacific that occurs every 3-5 years. This year, La Niña will continue to pose challenges for farmers around the globe.
3. Politics
Throughout history, cheap food has helped ensure that citizens are on the side of the ruling party. That’s why cheap bread was a core of the social contract between the former Communist regimes and their citizens. Insufficient and expensive food prices often leads to protests in the streets that can quickly develop into revolutions and even overthrow governments. Today, many developing countries are facing similar food supply issues.
Both China and governments in North Africa have been buying up imported grains. Chinese imports of corn for the 2020-21 crop could triple to 30 million tons to damp down both domestic food prices and political pressure. But it only results in more upward pressure on agricultural commodity prices. It also causes imbalances on food supply around the globe.
The current agriculture bull run has just started and there are many reasons why it should continue. Thanks to exchange-traded funds, an investment in this sector is very easy. One way to bet on the bull is through the Invesco DB Agriculture Fund (NYSE: DBA).
Sven Franssen