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Posted on 05/26/2009 4:07:01 AM PDT by saganite
Saudi Arabia just announced it was shutting down half of its oil production.
It also says it will keep the capacity shut down for at least a year – maybe longer.
The move would wipe out about five percent of the world’s oil supply overnight.
What do you expect to happen?
It would be bedlam. Oil prices would skyrocket. The price would jump to $100 or more within minutes. Prices would spike even if demand continued to dip and oil stockpiles stayed high.
Gasoline prices would climb too. Every politician would vow to do something about it. Every major media news outlet would be all over the story.
Oil stocks would dominate the markets. Any investor holding shares of oil producers, oil service companies, or alternative energy companies would be banking some solid gains in no time.
Now, imagine if you were tipped off weeks before the announcement was made. You could load up on oil stocks and leverage up with call options and make a fortune.
Granted, the likelihood of this scenario playing out is pretty slim. The odds of you getting advanced notice are even slimmer.
So it’s pretty unrealistic, right?
Well, it is almost impossible when it comes to oil.
It is not unrealistic, however, in another commodity sector.
I’m talking about a commodity which is equally as important as oil. A commodity which has not been hit nearly as hard as almost every other one during this downturn. A commodity that is already in short supply. And one which will have a far greater run up this summer (and more profitable for investors) than oil probably will.
A Perfect Storm for Agriculture
The commodity is food. This summer has the potential to be a very big one for agriculture commodities. The price of everything – wheat, corn, barley, sunflower, etc. – are on the verge of going much, much higher.
We all know the long-term case for agriculture. The “Peak Soil” crisis is something we’ve followed closely in the Prosperity Dispatch for a long time. The combination of declining crop yields from overused soil and rising demand from a wealthier and growing population.
I don’t think I’m going out on a limb and saying the long-term outlook for agriculture commodities and stocks is outstanding.
Today though, I want to focus on the short-term prospects for agriculture. More specifically, how two big issues could launch agriculture commodity prices back to last year’s highs and beyond.
Just like every other commodity, agriculture commodity prices are driven by supply and demand. The catalysts for agriculture commodities in this summer rest on the supply side.
The first factor is grain stockpiles. They’re at record lows. Corn is the perfect example. Corn stockpiles in the U.S have currently fallen to a 33-day supply. That means if there was no corn production this year, the U.S. would be out of corn in a little over a month. This is the lowest on record since the old record of 34 days’ supply set in 2003.
It’s not just a problem in the U.S. though. The rest of the world is probably not going to make up for the shortfall. Allendale Inc, a commodities research firm, says:
“Equally alarming is the lack of help from major world suppliers such as China, Brazil, Argentina and South Africa. U.S. Department of Agriculture (USDA) projects the world end stocks [are at] 128 million tonnes, down 8.6% year on year. This would imply the world day’s supply of corn at 53 days, one day lower than the old record dating back to 1999.”
Sounds pretty bad right? Stockpiles are low and only another record-setting year of production will help ensure stockpiles remain at their current low levels. That’s where the second factor could create some real fireworks over the next few months in the agriculture sector.
Another bumper crop this year is highly unlikely. And it has nothing to do with farmers getting financing, fertilizer shortages, or anything which can be compensated for. The problem is completely out of the control of the agriculture industry.
The Sunspot Cycle
A few weeks ago we had the chance to sit down with John Embry, the chief investment strategist at Sprott Asset Management. Embry has been a commodities analyst and portfolio manager for decades and has done exceptionally well during this commodities boom.
In our conversation, Embry brought up a very important point about agriculture. He said:
I think the real arbiter in the short run might be the climate. I see a lot of industry people bringing this up, changing sunspots. These changes in the sunspots suggest that we may be facing drought conditions in a lot of the world all at the same time.
If that’s the case, I think you are going to see massive food shortages which would underrate a considerable price appreciation in the food because there will be a real fight for it.
So far the sunspot cycle has led to some extreme changes in the weather patterns in the world’s breadbasket regions. Some areas have been hit hard with droughts and others are too wet to plant.
For instance, due to excessive wet weather, corn plantings are way behind schedule in the Corn Belt. Illinois has only planted 14% of its expected total corn plantings and Indiana has only planted 11%. Normally, corn in these states is at least 80% planted by this time of year. May is almost over and time is running out.
The late plantings will have a few consequences. None of which are good for corn prices. Farmers in this region will choose to switch some of their fields soybeans. As for the corn planted now, it will produce lower yields.
That’s just the United States though. Another breadbasket country is experiencing far below average production this year.
The “Saudi Arabia of Soy”
Agriculture is one the leading industries in Argentina. It accounts for a large portion of agriculture commodities exported to the rest of the world. Argentina is responsible for producing 22% of the world’s soy and 13% of its sunflower supplies each year.
This year, due in large part to sun spots and associated drought conditions, Argentina’s agriculture production has drastically declined. Official estimates from the USDA on Argentina’s crop production continue to be lowered. As you can see in the table below, it’s shaping up to be a tough year:
All of Argentina’s key crops are expected to have an absolutely terrible year. The table shows Argentina’s production will decline 47.5% (wheat), 26% (soy), 34% (corn), and 46% (sunflower). Those are massive.
These aren’t rough estimates either. They’re based on the country’s production so far. Since Argentina is in the southern hemisphere its harvest season is ending while the northern hemisphere’s planting season is beginning so the data is based on what’s actually heading into the silos rather than what is expected five months from now.
The decline in Argentina’s soy crop is particularly dire for the world. Remember, Argentina is produces 22% of the world’s soy – it’s the Saudi Arabia of Soy. So a 26% decline in Argentina’s soy production equates to a 5.7% decline in the world’s soy supply (in oil equivalent terms – that’s the same as if Saudi Arabia cut its production in half). Still though, soybeans are only up 30% for the year.
Plenty of Room to Grow
The way things are shaping up, it’d tough to go wrong with anything agriculture at this point.
The long-term picture hasn’t changed much at all and is still as bright as ever. Agricultural commodities also offer some solid protection against inflation. And there’s no denying the world has hit Peak Soil. Now, the short-term is very attractive as well.
Normally, I don’t believe the best gains will be had in agricultural commodities over the long term. The upside just isn’t as high as it is with shares of fertilizer producers, farm equipment makers, and other stocks which run much farther when agriculture prices rise.
The Powershare DB Agriculture (DBA), a fund which tracks the prices of wheat, soy, corn, and sugar, has done well over the past few months. But its upside is somewhat limited. At just under $28 per share, a return to its highs would mean about a 50% move. Meanwhile, fertilizer and agriculture equipment stocks could double and still not reach their highs of last year.
Of course, the best asset of all in the agriculture sector is farmland. If you use a present value of future cash flow estimations, farmland offers some of the best leverage to any rise in agriculture prices. Also, since its farmland, it’s a pretty safe asset as well.
The agriculture re-boom appears to be coming and we’ll be looking at all sorts of ways to get in on it in the weeks ahead (including ways you can buy farmland without having to become a farmer). Stay tuned.
BINGO!!! Though the crappy part is....drilling infrastructure needs at the minimum....5 years.... yeah... well that sucks don’t it.... hmmm... who stopped ANWR? Wow...
“The article isn’t about the economics of farming - its about the end cost on the table - and that is going to go up and not return.”
Well, food costs have been steadily rising since I started eating solids at age two. So, where’s the crisis? ;)
A Hershey Bar was a NICKEL the year I was born. It’s now 79 cents. 74 cent increase over 50 years. That’s pretty darn amazing! could it be that manufacturers took the same ingredients (coca, sugar, lard, whatever) figured out how to buy them when they are LOW during the year, and still managed to turn out a profit?
Why wouldn’t today’s food producers/manufacturers do the same? Did you know there are DOZENS of recipes for an Oscar Mayer Weiner? Yep. A family friend was the Spice Buyer for Oscar Mayer for decades and there are different formulas based on which spices were low and high at any given time of the year, so they could still make the same product at the same price year-round, year after year. I’ve always found that fascinating, but I’m easily entertained, LOL!
In 1964 a McDonald’s basic hamburger cost 15 cents. We all know how successful that company has been. Heck, their dollar menu is amazing, and they still turn a profit after all these years, and have blanketed the globe with their stores.
But, Corn Flakes are an obvious rip-off. ALL processed cereals are; but you can still eat oatmeal for pennies per serving.
It’s all relative. Staples are still comparatively VERY cheap and if people would get off their lazy butts and cook from scratch, it would be crystal clear to them how much cash they p*ss away each month on food alone. :)
The shear WASTE of food in this country is maddening to me! I don’t think we’ll see people starving in the streets anytime soon, no matter who is manipulating the markets and no matter who is in the White House, and no matter who believes in sunspots or global warming or any of that other ‘research’ published in haste to garner more grant money. ;)
http://foodtimeline.org/foodfaq5.html
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It’s a hybrid from Gurney’s called Stonehead...supposed to store well. I am a big fan of sauerkraut and especially...especially!...slaw.
“three sisters garden”....that’s a neat idea....we have 14 acres of “lots” for sale behind us....bare ground waiting for homes....which I don’t think will be coming for years....soooo....I was thinking of using the lot right behind us....and you idea seems good, however, what about deer? Don’t they like all that stuff? I’m NOT putting any fences up. Thanks.
YEAH...re: food waste.....only when the FAST FOOD places shut down will we see people start starving...IMHO....and, I even get mad at myself at the food I waste....but, then, I mostly chop it up and use it as compost!!!
BTTT
That’s not good news about Argentina. We’ve put up a LOT of food...along with just a few others that we know. Between us all, we’ll eat pretty good, and have some left to share. But the masses who depend on grocery stores in town are going to suffer. What you pinged me to just heaps a little more onto the theory of everything going bad around Aug/Sep 09.
Are you referring to the Central Valley?
My small town has got the gardening bug bad. Our little local paper has a staff of 2 that are self reliant sorts. From time to time they print money saving ideas an one of late was landscaping to garden you can eat.
Many of my neighbors took em up on it. We have always done such as you know. Groomed well kept food gardens are just as good looking as a well manicured lawn and tastes much better.
Water well used IMO !!!
Yesterday I plowed and broke up a 45x25’ place for SP so she can plant blueberries! :-) We’ve still got about 12 more apple trees to plant.
Apple trees at the new place or current digs ?
My wife has five large planter beds behind our house chock full of decorative plants that the deer don't eat. Unfortunately, nobody told the deer.
In many cases, the deer don't eat it; they just bite it off and then spit it out. Apparently every deer in the county has to give it a try before deciding it isn't edible.
There is no way that we could plant something truly edible that isn't fenced off from the deer.
And the cold weather is with massive drought...
http://www.marketskeptics.com/2009/02/2009-global-food-catastrophe.html
“...but, then, I mostly chop it up and use it as compost!”
Same here, except the chickens get any and all veggie scraps and the few leftovers that don’t go on the dogs’ dinner.
I’m a great Brown Bagger, so leftovers are usually lunch the next day for Husband and/or I.
I’m on a current kick to use up everything in the pantry and freezer and only buy the very basics each week (milk, fresh veggies until the garden pops, pasta, rice, etc.)
Yes, I can make my own pasta...time constraints these days, though.
“...only when the FAST FOOD places shut down will we see people start starving...”
And when they stop NASCAR races due to fuel rationing, or the EnviroWeenies finally guilt them into it, even THEN I won’t believe that ‘global warming’ is anything more than a cash cow scam for Government.
Last week I was PRAYING for Global warming ... we had three consecutive nights with freeze warnings. SouthWest Ohio, official frost free date is May 11th. 7 Days later we are in the 80’s and I am doing my nekkid rain dance. I Throw my hat out into the middle of the lawn, get “nakey” and dance/pray for rain. (Maybe I’m confused with the hair dance ... need that as well.) “Wonka, tonka, I’m in pain .... gotta have water, gotzta have rain”
Ended up with chiggers.
Sorry .. I know you all needed to know that.
Frustrated gardener ...just once, I would love to have weather cooperate totally. I thought that that was supposed to happen with democrats in power .. they claim they have the answer to everything. But there answer is always .... See .. it’s dubya’s fault, he caused it. He brought me crabgrass as well. (dripping sarcasm)
I feel better now. thank you.
Can you add me, too?
I thought I was added earlier, but haven’t seen any posts, so I mustn’t be...
I’m loving my garden in Southern Oregon...the sugar peas and shelling peas are delicious, the Swiss chard is fantastic, the lettuce abundant, and my maters are all blossoming.
Ed
Hey, Concho, you live in Central Kansas?
I used to live in Larned, and worked in Liberal and Garden City.
I miss the people of Larned, and miss Hutch, Great Bend and the wonderful plains, where you can see silos twenty miles away!
I don’t miss the constant wind, nor the awful humidity...
Ed
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