February 22, 2016

A Bet on Agricultural Prices: Climate, Population Growth, and Limited Risk

Our focus in this paper will be to present the case for a rise in the price of agricultural
commodities. The market currently presents limited risk and affords us the proper reward to
engage in speculation. Within the following pages, we will focus on the future of climate change,
expected population growth, and the limited risk within the index fund, PowerShares DB
Agriculture Fund. We will study how temperatures, heavy rain, and flooding will contribute to
the destruction of crops and land, increasing prices. In addition, if population continues to grow
as expected, the demand for crops will correlate in growth. Lastly, due to vast amounts of stored
crops, agricultural prices are near levels not seen in over five years yielding low risk. In studying
the $DBA ETF for speculative purposes, downside risk is far out numbered by contributing
factors for reward that will be detailed below.
Our analysis begins with a study of the climate; specifically in understanding the effects
of climate change on cropland. Much of our forecasts will be aligned with a belief in global
warming so practitioners who oppose the assumption may not be inclined to proceed. The
following section of the paper will continue as a domino effect from higher temperatures to
heavy precipitation to flooding.
To begin our analysis, we see that the release of greenhouse gases via industrial
production is warming ocean temperatures. Best-case scenarios have an underlying assumption
of joint agreements from nations to decrease carbon emissions and actively work toward
reducing the release of such gases. Worst-case scenarios keep us on track at current emission
levels. We can see how ocean temperatures have been affected and use this as a projection
model. From 1900 to 1930, ocean temperatures have slightly fluctuated from its average in
negative (colder) rates, but from 1930 to 1980, ocean temperatures fluctuated slightly by both
positive (warmer) and negatives rates. From 1980 until 2010, temperatures experienced positive
rate changes. This is supported by frost-free seasonality data. Frost-free seasons are defined by
the period between 32degF in the spring and the fall. From 1991-2012, the U.S. wests frost-free
season length has increased by 10-19 days, moving higher as one travels farther west. For the
U.S. east, the frost-free season length has increased by 6-10 days, moving higher as one travels
north. It should be noted that these numbers are in comparison to the period from 1901-1960.
If we continue with our projections of increasing temperatures, then heavy precipitation
should follow. This is understood as warmer oceans leading to evaporative water and unstable
atmospheres. We also understand that when storms pass through warmer atmospheres and rising
sea levels, we should expect heavier precipitation. What we have seen from observed and
projected precipitation forecasts is an increase within the north/south-east of the U.S. even with
rapid emission reduction. If gas emissions continue as they currently do, we should see adverse
effects in Mexico as well. Heavier rain should also be expected in east Africa, southern Europe
and north Asia. This leads us to our final observation, increased flooding. From the 1920s to
2008, percentage change in annual flood magnitude has increased by over 12% in the Midwest
and at a minimum of 3% in areas near the Great Lakes. Flooding should affect the production of
corn, soybeans, wheat, and cattle. What we come to understand is that the above outlines what

we expect to be is a decreased supply of agricultural products. In the following paragraphs, we

will support the case for increased demand, creating a two-sided approach.
In studying how population will affect prices, we will not only explore growth rates, but
also analyze global demand and social classes. Population growth will factor into a foundation
for gains in consumption and trade. In late 2011, the world population surpassed 7 billion and
future estimates of population are 9 billion by 2040 and up to 11 billion in 2050, a change of
28.5% and 36.3%, respectively. A majority of population growth is expected to be in less
developed regions, about 5.3b to 7.8b and mostly unchanged at 1.2b in developed regions. The
notable exception is within the U.S. a change of 31% from 2008 to 2050, due to international
migration. In addition to population growth, smart & stable economic growth should create a
base level for crop demand. This provides us with the primary reasoning behind demand, but we
should also note who we believe will consume crops. Above we noted how less developed
regions will experience significant population growth. Consumers within these areas will not
consume luxury meals, but relatively low-priced, nutritious crops. Even within more developed
nations such as the U.S. the trend is beginning to shift toward a more health conscious mindset.
Although the development of preservatives/sweeteners such as high-fructose syrup may
decrease, we believe this will be offset as crops become more prominent in a health cognizant
population. Finally, as an added note, we should include forecasts of decreased planted acreage
due to lower producer returns. Over the next few years, planted acreage is projected to decrease
below 250m from 257m from 2012-2014, down to 244m by 2025.
Quite simply, we believe supply should decrease and demand should increase of agricultural
commodities.
Given our findings, we turn to an examination of profiting from our forecast through the $DBA
ETF. With recent lows within the security, a tight stop should be implemented at ones
discretion; we personally feel a decline to $19 and below is a sell. This being said, even with a
sell target, our long-term views hold and a new entry should be analyzed. Our target is near
previous support levels at $24, representing a 20% return. Those who would like to capture more
profit may have the opportunity as previous rallies have easily risen near 30-50%, but it may be
strategic to unload some shares at $24 with a secondary target at $30.
For those who may want to direct the allocation, corn may be a commodity for speculation. We
do not have detailed reasoning behind why corn with regards to quantitative data, but price action
within the $CORN chart (an ETF for corn for those who do not trade its futures contract ZC_F)
is bullish due to compressed levels preparing to break out. Our target would be slightly above
$27, yielding a 27% return from its current price.
Thank you for reading.

Sources: National Climate Assessment, USDA ERS, Climate Hot Map, Wikipedia, thinkorswim
See below for supportive charts:

Appendix: