Global Food Index: Food and Ag Outlook

As of April 2009, the Food and Agriculture Organization food price index had risen for the third consecutive month. The composite index, comprised of the weighted index values for 55 commodities, has come off significantly since this time of last year and is now roughly in the same territory as it was back in mid 2007. So at this juncture in 2009, do we anticipate a further decline or is this just a resting point before another spike?

The road ahead is somewhat more complex than it might appear upon first glance of the fundamentals at the primary origins. The Economist reports that world food prices are now 2.2% lower than the start of 2008, driven largely by a decrease in the price of wheat. The May USDA World Agricultural Production report is estimating global 2009/10 corn and soybean plantings and production to be equal to or greater than 2008/09, while they expect wheat to exhibit a decrease. With wheat and soybean reductions due to poor weather in Argentina now well documented and priced into the market, and a favorable outlook for Ukraine/FSU production, it would appear that the trend downward could be extended.

However, projected 2009/10 US stocks of coarse grains, wheat, and total grains are all expected to be lower than the 2008/09 crop year. Weather triggered planting delays in the eastern corn belt and northern Plains, and a potential shift in the planted acreage mix (replanted corn, shifting to soy, etc.) could exacerbate this situation a little more before midsummer. Further, the Weather Trends precipitation outlook for the coming year is not extremely favorable in many of the world’s primary growing origins, so stresses to global stocks for primary grains could increase in the coming months.

Even with reduced global economic activity, people still need to eat; in fact, the economic situation amplifies stress on the supply side of the grains complex as meat and livestock consumption may be curtailed in favor of grains and cereals.

I am not a believer that a quick economic recovery is in the works. Further, while I do not support the view that the next 12 months in the agricultural futures markets will resemble the behavior of the previous year, I remain cautiously optimistic regarding the upside potential of these indices, and their underlying futures, for the months ahead.

Comments

[mbkelly75:]

I also do not believe a quick recovery is possible as too many things seem to have been done that have a good percentage of working out badly. I expect darn near all commodity prices to head up and food is included in this expectation. Even a bull market in stocks will not fix the economy itself. I can see a great bull market run after another drop of 10%-30% sets it up while giving one more buying opportunity. However, that would only help to hide the problems that are built into the economy - not provide a lasting repair.

May 30 12:01 PM

[RiskReturnO...:]

DBA will benefit from five themes: 1) investment dollars seeking hedging for weak dollar / reflation trade; 2) increasing demand from China and India; 3) lower supply due to tight credit conditions in second half of 2008; 4) favorable weather conditions in US; 5) typical seasonal patterns -- strong performance in the Winter months in Argentina and Australia.

Technically, DBA is breaking out on high volume, and looks great until the mid 30's. For more conservative investors, consider selling out of money calls along the way, with strike prices +10% higher each month. Rolling over the covered calls each month will help achieve good premium income. If DBA gets called away after 10% pop in one month, consider that a good sell target for the short term.

May 30 12:33 PM

[Donald Ingram:]

As you say no matter what happens people still have to eat.
The future is agriculture and agribusiness. Anything to do with this field will make money. Especially those cutting edge bio-tech firms that specialize in GMF - genetically modified foods.
Oh, by the way, global food production this year is expected to decline between 20 and 40 percent due to wide spread and ongoing drought.

May 30 10:46 PM

[johnbee:]

A recent Economist Intelligence article was not bullish for the ag sector, as most stocks are plentiful, but they did not take into account buying ag as a hedge against currency devaluation.

Jun 01 06:27 AM