John Hussman on Speculative Hoarding in Agricultural Commodities

Includes: DIA, SPY
by: John Hussman

Excerpt from the Hussman Funds' Weekly Market Comment (4/28/08):

 As for agricultural commodities, what we are observing is probably not a Malthusian breakpoint, but what I'd call “speculative hoarding.” Essentially, as the prices of commodities rise, particularly in developing nations, there is a tendency to save in the form of real goods. We've observed this historically in various countries as hoarding of every form of physical output, even spoons and other household items.

    Supporting that thesis of speculative hoarding, it's interesting that on Wednesday, a news piece came out on Bloomberg noting “Wal-Mart Stores Inc's Sam's Club warehouse unit is restricting the purchase of some rice to four bags a visit because of ‘recent supply and demand trends.' Some consumers have started hoarding rice, the food staple for half the world, as supplies shrink. Some of Costco Wholesale Corp's stores, including locations in California, have put limits on sales of rice and flour, Chief Executive Officer James Sinegal told Reuters yesterday.”

    In effect, we are observing a version of tulip-mania with foodstuffs. I would expect that prices will reach a speculative peak, probably within a few months, and then most probably plummet with very little in the way of relief rallies. That is a fairly predictable dynamic once commodity price movements reach the parabolic stage that they have entered lately...

    Biofuels don't help, but biofuels are the result of high oil prices, which are the result of poor incentives to bring oil up (both because of low yielding U.S. assets and political resentment over U.S. foreign policy). As the Buddha said, this is because that is; this is not, because that is not. In any event, commodity prices reflect immediate supply and demand pressures, but are not an indication that the world as we know it has fundamentally and permanently changed. Future commodity price levels might certainly be different, on average, in the future than they were in the past, but we should not jump to the conclusion that the long-term boom-bust dynamics of commodities have vanished as a result.

    In case we need a red herring to suggest that the end is nigh, last week saw the debut of a little Denver fertilizer company, which promptly jumped 58% above its IPO price on its first day of trading. The company: Intrepid Potash (NYSE:IPI). Hand in hand with the surge in grain prices has been a surge in the price of this fertilizer (basically water-soluble potassium), and the frenzy for potash has increased in step with the speculative hoarding of foodstuffs. Clearly the company is a direct “play” on potash prices. But this is interesting – according to the company's own prospectus, “ Fertecon Limited, a fertilizer industry consultant, expects global potash fertilizer consumption to grow 3.7% annually from 2007 to 2011.” On that growth rate, and on the basis of elevated earnings due to high potash prices, the companies in this group are selling at P/E multiples of 40-60.