VIEWPOINTS OF A COMMODITY TRADER

I have written a number of times about the opportunity for investment in the agricultural sector of the commodities markets, if one has patience for a long term investment. I think it is postured to compete with any other asset class for risk adjusted returns over the next several years.

Global governments have gathered debt so massive that there is now concern whether it can be paid back at all without major disruptions for these countries, the U.S. included.  It’s easy to imagine that the value of currencies will be inflated down so dramatically that it presents a major opportunity for owning REAL THINGS that will become more valuable over time.

We have arable land issues and poor water conditions for growing, potential inflationary pressures and potential shortages that could fuel higher prices for quite some time to come. Of all the commodities that I can think of nothing is more valuable than food, especially in an inflationary environment, and particularly if there are demand driven shortages.

In a previous “Viewpoints” post, the foods were drifting in consolidation but lately prices are beginning to confirm the fundamental backdrop. Since the summer corn has appreciated by 47%, soybeans 30% and wheat 43%. There have also been major rallies in cotton and sugar.

I was reading an interesting article at DailyWealth.com on the subject and thought I would share some of the more salient points.

“In 2009, U.S. farmers grew 39% of the world’s corn – 307.4 million metric tons. The crop was worth $48 billion. Our corn exports totaled $8.7 billion. Here are some of the interesting excerpts.

“Most harvested corn in the U.S. is used to feed livestock – 43% of 2009 production. Almost as much (41%) was used for food, consumer, and industrial products (toothpaste, adhesives, cosmetics, starches, sweeteners, oils, beverages, industrial alcohol, fuel ethanol, etc.). The remainder was exported. The U.S. sent most of its corn to Japan, Mexico, and South Korea.”

“The second-largest corn grower, China, produced 165.9 million metric tons, or half the U.S. production. The European Union was a distant third, harvesting 62.7 million metric tons. Brazil checked in fourth, at 51 million metric tons.”

“In 2009, a severe drought in China killed millions of bushels of corn. Stockpiles dwindled to alarming levels as the government sold corn to keep the price from rocketing higher. Into 2010, the situation hasn’t improved. The Chinese have become net importers of corn for the first time in 16 years. Experts predict China will require 6 million to 8 million metric tons of corn this year.”

“The Chinese corn crunch reminds the world of the food shortages of 2006-2008. Average global prices for wheat, corn, and soybeans spiked more than 100%. Rice prices surged more than 200%.”

This chart of the Power Shares Agriculture Fund (DBA) shows the sharp rise in agricultural commodity prices from 2007 to 2008…

“This price rise resulted from changing diets in developing countries and the U.S.’s move to use corn as a fuel source (ethanol). From 2006 to 2008, total global grain consumption increased 3% per year, up from 2% per year from 2000 to 2006. People were eating more meat. You need seven pounds of feed grain to produce one pound of beef.”

“Increasing affluence leads to a desire for greater luxury in everything, including food. Developing and developed countries are now competing for what they want to eat. And that means prices are going up again. ”

“The U.S. produced $31 billion worth of soybeans in 2009. It’s our largest agricultural export. Total exports in 2009 exceeded $16 billion, setting a record.”

“The U.S. produced almost one-third of the world’s soybeans in 2009 (91.4 million metric tons). Brazil and Argentina combined for 50% more of the globe’s production. China produced 7%, and India produced 4%.”

“Soybeans are also used for animal feed. They have twice as much protein content as any other major vegetable or grain. Their protein also makes up many common meat and dairy substitutes, including soymilk and tofu. Soybean oil is used for food and industrial applications.”

“China has overtaken the U.S. as the leader consuming 45 million metric tons of soybeans compared with the U.S.’s 51 million metric tons. Last year, China consumed at least 60 million metric tons. The U.S. consumed less than 50 million metric tons.”

“Unfortunately for China, its domestic production can’t begin to satisfy its growing soybean consumption. In 2009, the Chinese imported more than 45 million metric tons of soybeans. Almost half came from the United States. Chinese producers harvested a little more than 15 million metric tons on their own.”

“The China National Grain and Oils Information Center is projecting total Chinese imports for 2010 will total 60 million metric tons. That would be a 33% increase over 2009. The U.S. will likely supply half of this. This demand is already driving soybean prices back toward their record 2008 levels of $16 per bushel…”

“The combination of increasing global demand coupled with the Fed’s quantitative easing makes a huge move higher in these commodities (and funds like the DBA) likely. Prices could soar high enough to trigger a global crisis.”

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Filed under: Food For Thought by Charles Maley