Another problem is that much of the of the most productive farm land (around Taylor, Hutto, Elgin, etc.) is now covered with homes. Subdivisions are going up everywhere within the 50 miles east of Austin.
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.
The planting season in Illinois and Indiana is even further behind than Ohio according to the charts there. However, Iowa is right on schedule with their planting and I believe they plant more corn than anybody.
“What say you? Fear mongering or not?”
Every chance they get! I thought we would be out of food by now, because LAST season everyone was planting field corn for bio-fuels. Has anyone missed a meal around here? Nope. Has anyone made a huge killing on their corn crops? Nope. Same old, same old. Everyone squeaks by to do it all over again the next season.
*Rolleyes*
“The farmer is the only man in our economy who buys everything at retail, sells everything at wholesale, and pays the freight both ways.” ~ John f. Kennedy
I bought Sweet Corn seed this past winter. Thought I’d plant it in the spring around a few of the home garden beds. I haven’t planted it yet as it says soil temps need to be above 70F. Sort of had decided not to plant it. Now, reading this article etc., I guess I’ll go ahead and add a few rows behind the garden beds. Was going to do it for fun, but maybe now for real harvest corn.
Not sure but worth keeping an eye on.
—and having spent April in Grant County, I still see no evidence that the corn rowing industry is switching to either ethanol or Bio-willy for planting , cultivating or harvesting-—
-—aaargh—”rowing”=”growing”—
A PING worth having, please add, and thanks.
As far as the planting progress, here in northern Indiana it is all true. I have never seen it as wet as it has been this year. Normally the ground is saturated after the frost comes out in the spring, and it is really soft. This year the ground was that soft in May!! Our neighbor farms 2000 acres, and very little corn was planted as of 10 days ago. The rule of thumb is that planting after May 15 causes yields to drop for each day of delay. We have had a good 10 days, so planned corn plantings will not be switched to beans except for heavier ground (like muck). Bean planting is in full swing now, even before the corn planting is finished...
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The question isn’t whether we run out of food or miss a meal. The question is how much will it cost and that’s the thrust of the article. Prices will be going up dramatically according to the author.
You have bee added.
Old data. Most of the corn is in now, at least in my part of Ohio. Many farmers have the beans in now, too.
The last week of pleasant weather has been very good to us.
Central Kansas is just now able to get in the fields because of wet and cold. Some of the guys are still trying to get in corn while others have gone to beans. Two things control the planting, one is dry enough to get in the field, and second is soil temperature. As long as the soil temp is too cold, the seed will just rot in the ground instead of germinating anyway.
How does the delayed planting affect the harvest? According to the USDA website the 5 year average for planting corn in Ohio is 82% in the ground by May 17 and 39% was in the ground at that time this year.
It translates into reduced yields.
I thought so and the article makes that point. If crops are going in later than expected yields will be down and prices will be up. Still, the author’s examples look cherry picked to me. I looked at Iowa’s planting schedule and they are right in line with their 5 year trend.
Many analysts have predicted food shortages and skyrocketing prices by 2012. Jim Rogers has given many lectures on this.
Climate change (cooling of the earth) seems more and more likely to be occurring as part of the phenomenon of solar minimum or maybe even maunder minimum - the consequences and preparations are being willfully ignored by governments because they are wedded to PC global warming policies as a cover for revenue raising and population control.
Actually it doesnt matter what we produce, whether it is good or not good crops, supply and price is going to be manipulated by the speculators and the grain giants. You are going to pay or not eat whatever makes Cargill or ADM the largest profits, whether the farmer makes a nickel or not. It is as simple as that.
Another problem is that much of the of the most productive farm land (around Taylor, Hutto, Elgin, etc.) is now covered with homes. Subdivisions are going up everywhere within the 50 miles east of Austin.
My wife and I were living just a few miles west of the San Antonio city line in 2006. Water use restrictions were the norm. Evey time it rained was a news event and the aquifers were monitored every day on TV and the news paper.
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