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In addition to monetary inflation, which
I wrote about in part one of
this series, another well known-driver for the higher prices in agricultural
commodities has been the use of corn for the production of ethanol. That
increase in the intrinsic value of corn has translated into higher prices for
other agricultural commodities because
land replanted for the growing of maize means less available for the
production of wheat, soybeans, cotton, etc.
Much has been made recently of the
increased planting of the corn crop witnessed this year. However, even with
the increased production (13.3 billion bushels) demand has kept pace,
consuming nearly all the added supply (12.8 billion bushels), and future
demand for this commodity looks strong. Today 16% of the current corn crop is
used in the production of ethanol; in just two years it will consume 30%,
according to USDA estimates.
While the bio-fuel component of the
agricultural story has been well promulgated, it is only a part of the story.
Another reason for the bull market in agriculture is the growth of GDP on a
worldwide basis along with increases in population. Global population should
reach 7 billion by 2013 causing
demand for grain to increase by 40% by that time. Along with strong
population growth is the even more powerful phenomenon of a new middle class
being created in emerging economies at a record pace, spurring GDP rates that
are projected to rise at twice the historical average for the next ten years. Such wealth creation brings about a consumer who is
able to demand a healthier, higher-protein diet, which is straining
agricultural commodities producers who have to supply the livestock required
to meet that end demand for meat.
The result of these three new dynamics:
the conversion of bio-mass into bio-fuels, investment in agriculture as a
hedge against inflation and an expanding, more wealthy global population has
led to scarce supplies for soft commodities -- rendering stock-to-use-ratios
at record lows.
Wheat, for example, is at its lowest
inventory level since 1978 -- currently 112 million metric tons, down 46%
since 2000! And today's demand for wheat is running at 616 million metric
tons while production is estimated at just 606 metric tons for 2007; in fact,
demand has outstripped supply for the last 7 years. It's little wonder, then,
that prices have doubled in the last 6 months, albeit having been pressed
higher recently by weather.
Which leads to
what may be the most compelling evidence behind this agriculture story:
weather. Or the lack thereof.
Aside from wheat in recent weeks, as
mentioned above, this is perhaps the first time in modern history when the steady
rise in agricultural prices has not been due to weather -- a crop freeze,
drought, flood, etc. -- which is what has always been the driver of past
price spikes in soft commodities. No, this rise has been slow and steady, the result of all the demand-side pressures listed
above, which means agriculture may be in the early stages of a bull market
that ends up looking a lot like the ones other raw materials have witnessed
in recent years.
In crafting the Delta Global Agriculture UIT
portfolio on which we advise for Claymore
Securities, we came to a simple conclusion about how to best participate in a
bull market in agriculture: by owning the marginal producers at the source
and those companies most closely tied to them, like seed and ag chemical companies. Consumer food companies like
Kellogg's (NYSE Symbol: K) are not agriculture stocks, in our opinion, and
even the recent severe earnings warning from Tyson (NYSE Symbol: TSN) due to rising
feed costs suggests such companies may not quite be in the right place for
this trend.
The bullish macroeconomic environment
for agriculture is likely still in its early stages. Investors should take
heed of the positive changes occurring in this asset class and should look to
own specific types of agriculture companies should they decide to participate
in this trend.
Michael Pento
Senior Market Strategist
Delta Global Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA
92648 Phone:
800-485-1220 Fax: 800-485-1225
A 15-year industry veteran whose
career began as a trader on the floor of the New York Stock Exchange, Michael Pento recently served as a Vice President of Investments
for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk
Securities, where he focused on options management and advanced
yield-enhancing strategies to increase portfolio returns. He is also a published economic
theorist in the Austrian school of economic theory.
Information
contained herein is obtained from sources believed to be reliable, but its
accuracy cannot be guaranteed. It is not intended to constitute individual
investment advice and is not designed to meet your personal financial
situation. The opinions expressed herein are those of the author and are subject to change without notice.
The information herein may become outdated and there is no obligation to
update any such information. The author,
24hGold, entities in which they have an interest, family and associates may
from time to time have positions in the securities or commodities discussed.
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