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Load up on Food ETFs...

They're Likely to Rocket Even Higher

Written by Brian Hicks
Posted February 9, 2011

It's time to load up on more food ETFs, like the Market Vectors Agribusiness ETF (MOO).

The USDA just reported even more inventory cuts for agriculture commodities, including corn, wheat, soybeans, sugar and rice. Couple that with last week's Food and Agriculture (FAO) of the UN Food Index report, and food-related ETFs are likely to rocket even more, according to Briefing.com.

Just last week, the FAO reported that the food price index nailed new all-time highs for January. According to Briefing.com, “The Index rose 3.4% from December, averaging 231 points in January. This is the highest level (both in real and nominal terms) since FAO started measuring food prices in 1990. Overall, prices of all monitored commodity groups registered strong gains in January, except for meat, which remained unchanged.”

Even better...

“Unusual weather in 2010 hit many areas of the world, including Russia, the U.S. and many parts of Europe, which has cut inventory levels in many agriculture commodities around the world to multi-year lows. Overall, many commodities have seen notable inventory reductions including corn, wheat, soybeans, soybean meal, soybean oil, sugar, rice and coffee. Palm oil and cooking oil inventories have also fallen notably.

Overall, there are both supply and demand factors driving commodities prices higher, but for the most part, it's a supply driven story. In certain commodities such as corn, ethanol is a key demand driver. On the supply-side, poor weather cut corn inventory levels sharply last year through this year so far. For the current 2010/11 crop year in the U.S., corn ending stocks (inventory) have now hit levels not seen since the 1995/96 crop season.

China has been a catalyst to strong commodity demand, but the country may now be an even larger-than-expected driver of corn demand on additional unusual weather as its now seeing continued drought conditions. Last year, China imported corn for the second year in 14 years and it will import again this year. In fact, the U.S. Grains Council is now possibly expecting China to import up to 9 million tonnes in 2011-12, up from 1.3 million tonnes in 2010-11.”

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