Hungry for Profit: 2 ETFs to Leverage the Coming Global Food Crisis

“You’ve gotta tell them! Soylent Green is people!”

Remember that famous line of movie dialogue? The classic 1973 sci-fi film Soylent Green depicts a bleak future set in 2022 in which overpopulation, pollution and climate change have destroyed agriculture. The population is forced to survive on a food ration called “soylent green” (which is processed humans).

The year 2022 is getting closer, in more ways than one. Consider events now unfolding in Venezuela.

Venezuelans are violently protesting food shortages in that unraveling country, perhaps providing a harbinger of what’s to come for humanity.

Wearing scarves to hide their faces, ordinary citizens have taken to the streets to bang empty pots and yell: “Only the politicians are getting fat!” Confronted with bare grocery store shelves, many Venezuelans have resorted to attacking delivery trucks and hunting dogs for food.

A confluence of crises…

Political instability, climate change and population growth are adding up to a world that can’t feed itself. With that harsh reality in mind, I scoured the investment landscape and unearthed two exchange-traded funds (ETFs) that leverage these developments. More about my recommended ETFs in a minute.

In this overvalued stock market, it’s tough to find new sources of safe growth. One time-proven strategy is to latch onto a trend with sustainable momentum that will unfold regardless of financial and economic ups and downs. By investing in plays that benefit from sweeping global transformations, you can settle in for the long haul and tune out the white noise about fluctuating indicators.

The coming food crisis is one such play. Climate change poses a particular threat to agriculture, as farmers try to get greater yields from less and less arable land, to feed ever-growing populations.

The National Oceanic and Atmospheric Administration reports that so far in 2017, there have been five weather and climate disaster events with losses exceeding $1 billion each across the U.S.

Whether the culprit for the rising incidence of ferocious storms is climate change or something else, violently erratic weather is a new global reality that the public and private sectors are scrambling to mitigate. Perhaps the most devastating effect is on agriculture.

The journal Nature reports that droughts, floods, extreme temperatures, and hurricanes have destroyed about a tenth of the globe’s wheat, corn, and other cereal crops over the last five decades.

What’s more, a recent report in Science magazine estimates that the world population is unlikely to stop growing this century. Based on United Nations data, the magazine states there is an 80% probability that world population, now 7.2 billion people, will increase to between 9.6 billion and 12.3 billion in 2100.

The collision of these three relentless trends — political turmoil, agricultural destruction and population growth —  is manna for the two investments highlighted below.

No farming, no food…

Agricultural commodity ETFs provide exposure to food products such as wheat, soybeans, sugar, corn, livestock, hogs, and also raw materials, such as cotton, timber, and wool.

These two agricultural ETFs are easier and less risky plays than individual stocks; at the same time they’re pure plays on the confluence of agricultural need, climate devastation and out-of-control population growth. They offer investors exposure to commodities without the need for directly trading futures contracts.

PowerShares DB Agriculture ETF (NYSE: DBA)

The benchmark agricultural commodity ETF is PowerShares DB Agriculture, a pure commodity play on food products. DBA holds futures contracts on corn, wheat, soybeans and sugar. These contracts are rolled over before expiration to maintain exposure.

Net assets stand at $710.83 million. The fund’s year to date return is 0.05%; the one-year return is -6.20%. The expense ratio is a reasonable 0.92%.

PowerShares DB Commodity Tracking ETF (NYSE: DBC)

Another futures contracts-based fund, this ETF is more diversified than DBA, which makes it less risky but also more limited in potential upside. DBC holds futures contracts in corn and wheat, as well as major positions in gold, heating oil and crude. Net assets stand at $1.91 billion. The fund is down 7.89% year-to-date and down 0.82% over the past year. The expense ratio is 0.89%.

Pressure on commodity prices and uncertain growth in China and other emerging markets have weighed on both funds, making them good buys now. They should rise this year and beyond as commodity prices recover and weather anomalies create ever-greater food shortages.

Another tailwind is the broad recovery of emerging markets, especially in Asia and South America, which in turn is creating greater numbers of hungry middle-class consumers.

Countries such as South Korea, the Philippines and Mexico are showing an insatiable appetite for grain, as rising middle classes in those regions pocket more disposable income and embrace a Western diet that’s heavy on meat and processed convenience foods. (See my April 4 issue, Latin American Stocks: Dancing to a Faster Beat.)

Commodities represent a fast moving and volatile sector, and as such deliver the potential for fast gains (or fast losses). These two ETFs could make sense for patient investors with an appetite for risk and an eye on long-term global trends.

If you have a question about the risks and rewards ahead in 2017, shoot me a question: — John Persinos

Stable income in a troubled world…

Investing in crisis is one way to build wealth. Another way is to simply rely on a proven formula that works like clockwork.

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