The Agriculture Re-Boom Is Coming 18 comments
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Picture this…
Saudi Arabia just announced it was shutting down half of its oil production.
It also says it will keep the capacity shut down for at least a year – maybe longer.
The move would wipe out about five percent of the world’s oil supply overnight.
What do you expect to happen?
It would be bedlam. Oil prices would skyrocket. The price would jump to $100 or more within minutes. Prices would spike even if demand continued to dip and oil stockpiles stayed high.
Gasoline prices would climb too. Every politician would vow to do something about it. Every major media news outlet would be all over the story.
Oil stocks would dominate the markets. Any investor holding shares of oil producers, oil service companies, or alternative energy companies would be banking some solid gains in no time.
Now, imagine if you were tipped off weeks before the announcement was made. You could load up on oil stocks and leverage up with call options and make a fortune.
Granted, the likelihood of this scenario playing out is pretty slim. The odds of you getting advanced notice are even slimmer.
So it’s pretty unrealistic, right?
Well, it is almost impossible when it comes to oil.
It is not unrealistic, however, in another commodity sector.
I’m talking about a commodity which is equally as important as oil. A commodity which has not been hit nearly as hard as almost every other one during this downturn. A commodity that is already in short supply. And one which will have a far greater run up this summer (and more profitable for investors) than oil probably will.
A Perfect Storm for Agriculture
The commodity is food. This summer has the potential to be a very big one for agriculture commodities. The price of everything – wheat, corn, barley, sunflower, etc. – are on the verge of going much, much higher.
We all know the long-term case for agriculture. The “Peak Soil” crisis is something we’ve followed closely in the Prosperity Dispatch for a long time. The combination of declining crop yields from overused soil and rising demand from a wealthier and growing population.
I don’t think I’m going out on a limb and saying the long-term outlook for agriculture commodities and stocks is outstanding.
Today though, I want to focus on the short-term prospects for agriculture. More specifically, how two big issues could launch agriculture commodity prices back to last year’s highs and beyond.
Just like every other commodity, agriculture commodity prices are driven by supply and demand. The catalysts for agriculture commodities in this summer rest on the supply side.
The first factor is grain stockpiles. They’re at record lows. Corn is the perfect example. Corn stockpiles in the U.S have currently fallen to a 33-day supply. That means if there was no corn production this year, the U.S. would be out of corn in a little over a month. This is the lowest on record since the old record of 34 days’ supply set in 2003.
It’s not just a problem in the U.S. though. The rest of the world is probably not going to make up for the shortfall. Allendale Inc, a commodities research firm, says:
“Equally alarming is the lack of help from major world suppliers such as China, Brazil, Argentina and South Africa. U.S. Department of Agriculture (USDA) projects the world end stocks [are at] 128 million tonnes, down 8.6% year on year. This would imply the world day’s supply of corn at 53 days, one day lower than the old record dating back to 1999.”
Sounds pretty bad right? Stockpiles are low and only another record-setting year of production will help ensure stockpiles remain at their current low levels. That’s where the second factor could create some real fireworks over the next few months in the agriculture sector.
Another bumper crop this year is highly unlikely. And it has nothing to do with farmers getting financing, fertilizer shortages, or anything which can be compensated for. The problem is completely out of the control of the agriculture industry.
The Sunspot Cycle
A few weeks ago we had the chance to sit down with John Embry, the chief investment strategist at Sprott Asset Management. Embry has been a commodities analyst and portfolio manager for decades and has done exceptionally well during this commodities boom.
In our conversation, Embry brought up a very important point about agriculture. He said:
I think the real arbiter in the short run might be the climate. I see a lot of industry people bringing this up, changing sunspots. These changes in the sunspots suggest that we may be facing drought conditions in a lot of the world all at the same time.
If that’s the case, I think you are going to see massive food shortages which would underrate a considerable price appreciation in the food because there will be a real fight for it.
So far the sunspot cycle has led to some extreme changes in the weather patterns in the world’s breadbasket regions. Some areas have been hit hard with droughts and others are too wet to plant.
For instance, due to excessive wet weather, corn plantings are way behind schedule in the Corn Belt. Illinois has only planted 14% of its expected total corn plantings and Indiana has only planted 11%. Normally, corn in these states is at least 80% planted by this time of year. May is almost over and time is running out.
The late plantings will have a few consequences. None of which are good for corn prices. Farmers in this region will choose to switch some of their fields soybeans. As for the corn planted now, it will produce lower yields.
That’s just the United States though. Another breadbasket country is experiencing far below average production this year.
The “Saudi Arabia of Soy”
Agriculture is one the leading industries in Argentina. It accounts for a large portion of agriculture commodities exported to the rest of the world. Argentina is responsible for producing 22% of the world’s soy and 13% of its sunflower supplies each year.
This year, due in large part to sun spots and associated drought conditions, Argentina’s agriculture production has drastically declined. Official estimates from the USDA on Argentina’s crop production continue to be lowered. As you can see in the table below, it’s shaping up to be a tough year:
Click to enlarge:
All of Argentina’s key crops are expected to have an absolutely terrible year. The table shows Argentina’s production will decline 47.5% (wheat), 26% (soy), 34% (corn), and 46% (sunflower). Those are massive.
These aren’t rough estimates either. They’re based on the country’s production so far. Since Argentina is in the southern hemisphere its harvest season is ending while the northern hemisphere’s planting season is beginning so the data is based on what’s actually heading into the silos rather than what is expected five months from now.
The decline in Argentina’s soy crop is particularly dire for the world. Remember, Argentina is produces 22% of the world’s soy – it’s the Saudi Arabia of Soy. So a 26% decline in Argentina’s soy production equates to a 5.7% decline in the world’s soy supply (in oil equivalent terms – that’s the same as if Saudi Arabia cut its production in half). Still though, soybeans are only up 30% for the year.
Plenty of Room to Grow
The way things are shaping up, it’d tough to go wrong with anything agriculture at this point.
The long-term picture hasn’t changed much at all and is still as bright as ever. Agricultural commodities also offer some solid protection against inflation. And there’s no denying the world has hit Peak Soil. Now, the short-term is very attractive as well.
Normally, I don’t believe the best gains will be had in agricultural commodities over the long term. The upside just isn’t as high as it is with shares of fertilizer producers, farm equipment makers, and other stocks which run much farther when agriculture prices rise.
The Powershare DB Agriculture (DBA), a fund which tracks the prices of wheat, soy, corn, and sugar, has done well over the past few months. But its upside is somewhat limited. At just under $28 per share, a return to its highs would mean about a 50% move. Meanwhile, fertilizer and agriculture equipment stocks could double and still not reach their highs of last year.
Of course, the best asset of all in the agriculture sector is farmland. If you use a present value of future cash flow estimations, farmland offers some of the best leverage to any rise in agriculture prices. Also, since its farmland, it’s a pretty safe asset as well.
The agriculture re-boom appears to be coming and we’ll be looking at all sorts of ways to get in on it in the weeks ahead (including ways you can buy farmland without having to become a farmer). Stay tuned.
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This article has 18 comments:
Commodities are a win win. If hyperinflation then commodities go up. If recovery, then commodities go up.
the fundamentals have really not changed from last year. Indeed, the agri-commodities crash in late 2008 was due to general correction of commodity prices and exceptionally good 2008 harvest in almost all major grain growing countries.
So far, 2009 has already proved way worse. Besides Argentina, we can already basically write off US and Canadian spring wheat crop. Simply too late to drill already. My feeling is that wheat will see most fireworks this year, if the Stormx drought forecast for East Europe is realized, then watch out!
If the Andrew's scenario becomes true, I expect the high prices last longer than in the previous case - simply because the violent volatility of the last few years has seriously discouraged the farmers to invest and take risks. Lots of people who responded the high prices by expanding acreage and adding inputs, are still under water from the subsequent crash - it takes serious prices for long time to motivate them to take those risks again.
I must note though that in longer term, there IS a very considerable "soil reserve" available that will have a big impact on the grain prices 5-10 years down the road. This is Russia, Ukraine and Kazakhstan - those three could feed the whole world, if the efficiency of their agriculture were raised to US/European standards. It takes a HUGE investment, though, not only in tractors and combines, but also the supporting infrastructure (elevators, railways, port terminals) and foremost in people and R&D. Probably a trillion $ or so project, but it will happen if the prices stay high long enough. Meanwhile, if you're invested in agriculture elsewhere, enjoy the show and get out in time!
Sadly, if a really big shortage were to occur, it could create a very tough and painful situation. If really big shortages develop (or it becomes clear that they inevitably will occur) then you will see a rush to vehicles like DBA. Since DBA invests directly in ag-futures, this could lead to additional (speculator) demand worsening an already dire situation. I fully expect that the govt will ban and outlaw DBA sooner rather than later in this case.
What they can't outlaw as easily are the agricultural futures themselves - though in an emergency they may prohibit retail and institutional speculators from opening new positions in crops.
Then what? fertilizer stocks or farming equipment will certainly get a good uplift - but when there is a drought or a flood, all fertilizers and caterpillar machinery in the world won't save your crops. And you can only extract so much additional output with ever increasing quantities of fertilizers. (Which, btw, already are way too much in use. The quantities of our food are high, but the quality, from a nutritional and biological point of view keeps declining rapidly. And no, genetic manipulations are not part of the solution, but creates a lot of new and related problems)
Farmland has its own host of problems. Ask anyone in Alberta or Sasketchewan. Pure farmland investments are not the easy road to riches. many who thought otherwise, have learnt a very costly lesson over the years. And farmland in Argentine looks cheap, but carries a boatload opf political risks.
perhaps you could elaborate more on your views of how to invest here - and not just present the bullish background story. But I guess, Andrew, the meat will only be available to your subscribers (what I respect) and your articles here are just teasers to sell your newsletter (wat I don't endorse)
World food stocks are at fifty year lows. eg; Thailand is the worlds biggest producer of rice. Last year one ton at $1,000 USD. This year one ton at $400 USD. Most of the current crop has been destroyed by floods. Farmers can't get credit to replant. Cattle on feed lots in the US are at fifty year lows, with mutton and lamb slaughter at record lows. Ongoing droughts in much of the worlds food producing areas is expected to continue. As for the Oceans of the world - of the 600 wild marine fish stocks monitored, 17% have been depleted, another 52% fully exploited. Aquaculture now accounts for nearly half of all fishery products for human consumption. These are more energy expensive and environmentally harmful to produce. Plant seeds. NOW!
On May 26 08:53 AM specsmurdock wrote:
> Declining yields? Where in the world have you been?
On May 26 05:44 AM User 305589 wrote:
> Interesting article, Andrew, but unfortunately, you stop where it
> starts getting interesting. You present the bullish case for Ag-commodities
> but imho you do not think the idea through in earnest.
>
> Sadly, if a really big shortage were to occur, it could create a
> very tough and painful situation. If really big shortages develop
> (or it becomes clear that they inevitably will occur) then you will
> see a rush to vehicles like DBA. Since DBA invests directly in ag-futures,
> this could lead to additional (speculator) demand worsening an already
> dire situation. I fully expect that the govt will ban and outlaw
> DBA sooner rather than later in this case.
> What they can't outlaw as easily are the agricultural futures themselves
> - though in an emergency they may prohibit retail and institutional
> speculators from opening new positions in crops.
>
> Then what? fertilizer stocks or farming equipment will certainly
> get a good uplift - but when there is a drought or a flood, all fertilizers
> and caterpillar machinery in the world won't save your crops. And
> you can only extract so much additional output with ever increasing
> quantities of fertilizers. (Which, btw, already are way too much
> in use. The quantities of our food are high, but the quality, from
> a nutritional and biological point of view keeps declining rapidly.
> And no, genetic manipulations are not part of the solution, but creates
> a lot of new and related problems)
>
> Farmland has its own host of problems. Ask anyone in Alberta or Sasketchewan.
> Pure farmland investments are not the easy road to riches. many who
> thought otherwise, have learnt a very costly lesson over the years.
> And farmland in Argentine looks cheap, but carries a boatload opf
> political risks.
> perhaps you could elaborate more on your views of how to invest here
> - and not just present the bullish background story. But I guess,
> Andrew, the meat will only be available to your subscribers (what
> I respect) and your articles here are just teasers to sell your newsletter
> (wat I don't endorse)
www.radio-sport.net/su...
www.radio-sport.net/su...
Sunspot minimums are the problem. Sunspot maximums are clear sailing. We have 400 years of reliable data on sunspot activity. The most famous minimum, the Maunder Minimum from about 1645-1715, coincides with the most severe weather Europe suffered during the Little Ice Age. Agriculture went for s___ during that time as the weather was completely erratic and unpredictable.
As a matter of interest, variation in sunspot activity is pretty much perfectly correlated with variations in Earth's weather. There is no correlation between CO2 levels and weather, except that CO2 levels increase about 800 years after a warm spell (probably due to the long timeframe of the oceans' carbon cycle). Incidentally, the Medieval Warm Period ended about 800 years ago, which may account for recently observed increases in atmospheric CO2.
When the sun is more active (i.e. more sunspots) the Earth is warmer and our climate more benign. When sunspot activity declines the planet gets cloudier and cooler and the weather gets more extreme. Anybody who thinks 'global warming' is a bad thing should read a little bit of geological history.
1. Only 15% of arable land in Africa has been utilized, and the breadbasket of Russia is massively underperforming;
2. Hydroponics can produce 2-20X yield using only 5-10% of the water;
3. All the energy required to power the US can be generated in a 100 x 100 mile patch of Nevada (adios, ethanol);
4. Americans eat more than 2X the amount of food on average as required for adequate health;
5. Milk is at a lower price now than 50 years ago, and some farmers are slaughtering their cows and pouring milk on the ground;
6. The cost of grain in a $3 box of cereal is about $.15.
7. Increasing CO2 has the effect of fertilizing corn and other plants.
I won't deny that agricultural output must grow with population growth and as hundreds of millions rise above poverty levels, and that profits could rise, but given the facts above, I really don't see the word "crisis" applying to this situation, unless you consider strong growth and earnings in an industry a "crisis".
So, although I'm bullish on soft & hard commodities, I don't think all the doomsday predictions are even within reason.
Check the cooler coming weather here:
www.minnpost.com/daved...
> 4. Americans eat more than 2X the amount of food on average as required.
The 'normal' civilized Western society human being eats already about 3-4 times as many calories (and drinks way too much, too)as would be required - most of that is due to way way too high intakes of meat. So for an average American the figure easily comes to 6-8 times. You can easily live from 800-100 calories a day - privided you eat the right food (natural, as little processed as possible, no meat) along with an overall healthy way of life. The 'civilized' mankind is moving farther away from that every day.
On May 26 11:52 PM Dirk McCoy wrote:
> Here are a few things I've read, feel free to correct me:
>
> 1. Only 15% of arable land in Africa has been utilized, and the breadbasket
> of Russia is massively underperforming;
> 2. Hydroponics can produce 2-20X yield using only 5-10% of the water;
>
> 3. All the energy required to power the US can be generated in a
> 100 x 100 mile patch of Nevada (adios, ethanol);
> 4. Americans eat more than 2X the amount of food on average as required
> for adequate health;
> 5. Milk is at a lower price now than 50 years ago, and some farmers
> are slaughtering their cows and pouring milk on the ground;
> 6. The cost of grain in a $3 box of cereal is about $.15.
> 7. Increasing CO2 has the effect of fertilizing corn and other plants.
>
>
> I won't deny that agricultural output must grow with population growth
> and as hundreds of millions rise above poverty levels, and that profits
> could rise, but given the facts above, I really don't see the word
> "crisis" applying to this situation, unless you consider strong growth
> and earnings in an industry a "crisis".
On May 27 04:25 AM User 305589 wrote:
> Yes, iwant to correct at least one item:
On May 26 10:34 PM derryl wrote:
> przem23:
> Sunspot minimums are the problem. Sunspot maximums are clear sailing.
> We have 400 years of reliable data on sunspot activity. The most
> famous minimum, the Maunder Minimum from about 1645-1715, coincides
> with the most severe weather Europe suffered during the Little Ice
> Age. Agriculture went for s___ during that time as the weather was
> completely erratic and unpredictable.
>
> As a matter of interest, variation in sunspot activity is pretty
> much perfectly correlated with variations in Earth's weather. There
> is no correlation between CO2 levels and weather, except that CO2
> levels increase about 800 years after a warm spell (probably due
> to the long timeframe of the oceans' carbon cycle). Incidentally,
> the Medieval Warm Period ended about 800 years ago, which may account
> for recently observed increases in atmospheric CO2.
>
> When the sun is more active (i.e. more sunspots) the Earth is warmer
> and our climate more benign. When sunspot activity declines the planet
> gets cloudier and cooler and the weather gets more extreme. Anybody
> who thinks 'global warming' is a bad thing should read a little bit
> of geological history.
and quietly booking profits in DBA, ADM, and Bunge.
There may be even more of a crisis developing in wheat than in corn. Across the northern plains, the weather has been too cold and wet for many farmers to plant. Also, the credit crunch has inspired others not to plant. Meanwhile, across the middle east and into central asia a new variety of plague, yellow stem rust, named Ug99, is devastating whole fields.
Its not pretty... while I am making money,
I know that there will be many, many people starving to death later on this year ...