Tuesday, August 3, 2010

Jim Rogers and Commodities

I was asked to comment on this CNBC piece that quotes Jim Rogers and his bullish thesis on agriculture commodities.

The July rise in wheat prices, the fastest in 51 years, indicates that shortages in agriculture are coming, Jim Rogers, chairman of Rogers Holdings, told CNBC.com Tuesday.


"Anybody who's got potentially good agriculture land and good weather" is likely to emerge a winner out of this situation because prices of nearly all agricultural commodities are set for steep rises, Rogers said.

"Prices aren't high enough and most people don't believe it," he said. "Unless prices are high you're not going to attract people in the business. Eventually people will go into farming again but it's going to take a while."

Shortages in agriculture are likely to add to problems created by governments who printed money to spend their way out of the financial crisis, according to Rogers.

"It's all happening at a time when governments are printing more money… it's a very dangerous situation," he said.

If there was any asset I would like to own over a five year period besides gold, it would probably be agriculture commodities. However, like gold, I do think agriculture prices are not about to skyrocket to all time highs. They could, but I just don't think the probabilities are in their favor. In the intermediate term (six to 18 months) I think gold and agriculture prices will be lower but there is no way I would put money on that bet. In fact, even though I think that, I would want to own gold currently because the possible alternative is gold goes parabolic.

Jim Rogers has been an agriculture bull for at least five years. He has been mostly right though did not see agriculture prices getting killed in late 2008 with all other commodities. I think we are in a similar situation now and it seems we are following a similar playbook to 2008 in the way the commodities are spiking right as the economy seems to be slowing. Oil going above 140 in the summer of 2008 helped add a final bullet to the head of the consumer.

Finally, there is not much money printing occurring. Only reserves being built.


Virginia said...

I've read some about Rogers' commodities comments in the past, but perhaps I'm missing the boat. He mentions that argi. commodities are heavily subsidized. Is that going to go away? Are farmers quitting the business such that we might have a shortage? Is there a drought looming? Are underlying costs of production going higher? Do we have some new trade agreement that's going to create a lot more demand for our food?

I don't see subsidies going away any time soon. I don't see farmers jumping ship. I don't see a drought looming. What would cause the cost of wheat to skyrocket?

(Is it an inventory issue? Have we gotten complacent about how much we hold for hard time? Is Rogers speculating that a shock to the supply would rapidly deplete our inventory? That's the only thing that makes sense to me.)

Market Seer said...

Yes, yes, yes, yes, and yes.

What has caused all the chatter recently is a massive drought in parts of Russia destroying much of the wheat crop. This has caused a huge surge in wheat prices. Production costs have been going up the past decade and world food stocks have been at multi decade lows for a few years now.

Every year you have 75 million more mouths to feed than the previous year. Also - as Asia standard of living goes higher there has been more and more demand for higher quality food - i.e. meat. Chickens, Beef, Pork all require much more energy and hence higher grain consumption than eating rice or wheat directly.

A brief article on the surge in wheat prices because of drought recently. http://green.blogs.nytimes.com/2010/08/03/drought-strains-russian-wheat-supplies/

Virginia said...

Hmmm... I'll take a look at the article. Somehow I'm not sure I'll be growing tomatoes in my backyard any time soon. But, who knows... I may eat my words ; )

Market Seer said...

Ha - no - i don't think you will start growing tomatoes but that doesn't mean wheat prices cannot double and corn couldn't go back above $6 a bushel. I don't really prescribe to this. Just giving you the bullish arguments. Like I said, if I was forced to own an asset outside gold for a five year period - it would be agriculture. Doesn't mean I own it (and I don't)