United Nation’s Food Report
- Last month the UN’s Food and Agriculture Organization’s twice yearly Food 
Outlook report noted that food prices are rising rapidly putting the world ‘dangerously close’ to a new food crisis. The report also predicted higher prices next year, and noted the need for farmers to ‘expand substantially’ their production, particularly for corn and wheat.
Global cereal inventories are forecast to decline sharply according to the report. World cereals stocks are anticipated to shrink by seven percent with barley plunging 35 percent, corn 12 percent and wheat 10 percent. Only rice reserves are foreseen to increase, by six percent according to the report.
Meanwhile rising food prices led the Chinese government last month to announce that it would take forceful measures to limit price increases for a wide range of foodstuffs and cotton, and that it would distribute additional supplies of fuel. (Chart at right courtesy Financial Times)
Rising prices for food and energy are a global problem. But the UN noted they particularly affect lower-income countries where these necessities claim a much larger share of household incomes. The consumer price index in China assumes that food represents a third of a family’s spending. Price controls are one option for governments, but tend to produce shortages.
USDA Farm Income Report
- The USDA announced at month end that net farm income in the U.S. was expected to increase by 31 percent in 2010 to .6 billion, 26 percent higher than the 10-year average for the 2000-2009 period. Net cash income would be a record, 2.3 percent above the prior record attained in 2008. Chart at right courtesy USDA.
The net value added by agriculture to the U.S. economy in inflation-adjusted terms reached its highest levels since the mid- 1970s in 2004 and 2008. Inflation-adjusted net cash income is once again approaching levels not seen since the mid-1970s. The mid-1970s was the last comparable period when U.S. farming enjoyed multiple years of sustained levels of high output and income. All these trends are positive for the farm sector.
Russian Grain Requirements
- Russia moved a step closer to importing grain last month as Vladimir Putin said they may try to import grains to keep domestic prices low. In 2009 Russia was the world’s third biggest wheat exporter. One third of Russia’s grain crop was destroyed this summer in the worst drought in 50 years. Spring wheat plantings will likely result in a disappointing crop according to analysts as planted acreage is down 10 to 15% from last year and the drought persists. If the Russian import scenario occurs we can expect higher prices globally in the grain sector. Russia has not imported significant amounts of grain since the 1990’s.
Basic Points Report
- Don Coxe in his latest (October) Basic Points report reaches the following conclusions with regard to the agricultural commodities:
We have entered the second global food crisis in four years, despite annual gains in grain output. The ineluctable arithmetic of protein conversion from grain to meat—seven for beef, six for milk, five for pork, three for chicken—means that the richer the Asian become, the greater the demand for vegetable protein. Meanwhile, gasoline consumes one-third of US corn, and biodiesel consumes important quantities of palm oil and soybean oil. The arithmetic is daunting: in the past decade, hectares under cultivation have grown less than half as fast as demand for grain. The great agribusiness companies are global treasures.
Summing up: what is in short supply, and cannot be synthesized, and is absolutely necessary for economic progress, is a great place for investment capital. After the Crash, we were told that “The Commodity Boom” was just the latest bust and there wouldn’t be another commodity rally for at least a decade. The CRB Futures Index is back to where it was in 2007. The S&P isn’t—and won’t be for a long time.
“When we have the first serious crop failure, which will happen,” says Coxe, “we will then have a full-blown food crisis” – one far worse than 2008. Coxe has studied the sector for more than 35 years as a strategist for BMO Financial Group. “We’ve got a situation where there has been no incentive to allocate significant new capital to agriculture or to develop new technologies to dramatically expand crop output.”
“We’ve got complacency,” he sums up. “So for those reasons, I believe the next food crisis – when it comes – will be a bigger shock than 0 oil.”
Macintosh Report
- John Macintosh has been trading grains for 30 years and writes a periodic report on the sector. His take on recent USDA reports and global trends is that China will have to import a massive amount of grain to make up for poor weather conditions and a poor harvest, and that the US corn crop yields are much lower than being reflected in current USDA reports. He sees corn yields falling to 150 bushels per acre in the USDA reports, down from 154.2 bushels per acre in the November report. He does not think the China import needs are being reflected in market prices. Supply and demand will cause grain prices to go “much higher” he claims - and quite soon:
. . . Meanwhile the US corn harvest is virtually complete and it is almost certain that the USDA will have to further reduce the yield in next week’s report and probably again in January. I believe that only two States will have a higher yield than last year, North Dakota and Wisconsin. . . I expect the USDA, in their usual manner, to stair-step the yield down 2 to 3 bushels now and 2 to 3 bushels in January. I continue to believe that the final yield will be below 150. Mark every 2011 corn stocks report on your calendars. . .
It has become screamingly obvious that China will soon have to import large quantities of corn. Their demand for soybean meal is growing at a rate of 7-8 million tons per year, which would imply that corn for feed should be growing at a rate of about 12 million tons a year. Add 2-4 million tons growth in industrial use, and Chinese increase in demand for corn is probably above 15 million tons per annum. The USDA claims that the increase in Chinese corn usage, for food and industrial use combined, is 4 million tons per annum. . . .
With a sub 150 corn yield, a carry-in 250 million bushels below the official estimate, thanks to co-mingling of new crop in the Sep stocks report, and using 2.250 billion bushel corn exports, minimum, to accommodate Chinese buying, and to offset the lack of corn exports from Ukraine, my carry-out at current corn prices is negative. At today’s usage we will effectively run out of corn next July. With demand approaching 1.2 billion bushels per month a minimum pipeline requirement would be 800 million bushels.
With nothing to trade, we could turn off the screens and have an extended European style vacation, coming back mid-September if the crop is early, like this year, or mid-October, if the crop is late, like last year. Alternatively, we will ration domestic usage severely to make it into new crop. It is assumed that ethanol will take the big hit, but ethanol has now become a fully integrated part of the gasoline blend. The U.S. refiners are set-up to produce gas at only 86 octane and ethanol gives the octane the necessary boost.
The cure for high grain prices is not simply high prices any more, but much higher prices, and how high that might be, we are possibly about to find out. The answer, Good Reader, will surely scare you.
(chart above courtesy Wall Street Journal and previous page Financial Times)
Agricultural Equipment
- The bullish trends in the agriculture sector continued last month. The latest Mainstreet Economy Report, authored by Dr. Ernie Goss at Creighton University, indicated the agriculture-equipment sales index continues to rocket upward—rising to 68.1 from 61.0 in October. Readings above 50 mean this sector is expanding. We have seen eight months in a row of expansion.
The Mainstreet Economy Report noted:
Farming: The farmland price index soared for the month with the index moving above growth neutral for a 10th straight month to 68.1 from 60.0 in October. This is the highest recorded index since May 2008.
The farm equipment sales index likewise bounced higher with a November reading of 68.1, up significantly from October’s 61.0 and moving to its highest level since May 2008. Scott Tewksbury, CEO of Heartland State Bank in Edgeley, N.D. said, “One area farm equipment dealer told me he had record sales for October.” He added that operating loans were being repaid quicker than normal due to high commodity prices and decent yields.
Long Term Weather Forecasts
- The Browning Report on long term weather trends was published last month. Some of their comments on the upcoming winter include the following:
The La Niña continues to grow stronger and, combined with other factors, will shape a cold and stormy winter. I’m watching a potential pileup. Three enormous weather patterns are surrounding North America. All three cause cold winter weather. Expect to be flattened. . . . This winter’s La Niña will have far reaching economic consequences. Prepare for storms and flooding, higher food and fuel prices, strains on the local infrastructure and, oh yeah, really great skiing
Agriculture – This year’s La Niña has created global crop problems, especially for cotton, grains and oilseeds which, combined with the sinking dollar index, is raising food costs. The US has escaped most of the dry weather problems typical of La Niñas for most of the year, but now we are finally seeing drought in parts of nine states stretching from the Southeast to the lower Midwest, damaging crops, driving up the cost of keeping livestock and putting officials on alert for wildfires. Climatologists say the dry weather likely will continue at least until spring, raising the possibility of prolonged drought in some areas next summer.
There is a possibility that this year’s La Niña may be as damaging to global crops as the La Niña of 2007 – 2008. This winter’s phenomenon will be the strongest in almost 70 years and like the earlier event, it is interacting with Arctic volcanism. The La Niña of 2007 led to food shortages, particularly the rice shortage, of 2008. Historically, there is only a 30% chance of this happening – but the Newsletter is monitoring the impact of this event on agriculture.
Conclusion:
With the global trends in place the outlook for the agricultural sector remains very attractive for investors.
