Friday, October 26, 2007 3 comments ++[ CLICK TO COMMENT ]++

Jim Rogers Still Bullish on Agricultural Commodities and Bearish on US$

Jim Rogers appears to be still bullish on commodities. I recall some concern he had about overheating in the commodities markets but he still seems to like them. In this article by IHT, he says he is moving out of the US$ and into the Renminbi. He is also moving into precious metals and away from the US$. This isn't anything new to anyone who has heard him talk. He has maintained that view for many years now. The information I find worth pondering are the following:

Agricultural Commodities

As with Marc Faber (they are both friends), Jim Rogers seems to like agricultural commodities.

Rogers said he remains bullish on commodities because "that's where the big fortunes are going to be made in the world in the next five, or 10 or 15 years. The current bull market is going to last until sometime between 2014 and 2022."

Commodity prices have surged as demand for raw materials, especially from China, rose faster than producers were able to increase output. Agricultural prices have led recent gains, including a record high for wheat last month and a three-year high in soybeans.

"The number of hectares devoted to wheat farming has been declining for 30 years. The inventory levels of food are at the lowest level since 1972," Rogers said. "Suppose we start having droughts again. God knows how high the price of agriculture is going to go, so that's where I'm putting more of my money now than in other things."

He added, "I think I'm going to make more money in agriculture than I make in precious metals."

He thinks agricultural commodities will outperform other commodities like base metals and precious metals (he doesn't say base metals in the article but he has said that in the past). I'm not entirely sure about Jim's view of declining agricultural land use in the past leading to price increases now (it matters a bit but don't think it's going to be the big reason). Of all the commodities, agricultural commodities have historically deflated more on a consistent basis than anything else. This is mainly due to improvements in technology, better land use, and so forth (crop yields are higher now than, say, 40 years ago).

Having said that, I can see agricultural commodities doing well simply because most of the developing countries are poor. As someone who comes from a poor country, I can tell you that food is a bigger issue than anything else. Investors seem to be tripping over themselves for consumer goods companies but I suspect there will be more money made on agricultural goods. Unlike wealthy countries, a big chunk of the budget in developing countries are dedicated to food. People in countries like China, India, etc, will increase the quality of their food intake long before they spend money on consumer goods. The Street always talks about the middle class in countries like China and India, but the middle class is tiny compared to the lower classes. There is far greater potential if you can capitalize on the lower classes than on the middle class (think Wal-mart vs Nordstorm's or JC Penney in 90's).

The risk with agricultural commodities is that they are localized. The food that people eat in different parts of the world can be different. So if you are going into commodities, make sure you target properly. For example, corn is huge in USA but isn't as big in Asia. In contrast, rice is huge in Asia but not really a big deal in USA. So if you buy, say, an ETF that contains corn instead of rice, the results will be materially different.

If you are bullish on agricultural goods, there are many ways to play it:

  1. agricultural commodities
  2. farmland
  3. farm suppliers
  4. farming capital goods makers
  5. distributors/facilitators

Jim Rogers generally prefers the commodities themselves but they tend to be risky, harder to access, and have roll-yield problems. The advantage of commodities is that they have low (sometimes negative) correlation to the broad markets. They will do well during stock market corrections whereas stocks of all stripes can get hit during a correction. In contrast, agricultural stocks or farm equipment stocks often track the broad stock market. These days there are a lot of ETFs and exchange-traded notes (ETNs) that track agricultural commodities (these are just a selection):

  1. PowerShares agricultural ETF: DBA
  2. BGI iPath ETNs: JJA, JJG
  3. Elements ETNs: RJA (this family of unpopular ETNs track Jim Rogers's commodity indices)

Volume on these ETFs and ETNs can be very thin so watch out. Expense ratios are also high for some of them.

Yen Unwinding

He says that the Renminbi will go up 3x or 4x and I find that to be quite a lot. The part I found beneficial to me is his view of the Yen:

Rogers also is buying Swiss francs and Japanese yen, which he said have been "pounded down" because of the so-called carry trades...

The carry trades in yen and francs will "unwind someday," which will send the currencies "straight up," Rogers said. "I'm buying the yen."

I'm also bullish on the Yen and am trying to invest in Japanese stocks. You don't need to invest in Japanese stocks to benefit from the Yen but it's better than just holding Yen-denominated bonds. Once I get through reading some classic investing books, my plan is to read some books on Japan. I would like to check out the following books but it depends on which ones are available in the library (I'm cheap :) ) and which ones I have to buy:

  1. Japan On The Upswing: Why the Bubble Burst and Japan's Economic Renewal
  2. The Japanese Money Tree: How Investors Can Prosper from Japan's Economic Rebirth
  3. Saying Yes to Japan: How Outsiders are Reviving a Trillion Dollar Services Market

As usual, I'll post book summaries once I read them. Right now I own Takefuji (PK: TAKAF, TSE: 8564) and my idea is to look at REITs and consumer product companies in Japan. One thing to note is that if the Yen ever starts appreciating, Japanese exporters will suffer significantly. The high-flyers in Japan right now, such as Toyota, are the exporters who benefit immensely from the low Yen and I can see these struggling (it depends on how these companies adjust to a rising Yen of course).

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3 Response to Jim Rogers Still Bullish on Agricultural Commodities and Bearish on US$

August 2, 2008 at 4:56 PM

I do not understand why Jim Rogers is bullish on the Yen. Japan has an aging population, no natural resources, and a 7 trillion dollar debt. Investing in the Yen flies in the face of his basic rules of an economy with little to no debt and one that is also rich in natural resources despite any unwinding of the carry trade.

August 5, 2008 at 11:56 AM

Even with all that negativity, the Yen seems undervalued. The Yen has been artificially kept low and there is a massive carry-trade that is essentically "short Yen". So maybe Rogers is looking at that. I don't know.

September 15, 2008 at 6:49 PM

I think Rogers is smarter than everyone on the internet put together...he certainly knows more than I do. I think the yen is a relatively short trade (maybe months or years, not decades). It's not like his China call. I think the low value from the carry trade trumps demographics, aging.

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