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.
I’m a consumer, not a grower. Here in north central WV we don’t grow corn on a large scale. However, I’ve not seen ANY fresh corn at either supermarkets (mainly Wally World around here) or at the tables of truck gardeners at the flea markets.
“Prices will be going up dramatically according to the author.”
Well, yes. They might when the entire economy goes to h3ll, which is the end game of 0bama and crew. If it’s a true Depression again, we’re all screwed, and while my gold will be through the roof, if there’s no food available, that’s not going to do me any good, is it?
However, while some City Folk WILL be having a devil of a time with that, I’m eternally grateful that I married into a Farm Family.
It’s amazing how long you can survive on gleanings from a field, a few boiled potatoes and whatever meat you shot that day. But then, I’m the Eternal Optimist. :)
People ARE freaking out. You wouldn’t believe the number of seed packets and veggie and herb plants I’ve sold this season at the garden center! Everyone and their brother is either learning how to garden for the first time, or greatly expanding their gardens this season. Cha-ching! :)
But our family? Nope. Dad’s planting the same 200 acres in corn and soybean again this year. The 700 acres around us are plowed and ready to be planted with Sweet Corn.
That’s my anecdotal evidence from where I sit. I’ve seen farms and farmers around here in much worse shape and in panic mode in the past; not currently. And the WEATHER is cooperating for once. No floods this Spring, as we’ve had for the past three.
I think my tagline says it all.
Would you also add me to your Weekly Gardening list, please?
Well, I have one sister living in Boerne and the other in the Helotes area. I also have a friend living just outside Loop 1604 near Blanco RD. They say the same thing about the water restrictions.
Here in the Austin area, there are signs posted on all the major roads that are in the Edwards Aquifer recharge zone. Of course, most of that is in the southern part of Austin and that is a liberal haven. It is also one of the areas that has the most trash along the roadside.
I think this is mostly broker speak/hard sell as it runs counter to this market report on Iowa Public TV, “Market to Market”: http://www.iptv.org/video/detail.cfm/3849/mtom_20090522_3438
Pick it up around the 20:00 mark for discussion of wheat, corn, and soybean markets. It starts around the 17:00 mark with a general economic discussion on oil, gold, and the dollar. This was the report that ran this past weekend.
Sounds like a worst case scenario to me but not too far fetched.
I would be glad to add you!
Another thing I am pondering for next year is leasing small garden plots on my property. We have lots of friends and co-workers who tell us that the only thing that is keeping them from gardening is their lack of space. I was figuring on 200 to 300 sqft plots with a nominal monthly charge for watering, and a percentage of the harvest. Got to think about it a little more.
Interesting. Pinging to read after my AG Lab and ask my teacher :D.
Jim Rogers/Asian Financial Forum (World Commodities fundamenals enhanced)
FReeper 'muawiyah' has been predicting drought caused world wide food shortages for some time now.
He has developed a predictive formula that is based on mail delivery patterns by the US postal service.
BTW, the latest edition of National Geographic has a section on the coming world wide food shortage, etc.
Ping
Hello. My name is Petronski and I'm freaking out about gardening.
Yesterday, I planted cabbages.
Great! Thank you!
It is truly amazing how much you can actually fit into a 200sqft space. That was the size of the veggie patch I had for years when we still lived in Delaware. We had more than enough for ourselves, my next door neighbors, and my SIL.
Because I'm doing most of the "tilling" by hand this year, I'm patchworking everything, except corn, into 6x6 blocks.
This is premised on garbage. There has been a paucity of sunspot activity over the past several months. If anything, this points to global cooling.
Can’t comment on the rest of it.
> 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.
Has anyone seen the increase in food prices?
Does anyone predict that they are going down?
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.
In fact, I’m long on your product for just that reason.
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