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.
OSU...Oregon State?
Ed
i know huge tracts of California farmland are out of production because of the court decision to reduce available water for irrigation to protect that fish.
YOU HAVE
ADDED
Ed, you may have been added last year and some on that list may have been lost due to a computer problem. I was keeping a duplicate copy on my own and I am sure I missed some of the additions that were made by the orginal owner of the list.
Ohio
So climate change has brought us to peak oil, peak soil and now peak sun — mounting despair, so many hobgoblins to fight, so little time...
I used to help tear down older homes and had a large trailer that had a genset on it with 2 planers on it. Used to rough cut the scavenged wood check it with a metal detector, run it through the planer and stack it on the open part of the trailer. Did this for about a year and stored the wood on good pallets in the barn .
Built my house with it.......:o)
Lots to salvage from an old home being torn down. We used older cast iron sinks and and bath tubs , had em acid etched, cleaned and enameled again. new hard ware or restore the old even. Oak floors in the home are from an old roller rink. Bought part of that at auction and with the same planers and joiners we covered almost 1200 sq ft of the homes floors with it.
Working a deal to trade a friend who owns a line x bedliner business . I have found some cheaper metal roofing and it is not color or long term guaranteed etc like better stuff so I told him I’d trade him a some EBR’s and some fodder for em if he would line x coat all the metal and trim after I cut and fit it and transported it to him. A line x coated metal roof in hail country is best one can get per my observations.
Line x coated my old toyota 4x4 after fixing the last hail storms damage that had super sized baseball hail stones and that was 4 seasons ago and many hail storms later. Tennis ball size hail cracked the windows on it last year but didn’t ding the body at all......
I use that truck for work from April till July 1st when our worst of the worst is pretty much over.
Lots of farmers , 4x4 owners with work and play vehicles and folks fed up with hail damage are getting the line x paint jobs according to my buddy. There was even a older BMW in his shop getting a light grey line body coating.
I’m reading up on Line X now. I didn’t know about it, but we’ve been thinking about getting SP’s truck bed lined with “something”. There’s a plastic liner in it now, and it’s definitely tough stuff... but junk gets behind it and I’ve been taking it out twice a year to clean. Thanks for letting me know about this! :-) ...and you say you’re basically going to end up with a Line X tin roof?! Sheesh! That should stop a LOT of stuff from coming through the roof!
Thanks for the pings. :’)
I’m going nuts about gardening, but probably not in the same way as most of your customers. I’ve had a big garden every year since I was 12, and for 2 years now I’ve been too sick to plant. I even have 5 acres waiting for me now!
Talked my dad into letting me start a container garden in this big ugly gravel patch that’s in front of the house. Even on a bad day I can crawl that far. And once in a while mom and I go out to the land and do something. Last weekend we planted some mint, and marked a few of the trees I’d planted just after buying the land, the were so short they get lost in the weeds.
I was hoping to have my house built and my garden and orchard set up by now, but this year I’m just trying to survive.
It stinks though, gardening is in my blood, and this year when it could count the most I can barely walk.
I know, Sweetie. I’ve had seasons like that, too. Either a sick kid, or my back was in terrible shape, or like now when I have to work full-time, etc.
Do what you can to keep yourself healthy and eventually things will fall back into line.
I REALLY miss my garden (I logged 98 hours last paycheck at work!) but Husband has everything ready for me to plant when I can. It’s going to be a late garden this year, but that’s OK, too. The plants are getting good care and nutrition in the greenhouse...just a few more days for them to wait.
I was going to work on it today, but it’s too wet. Grrrrr!
I just came back from a mini-vacation in Wisconsin the last 5 days, and let me tell you ..... I didn’t see very many farms along I-90, I-94 or I-43 planted yet. That’s not a good sign.
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