CBOT rice futures have soared 81% in 2008 to reach never-before-seen heights.

Food prices around the world are soaring, sparking riots, restricting sales and even raising concerns that governments could fall. To wit: The two biggest retail warehouse chains in the U.S. – Wal-Mart and Costco – have placed limits on the number of 20-pound bags of basmati, jasmine, and white rice each customer can purchase per day.  

Broad Agri ETFs like the PowerShares DB Agriculture ETF (Ticker: DBA) and iPath Dow Jones-AIG Grains ETN (Ticker: JJG) are up 11.46% and 6.98% YTD.

But with this year's launch of new grains specific ETFs, razor sharp exposure to grains and a potential for investment gains from food shortages are just a trade away.

Is the world on the brink of a famine?

Farmers are producing record harvests. 2007, the world’s farmers reaped more grain than ever, and this year, the yield will be another all-time high of 2.16 billion tons, according to the U.N. The problem is that demand for the precious grains (rice, wheat, corn, soy, etc.) is growing just about as fast as the supply.

In the big picture however, rice in the U.S. is a much a food staple as burgers in Asia. U.S. consumption of rice is one-tenth that of Asia, all the while 50% of the domestic rice crop is exported.  

As for the region in which rice is a culinary mainstay, Asia, Reuters reported on April 24: “Do Not Panic: Asia Has Enough Rice Supply.” Last count by industry heads reveals “ample reserves… and buffer stocks sufficient for local consumption.”

What is driving the food prices?

There seems to be no imminent supply shortage of rice. There is FEAR of a supply shortage – which, in turn, is causing the world’s key sellers of rice to halt exports, which in turn, causes prices to rise.  

Why the fear?

- Increasing demand in bio fuels:
  The US produces approx. 40% of the global corn crop. About one in five ears is now used to  
  make ethanol.
- High oil prices:
  Higher cost of transportation is seen in the bottom line prices
- Expanding middle class:
  2.3 billion people in China & Indiawant to attain a higher standard of living.
- Extreme weather:
  Six year drought in Australia and flooding in Argentina affects harvests  

Grain specific ETFs:  

The average Chinese, for instance, now consumes 110 pounds of meat a year ( 44 pounds in 1985). Because it takes almost 10 pounds of grain to produce a pound of pork, and 20 poundsof grain to yield a pound of beef, both grain and animal stocks are getting hit.

And expect global demand will continue to rise. The Brookings Institution estimates that by 2020, the global middle class will increase by 1.8 billion people—or 30 percent—to constitute 52 percent of the earth’s population.

As other nations and cultures aspire to live like “Americans” we will have to get used to sharing the resources mother earth graciously provides for all of us.

Even though just the perception or fear of a possible food-and-grain shortage might be driving the prices today, increasing demand won’t subside anytime soon.

Deutsche Bank realized investor’s fascination with agriculture and issued four leveraged and inverse Agriculture ETNs in April. Unfortunately, Deutsche Bank does provide much information about  the underlying index. The annual expense ratio is 0.75%.

--DB Agriculture Double Short ETN (Ticker: AGA)
--DB Agriculture Double Long ETN (Ticker: DAG)
--DB Agriculture Short ETN (Ticker: ADZ)
--DB Agriculture Long ETN (Ticker: AGF)

For broader diversification into commodities you might want to look at the iShares S&P GSCI Commodity-Indexed Trust (Ticker: GSG) or iPath S&P GSCI Total Return Index ETN (Ticker: GSP). Both are diversified across 24 different commodities, such as; energy products, industrial metals, agricultural products, livestock products and precious metals.

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