Welcome to “Part 3” of an extended conversation I recently had with my colleague and seasoned journalist Chris Preston. Today’s topics include soft commodities, why you should buy a farm, and why natural gas prices can’t get much cheaper. If you missed Part 1 and Part 2 of our conversation, click on these links.
Chris: What would you recommend for the gold and silver averse in terms of resource investing?
Kevin: If you don’t want to own physical gold or silver – putting it in a safe, hiding it in your house or on your property – I think the next best thing would be to own an operating and profitable farm. Agriculture is kind of like the laggard in this commodity bull market. We’ve seen oil, gold, copper, silver – almost everything in the hard commodity world – rise two, three, four, five times in this 12-year commodity bull run we’ve been in. But we haven’t really seen that price movement so much lately in the soft commodities – cotton, corn, wheat, cattle, pork bellies, coffee.
Jim Rogers always talks about how the age of the average farmer in the United States is 58. There’s going to be a real absence of farmers out there and there’s going to be a real need for productive farms. Everyone is kind of in the mindset that this is in the information age and that we only need to trade bits of paper and “ones” and “zeros” over the Internet. People think we’re an information society and we don’t make anything anymore. And that’s great. But we still have to eat food.
Chris: And there are more mouths to feed than ever.
Kevin: Right, there are more people. And farm land acreage has been dwindling in the United State since the late ‘60s. So possibly the biggest leg up in the commodity bull market is going to be in agriculture. It’s kind of tricky to trade futures. I have no interest in doing that, and very few people can actually access that market. So the best thing is to start a farm yourself or to buy shares of companies that are likely to benefit from much higher soft-commodity prices.
Chris: I believe 2011 was a record year for U.S. farm profits – and that’s with less of them than there were years ago.
Kevin: Yeah, and part of that was because of some weakness in the oil market relative to everything else. And that’s another thing – I think we’re going to see much higher oil prices over the next 10, 20, 30 years. Energy analyst Jeff Rubin (author of Why Your World is About to Get a Whole Lot Smaller) says we’re going to see a reversal – you hear about our politicians complaining about sending our jobs overseas, and that’s largely because of oil. It’s cheap to send components to Asia, have things assembled and built there and shipped back. As oil gets more expensive, that kind of dynamic is going to shift back to more local labor.
When on one side of the scale you have really cheap labor, and on the other side of the scale you have really expensive oil, eventually that oil is going to outweigh the cheap labor. So it’s going to make a lot more sense to have stuff built here in Vermont than it will to have it built in Thailand or outside of Beijing or Singapore. In a way that’s a good thing. Obviously it’s not a good thing to have to spend more to drive to see your family, or to get to work. But it would be a good thing in that we’ll see a huge reversal in production coming back to the United States.
Chris: Do you see natural gas prices remaining as low as they’ve been?
Kevin: I think that we’re going to look back in 10 years and ask, “Why didn’t we buy more natural gas when it was less than $2 per thousand cubic feet?” I think this is one of those market anomalies. I’ve been saying natural gas is cheap for years now. But, as we know, things can always get cheaper. I think now we’re really close to a point where we might see some sideways trading. It’s almost impossible for nat gas prices to get any lower. Now we’re at the point where most natural gas producers’ costs are higher than the current natural gas price is. So we’re going to see people going out of business, we’re going to see lots of consolidation, and we’re going to see strong energy companies like Exxon (NYSE: XOM) buying up strong natural gas companies like Chesapeake Energy (NYSE: CHK) – which I own – at fire-sale prices, and that’s going to be a huge revenue stream for them for decades to come.
If you’re not buying natural gas assets now, I think you’re making a big mistake. I think it’s one of the best investments you can make.