Posted on 04/20/2008 8:37:43 AM PDT by SeekAndFind
Many investors have become contrarians and are now apparently experts in being able to spot bubbles. Hence, they all are fully aware that a bubble exists in agricultural commodities at this juncture. Really, you can listen to just about any financial source and hear some commentator warning about the epic bubble that is evident in agricultural commodity prices. However, some of these same folks were completely blindsided by the collapse of the tech bubble in 2000. And they also were shocked that real estate prices could ever decline in value. Of course, this new class of maverick investor is also currently incapable of viewing the real bubble occurring in the Treasury market (it doesn't bother them that real yields on government debt are negative). The only thing they are sure of is that agricultural prices are poised to plummet.
This sophomoric conclusion focuses on just the increase in commodity prices, yet ignores some key factors that must be present for a bubble to exist. For an investment to reach bubble territory there must first be a dramatic increase in the quantity of the investment in question. Once demand contracts, an environment ensues where a massive oversupply imbalance in the investment out strips intrinsic demand by a great degree.
The two most recent actual bubbles offer great examples to this phenomenon. The tech bubble produced massive increases in stock issuance that exceeded the real demand for such equities, and the creation of new shares had a virtually unlimited supply constraint. Likewise, new home construction companies increased production rates to over 2mm units per annum, which grossly oversupplied the intrinsic demand of just 1.15mm units needed to house the growth in population. Once demand returned to historic levels, the excess inventories become a massive overhang on the market pushing prices down precipitously-an environment which persists today.
The question investors must ask themselves is whether a condition of oversupply now exists in agricultural commodities. In fact, the evidence shows just the opposite situation exists. If there was a bubble, the amount of land available for crop production would be expanding rapidly. In actuality, China has lost 6.6% of arable land in the past 10 years. Globally, we have less than half the amount of arable land per capita available for production since 1950. If crop prices were poised to fall, then inventories would be surging, yet we find that inventories for most crops are at or multi-decade lows while stock to-use ratios are also extremely thin. That hardly represents an environment where investors should fear pricing pressures.
The fact is that the food supply cannot be readily increased in short order, and the World Bank would is estimating that 33 countries face civil unrest and riots due to food emergencies. If the price and quantity of agricultural commodities could be easily manipulated, then we would not be seeing shortages breaking out on a global level. The truth is that the demand for these commodities is far more genuine then it was for house and stock flippers.
Although the world's productive agricultural capacity will one day catch up, land and infrastructure challenges around the globe will make it much more difficult for growers to increase the crop supply as easily as Wall Street was able to flood the market with new homes and equities.
On the demand side, we see that the Global need for food is projected to increase by 50% in the next 20 years. Outside of cutting subsidies for ethanol production, which seems highly unlikely, this projected future demand for food cannot be decreased substantially. Plus, there is no evidence that today's demand for food is artificial or temporal in nature, nor is there evidence that a major supply of crops is about to hit the market.
Ask the citizens of Egypt, Cameroon, Ivory Coast, Senegal and Ethiopia if their demand for food is real or speculative. Bottom line is people don't riot when all they want to do is speculate, they riot when they are hungry and cannot find or afford food to eat.
No, the increased demand for agricultural goods is real, as is the supply constraint facing the market. Investors may want to ignore the massive growth in earnings that are being reported by Monsanto (MON), Potash (POT), Mosaic (MOS) and others that service the agricultural industry.
But sorry, no bubbles will be found there.
Disclosure: Long
With more than 16 years of industry experience, Michael Pento serves as Senior Market Strategist for the California-based investment firm, Delta Global Advisors, an S.E.C.-registered investment advisor.
He is a well established specialist in the Austrian School of economic theory, and his commentaries are read on various forums across the Web. His steadfast advocacy of free markets has been broadcast on radio programs throughout the country, and he is a regular guest on CNBC and other national media outlets. Mr. Pento also helps develop investment products which are sold by major brokerage firms.
What’s your point?
Let's pretend the Green Revolution never happened, why don't we?
The outome of all of this will be that the large parts of the world that currently haughtily refuse genetically modified crops will have to change. Hardly a "crisis."
Choices to solve this “crisis” include:
1. mandatory roll out of genetically improved crops when seed is supplied to the third world when they request crop assistance
2. lifting of all import bans by all countries that ban GM crops
3. kill ethanol subsidies in US and start inconveniencing Alaskan caribou instead
4. Get rid of the tariff on Brazilian ethanol, so we can import cost effective stuff
5. Get rid of limits on working at home, when some municipalities ban you running a business out of a home “office” (more working at home, fewer drivers)
6. Plant a garden.
Good article. I own both some POT and MOS and I try to keep up with the fundamentals and technical analysis of both stocks. I don’t see any bubble, nor any decline in demand.
The Chinese situation is especially interesting. China faces not only serious agricultural problems but growing water shortages as well.
There is no major supply problem. The amount of wheat produced last year was about the same as the year before. Exports is up for all farm commodities because the USA has cheap food thanks to the cheap dollar.
1971-1975, 1977-1980 and the currently is a period of rapid commodities price growth. Supply wasn’t the issue back in the 70’s but devaluation of the dollar and inflation resulting from it.
The farmers of the 1970’s was told the exact same stuff that your article mentions. They was told to go ahead and expand because the demand for food was going up,up and up. When the Fed tightened money they soon found out that their crops and land wasn’t worth as much as they used to be worth.
Since most commodities Worldwide is priced directly or indirectly in dollars what happens when the value of a dollar changes. Lets say year 1 that a dollar is worth exactly one dollar. And in year 1 that X amount of corn sells for exactly $1. Year 2 the value of the dollar declines to 75 cents. Since the corn hasn’t declined in value then to make the same amount as they did in year 1 the traders value X amount of corn as $1.25
As long as the value of the dollar declines the people who believes in food shortages do alright but lets say year 3 the Fed really want to control inflation and the dollar rises to $1.25 in value. The price of X amount of corn will then be seventy five cents and those who don’t believe in a bubble is going to lose their shirts.
Knowing the history of bubbles one thing to know about bubbles is there is always experts and articles on how the current situation is different and is not a bubble.
3 years ago there was major surpluses of almost all crops and prices was low. The 8 years prior of 2007 was years of corn surpluses. There is certain localized supply problems such as a swine virus in China killing pigs or the rice crop failing in Vietnam or a deep freeze in April last year really hurt the fruit crops. I just don’t think there is a current major food or oil shortage.
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