Sorry, I know it’s a little dark…
For the past couple of years the haunting specter of inflation has been on the minds of a lot of people. Recently, the fear has experienced a growth spurt with the Fed’s Quantitative Easing II program. As an investor that does fear the impact inflation has on one’s portfolio, I often hear about investing ideas that seek it counter the eroding force of inflation. Often times it is commodities that I hear spoken of as a way to counter balance the negative forces that inflation brings.
Commodities, being mainly the first sources in the production process, are seen as pathways to capture the upward price movement inflation creates. Therefore, commodities are claimed to be, by some investors, as a good inflation hedge. Yet, commodities can be rather risky for an investor. Their prices can swing north or south rather fast.
If you want to mitigate your risk, but are convinced commodities are the way to hedge your bets against inflation, what are you to do? My suggestion would be to look towards companies, such as Monsanto (MON) as an indirect way of gaining exposure to commodities. Monsanto is known for producing genetically modified seeds. These seeds product a number of different commodities. Therefore, if the commodity is more valuable, the seeds probably will be more valuable, as well.
If commodities do not work as an inflation hedge or inflation does not occur in the drastic form we are expecting, you still are holding a company that has some very good growth potential in the long-term.
Consider this…To get 2.2 pounds of beef you need 15.4 pounds of grain. To get 2.2 pounds of pork you need 8.8 pounds of grain. To get 2.2 pounds of poultry you need 4.4 pounds of grain. (estimated figures) If the developing world gains more wealth and thus demands more meat products, how are they going to obtain them? The growers of various forms of livestock will need more grain. How will more grain arrive? With limited land and other resources like water, growers will look towards genetically modified seeds to help increase their crop yield.
I see Monsanto (MON) as an inflation hedge if commodities are forced upwards in price by inflationary pressure and I see MON as a company that is going to see a good deal of new markets demand its products in the years to come.
MON currently trades around $62 per share. I view it as a buy.
Disclosure: No Position.