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.
First, there are far too many johnny-come-lately speculators, hedge funds and other assorted riff-raff that wouldn’t know sweet corn from dent corn playing in ag futures markets now. There’s far too many commentators constantly spouting off about ag policy, trade policy, farming practices, tax issues, etc.
For reasons completely beyond their control, farmers are now “fashionable” — and I don’t mean that everyone wants to be a farmer (been there, done that, would do it again in a heartbeat - but it is damn hard work). I mean that everyone thinks that because they have a gastrointestinal tract with an opening on one end into which they stuff food, and out the other end there comes fertilizer, that they have some claim to a valid opinion on ag.
They don’t. Many of these financial analysts making commentary on the ag markets in fact know very little about farming, or the macro farm economy. For example, they keep missing the issues about fertilizer. Fertilizer costs have gone through the roof. Well, there comes a point where a farmer knows that additional fertilizer results in very marginal yield gains - there’s very, very few plants that exhibit anything like a non-diminishing linear response to the addition of fertilizer (orchardgrass is one of them). Some of these commentators think that because ag prices are up that farmers are just going to buy fertilizer with both hands. Not entirely so. They will become much smarter about what fertilizer they use, when and how they apply it.
These analysts also like to overlook the issues of basis, which change rapidly when fuel prices go up. We all know that prices of fuels are going to resume their prior levels when the economy picks up - but farmers got to see really up-close-n-personal what their basis was going to look like in the future in 2006 through early 2008. And that is going to start shifting some acreage around too.
Net:net — I think that if we start seeing the dollar devalue and/or inflation picking up that buying into commodities is a reasonably smart move. But commodities are NOT stocks. The price history chart of commodities does NOT look like a stock of a successful large company, where there is a long-term up-trend. Adjusted for inflation, corn STILL hasn’t regained the price high it made in August of 1973. So while it was an OK hedge for inflation in the 70’s, it fell apart as an ‘investment’ in the 80’s. Same sort of deal as gold. People will have to know that there’s a time to get into ag commodities, and a time to get out - same as for all commodities. The price changes want to revert to a long-term mean.
Too many people think that buying some commodity position (whether through futures or a commodity ETF) is “investing in commodities.” It isn’t. “Investing” in ag commodities would require that you buy a farm and start producing them. Most of the public should know that all they can do is trade around price movements of commodities - and that means that when you have a profit in your position, and you got lucky or good on calling the price trend for that season, you SELL. You don’t get pleased with yourself and just look at it on the screen. You TAKE YOUR PROFITS AND RUN.
No knee high by the 4th of July this year? :(
Just kidding.
That 3 crop gardening came from the Indians, not sure which tribe but the technique is very old.
I have noted a lot of the lawn seed guys around here* are working wheat into their rotation.
Probably a reflection of the housing industry.
*Yamhill Co, Oregon
Maybe thats where I messed up, I didn’t plant the corn in hills. I planted it in rows with a bean plant next to it and my squash in between the rows. How big are your hills to hold 6 corn plus beans and squash?
Traditionally the Cornbelt standard has been to get corn planted by the 4th of July. Production is reduced, but you still get a viable crop. With modern “franken corn” they can probably still get 1.5 corn crops in ~ with the second half consisting of stalks cut for silage.
Yeah, it's like that in Indiana, too. I don't really remember when they get planted, though. I saw a lot of planting going on over the weekend. All I know is that it's got to be "knee high by the fourth of July."
The Three Sisters technique was developed through recourse to the competitive market place. Indians who used it survived more often than those who didn’t, and had more children in the long run.
Knee High was a really old standard no longer applicable. Modern franken corn simply needs to be planted by that date. However, work proceeds apace on development of varieties that can grow in Canada.
Yes, Oregon is one of the largest grass seed (for both lawns and forage grasses) producing areas of the US. Huge seed farms up there. I saw one grass seed outfit up there that owned 58 (!) combines, all nearly new. Figure for every four combines you see, that’s about $1 mil in new iron cost.
The farmer behind my property that has several hundred acres hasn’t even plowed yet due to extreme wet weather. I got my stuff in but is was a struggle with the wet ground. Gas went up 30 cents a gallon today. It gets worse every day.
Self Reliant/Survivalist ping list
Every cloud has its silver lining. If planting is delayed beyond June 1, acreage will start to shift from corn to soybeans. Dealers who bid up the price of N trying to corner their regional market will be hurtin’ buckaroos.
Don’t know about y’all, but the weather here has been weirder than usual. Good article, good comments on both sides of the argument.
I think I have the answer. (Tongue in cheek, here-big time!) At least the one a customer gave me the other day!
Little background—last weekend we had a nor’easter rip through here. Three solid days of north wind at a solid 20, gusting to 30, with temps in the mid to low 40’s. Everything in my garden—in the county—is windburned. It looks like some really aggressive blight. Cold weather=no blight. Hot humid conditions=blight.
If I had a nickel for every customer who’s come in and asked about it, I wouldn’t have to worry about winning the lottery. Anyway, one guy didn’t come in, he called. I’ve talked myself hoarse explaining to people that there’s nothing they can do about the burnt leaves and as long as the bud and interior leaves are still green, it’s nothing to worry about. This guy called, asked me what was wrong with his plants. After I told him what we’d told everyone else, he proceeded to tell me that the damage was caused by global (his spelling, not mine) warming. Not only that, the ozone was swiss cheese and the sun shone more in some spots every day than it did in others and his plants had gotten too much sun.
I had to be polite and listen to his spiel while I had all these customers waiting. I just wanted to tell him, “That’s why we were freezing our asses off at the end of May, and why we didn’t see the sun for almost a week.” Shaking head.
Back to “normal” now. High 80’s today and so muggy it feels like a hurricane is about to hit.
Good news—we ate the first peas and potatoes out of the garden tonight. We have little zukes and squash that will be ready next week. Green beans are sending up tendrils and starting to bloom. Small green tomatoes.
Y’all have a great day!
Actually, this is the year he plants soybeans.
Please add me too.
First time gardener. I’m giving it my all :)
Cabbages? You ARE panicking, LOL!
I planted a few, but red ones ‘cuz they’re pretty. :)
Thank you for the ping :)
Thank you for posting that.
This has nothing to do with crops, but today we visited our library only to see they had removed a lovely salt water fish tank, had reduced their hours, and are now closed on Sundays. I’m not sure why, but that scares me. I’ll probably be scared for another couple of hours and then jump back into my prepping. :o)
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