http://www.cnbc.com/id/15840232?video=707473516&play=1
News story on CNBC of the global food crises. Last night 9 people died in Egypt in riots as peasants were trying to get rice and bread. Very interesting story.
I have not bought into the oil story, or the gas story, or the metals (not counting gold) story. I have completely bought into the agriculture food story.
The reason is inventory. We have large inventories (most in 10 years) in oil and gasoline. Oil has become a substitute currency and so tied to the dollar which is why it continues to move up. There is no way I would short energy related investments but agriculture products are a totally different story. I have written about this often. Inventories across the board are at 20 to 40 year lows.
Vick, the analysts from the pits in the CNBC video, I think is wrong. He talks about farmers responding to prices and upping output bringing down prices. I disagree. Don't get me wrong, soft commodities could easily be down 30% six months from now. These commodities move violently. But 2 years from now I still think they will be higher. Farmers will respond, well yes they did. Last year in the U.S. they planted more than 90 million acres of corn in response to high corn prices. The most acres since 1944. They took these acres from soybeans and wheat. The end result, corn prices stayed flat at very high elevated levels. Inventory did not increase because of ethanol and corn exports. Soybeans, wheat, and other ag prices skyrocketed as the acres planted for corn were taken from these products. This year farmers cut way back in corn, even though prices were slightly higher than a year ago, with estimates of 86 million acres in corn planted to plant other products. Soybeans and wheat have come off their highs while corn skyrocketed to another all time high today. Its give and take resulting in an overall higher average for everything. People act like there is all this farmland waiting to be planted. Well guess what, in the short term there isn't. I think Brazil will become an agriculture juggernaut over the next few years but that will take time. In the short term (18 months) I don't see how inventory levels develop any meaningful slack whatsoever.
In fact we are one major drought or flooded crop in the U.S. (something we haven't had in over 15 years on a national scale) from causing truly catastrophic consequences.
I wouldn't go out running out buying futures in this stuff (I did add to my corn position a couple of weeks ago at much lower prices) but there are still nook and crannies available to invest in agriculture companies. They move violently however and you have to have the stomach for volatility. I have looked at Russian, Brazilian, Canadian, and Australian agriculture companies. There are still values out there, you just have to dig. The big etf is MOO or COW. Easy way to play the ag story though I would like to see it under 55 before I added more to it. Even as an etf it moves violently. Seen 5% moves plus several times in the past few months.
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2 comments:
Kaspar, I think you are dead right on this one.
Classical economic theory does say that in the long run farmers will just increase supply, leading to price falls in commodities. However, I think we live in different times, like you say there just isn't the spare capacity in the agricultural system that we (globally) used to have.
Also there are a number of significant external factors:
- ever increasing global population
- growing global middle/upper class who demand higher protein foods (beef, corn etc etc)
- environmental restrictions on the expansion of agricultural systems due to climate change worries
- possible weather changes in key agricultural areas due to climate change (contentious issue but one to bear in mind nevertheless)
I suspect the only solution will be for developing countries to pick up the slack, using technology and modern agricultural techniques to boost production (not unlike how we exported manufacturing). If you've ever travelled through the Indian countryside (for instance), it's apparent that agricultural techniques used there haven't changed over many many years). However, the developed nations will on one hand assisting/urging developing nations to boost food production, but at the same time attempting to convince them to preserve rainforests, swamps, lakes, etc etc.
Regarding Brazil, I think you are correct that it will become a massive agricultural producer in the future (it's proximity to the US assists there too), however it is likely to come at the expense of the rainforests, which are already being cleared for agricultural. Same thing in Indonesia where 10% of the world's rainforests are being decimated in order to clear land for palm oil plantations.
Also, transporting all this food from producer nations to consumer nations uses an awful lot of oil, which is expensive, which is running out and which will only add to the price of commodities.
It may be tough to profit from this, as I suspect it will be more of a slow, structural change, rather than one that allows short-term profits. Still the implications are pretty clear I reckon.
Cheers
Justin
Well said, agree on every point.
I think eventually everyone will realize this and it will lead to a major bubble. You will get "it is different this time." No it is not different this time but commodity cyclical cycles are typicall long cycles. 10 to 15 years. We are in year 5ish. You can't snap your fingers and change dramtically the structure of supply. You can over many years which is what will happen to finally meet demand and bring marginal revnue back to marginal cost which is demanded by basic economic rules with commodities. It will happen but it will take time and MR=MC will get out of balance even more. Eventually the dumb money will start flowing in creating a massive bubble and all the development of supply will be way to much driving down prices where MC>MR creating large losses and you start the cycle all over again. A large strucutual shift needs to occur and it won't occur overnight. It will take a long time.
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