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Summary We discuss the long term bullish case for Rogers Agricultural Index ETN. 3 billion additional middle class consumers will support the demand for agricultural products over the next two decades. We discuss why Rogers Agricultural Index has been in a bear market since early 2011 and what is needed for the next bull market to start. We mention that coffee and sugar might be good investments already in the short term in light of the fundamentals. In 2007 Jim Rogers lent his name to a new line of exchange-traded notes. One of them was dedicated to the agriculture: The Elements Linked to Rogers International Commodity Index Agriculture Total Return Note ( RJA). Jim Rogers has been very positive on agriculture and farmland investments. There are probably tens of interviews where he cites to be more bullish on agriculture than any other commodity. So, why Rogers Agriculture Index has been such a horrible investment since 2007 and could this change? Was Jim Rogers wrong? These are the topics we will discuss in this article. We will also mention a few isolated picks in the agricultural sector that we believe to have more upside potential in the short term in comparison to Rogers Agricultural Index. For those not familiar with Jim Rogers, he was among the most successful and famous hedge fund managers on Wall Street. Currently he is living in Singapore and travels across the world as a guest speaker at investment conferences. Chart Analysis Rogers Agricultural Index is trading 50% below its all time highs reached back in 2008. This index contains around 20 most popular agricultural futures contracts such as corn (13.61%), wheat (13.61%), cotton (12.03%), soybeans (10.00%) and coffee (5.73%). (click to enlarge) Figure 1. RJA ETN price chart. Chart : Ycharts.com The price drop in RJA can be explained by the strengthening of the U.S. dollar, at least partially. Most producers get paid in U.S. dollars. Supply-Demand Fundamentals We went through OECD-FAO Agricultural Outlook 2015 report. This report suggests that the global inventory levels, supply and demand of the agricultural commodities are in a reasonably good balance right now. In the short term we believe that most agricultural commodities will stay at their low price levels. The bull market might be getting ready to start – but not right away. When To Buy Rogers Agricultural Index? Rogers Agricultural Index might not move up before a big change takes place in the global currency markets. The U.S. dollar should start to weaken against other major currencies. However, there is an another major price catalyst in the making. Asia has already 525m middle class consumers. That is more than the whole EU population. Over the next two decades, the middle class is expected to expand by another 3 billion. That will create a spectacular rise in demand. In parallel, the global arable land is expected to increase by only 5% by 2050. That will be a challenge. That means that 90% of the supply increases must come from the yield and farming intensity improvements. We believe that such a staggering increase in the yield might be very difficult to achieve. One option would be to consider genetically modified organisms (GMOs). Changes In GMO Policies and Consumer Habits A major policy shift is occurring in EU in 2015 with a more accommodating approach towards the use of GMOs across the whole European Union . This will surely add more supply to the markets. However, the additional 3 billion middle class consumers will make both European consumers (over 500m) and farms look very small. The demand for several crop products will grow parabolically. The meat consumption is expected to double by 2050. Now, consider that producing 1 lbs of beef does not require 1 lbs of feeds. It requires as much as 5 lbs. For chicken this would be 2 lbs respectively. Consequently, Rogers Agricultural Commodity Index will have a very strong tailwind from the increased meat consumption. Sugar Might Become A Sweet Investment (click to enlarge) Figure 2. The iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (NYSEARCA: SGG ) and the iPath Dow Jones-UBS Coffee ETN (NYSEARCA: JO ) price. Chart: YCharts.com Sugar is cheaper today than it was in the ’70s. The current supply-demand balance is currently in a deficit and several price catalysts are emerging: New fuel policy in Brazil lifting gasoline prices – this will increase the demand for both ethanol and sugar. Indian sustained drought conditions. Too low sugar price – farmers might as well do nothing for the same close to zero earnings or transfer their cultivations over to something else. We believe that sugar will be pushed higher with these catalysts already in the short term. The flex-fuel cars’ ethanol usage in Brazil might even double in 2015 due to the new policy. Besides sugar we think that coffee is a good investment right now. We covered coffee and the iPath Pure Beta Coffee ETN (NYSEARCA: CAFE ) in an earlier exclusive Seeking Alpha article . Risks and Opportunities We believe that an unexpected breakthrough in genetically modified crops might be among the risk factors hindering the bull market in Rogers Agricultural Index. The recent months low inflation rates, felt globally, could also continue to press the commodity prices lower. Also a short dollar rally could push the prices lower. Rising agricultural prices would be advantageous for the farmers not earning a decent income these days in most producing countries. Through higher salaries and incomes these rural regions would start to prosper. The rising salaries and incomes in the producing countries would increase the inflation levels. Higher inflation would mean higher crop prices. This vicious circle might get stronger and stronger and support the next bull market in the agricultural commodities. Conclusion We are bullish on both Coffee and Sugar, and over a longer term RJA. As the world will count over 3 billion additional middle class consumers over the next two decades, we will see an unprecedented growth in the agricultural products’ demand. In parallel the arable land surface area is going to increase by less than 5%. The changing patterns in the climate continue to reduce the harvests even more frequently. We do not recommend our readers to buy a tractor or a pair of rubber boots. Following up the agricultural commodities prices could do it for the short term if the farmlands’ productivity increases will be sufficient. Disclaimer: Please do your own research prior to investing and taking investment decisions. This article is provided for informal purposes only and any information mentioned may change at any time without a notice. Please consult your investment advisor for finding a proper allocation for your portfolio that is adjusted with your risk levels and personal situation. Scalper1 News
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