If I only had one investment

I sometimes ask myself, where would I put my money if I had only one investment? What will grow constantly and present limited volatility going forward? This superior investment would have to be diversified, present a growing demand and be protected against any major technological development.

First I thought of Apple, the almost perfect company, growing, envisioning our future needs before we do, cheap, and the darling stock of the market. However, what will stop Google, Facebook or Amazon from eating Apple’s cake in the near future? Will Apple be able to replace Steve Job’s vision? Can a new technology emerge that make Apple products obsolete? I love Apple but this would not be my one and only investment.

Then I thought of oil, a limited resource with a constant and increasing demand. If the world has reached “peak oil”, like many believe, it is a sure bet. What can make oil price go down? A rise in the dollar? The drop would be short term and demand from the BRIC countries would compensate. A depression? Oil would drop to the low forties until the Fed starts the printing press once more. The long term deflationary risk on oil price is minuscule. Humankind may be able to gradually replace oil with natural gas and electricity as a source of energy but remember that oil is also used in plastic and most chemicals. For as long as population grows, the price of oil will follow.

Then I asked myself, are there any other commodities that face a limited supply and increasing demand? A commodity more essential than oil, with similar growth but without the competition from alternative sources? There is such an investment, something simple, essential but forgettable, this commodity is food.

Food price will vary in response to supply and demand. Today, for every death on earth there are two births and, as a result, demand for food will increase. The world reached 7 billion people last month; the global population is forecast to rise to 10 billion by the end of the century. According to the UN, the planet needs to increase its food production by 70% to feed the world by 2050. Other than supply and demand, food price will also be dictated by production costs and guess what is the most important cost in food production? Oil.

We use fossil fuel for everything, from toothbrush to toothpaste but what most people don’t realize is how much fossil fuel is required to produce food. As an example, when crops are being planted an oil-powered machine is used to prepare the soil and another one to plant. Then chemical fertilizers, made of ammonia, which is derived from natural gas, are used to increase production. While the crop is growing an oil-powered plane sprays pesticide made from petroleum onto the plants. We harvest with another oil-powered machine and use more fuel to transport the food to a processing plant. At this stage the food is wrapped in plastic, made with oil of course, and sent around the world being transported using yet more fuel. In today’s world we eat garlic from China, oranges from Morocco and cheese from France. As the price of oil rise, so will the price of food.

We also need to remember that food demand will be altered as the BRIC economies transit from a low calories regime toward a higher protein diet. According to the Food and Agricultural Organization, 23% of the Chinese population is already considered obese. As they get wealthier emerging countries not only modify their diets they also increase their consumption.

Oil or food? I would say both, but if I were to choose then my preference would be toward food. A basket of food commodities is more diversified and less volatile than oil. If oil demand increases, food prices will follow. I can envision scenarios where the price of oil drops but demand, natural disaster and global warming pushes food inflation higher. The only scenario where the price of food could collapse, and stay low for a long period of time, is one where the world suffers a pandemic and the population is devastated. Possible, however such an event can also send the price of food rocketing as production is annihilated.

My recommendation? Invest in the ETF PowerShares DB Agriculture Fund (DBA). The fund is well diversified and presents investments in corn, soybeans, sugar, cattle, cocoa, coffee, hogs, different types of wheat and cotton. The ETF invests in liquid futures contracts and present a management fee of 0.85%.

Choose apples over Apple and as the old adage says: “Put your money where your mouth is”.

Disclosure: We are long DBA in our portfolios.