Fortunately for investors the majority of the world does not allow either bumbling Bernanke or wealth confiscating Obama Regime to manage economic policy for them. What that means is that once one departs the shores of the U.S., leaving its wealth destroying policies and laws behind, economic growth is possible. That reality allows investors to find economic sectors that are benefiting from economic growth.
As is readily evident in the graph to the right, returns on U.S. equities have been miserable. Despite the bump from last debt monetization by Federal Reserve, U.S. equity returns reflect the ineptness of U.S. economic policy. On the other hand, the returns produced by Agri-Food commodity prices have been exceptional. These returns have been created by the secular economic growth in China, India, et al, where governments encourage economic prosperity and the creation of wealth.
The secular growth produced by the free market economic policies in China, et al has created demand for Agri-Food commodities that is straining the capacity of the global Agri-Food production system. With Agri-Food commodity markets operating in the price inelastic portion of the long-run supply curve, Agri-Food prices have been pushed higher. While all markets will have up and downs, the growing inability of the global Agri-Food system to satisfy demand without price rationing is readily evident in the graph to the right of our Agri-Food Price Index.
While the secular Agri-Food story is now acknowledged, we must live in the short-term. In the short-term, both seasonal and government policies may influence Agri-Food prices. Those factors may produce both rewards and opportunities.
In the most recent portion of the above graph several factors have come together to push Agri-Food prices to a record high. First of which is strong demand for Agri-Food commodities. That is evident in the chart below of U.S. grain exports. While these trends are evident in other nations, the U.S. is a major producer of both grains and weekly statistics.
Green bars in that graph are the year-to-year percentage change in U.S. exports of the Big Four, wheat, corn, soybeans and rice. With the exception of corn, exported grains of the other three are up more than 30% from a year ago. Corn is lagging due to the short supply conditions that developed in the U.S. prior to the Fall corn harvest.
Second set of bars is for export sales that have been made, but not completed. There we see corn export sales up about 30% . Increase in wheat sales is almost “off the chart,” as the world has been scrambling for grains since the Russian export embargo. Soybean export sales seem weak, but that is because so many have already been sold, and the growing short supply of soybeans in the U.S. That may not mean much to some, but if one lives in the Americas each meal consumed probably includes some soybean oil.
We note that the growth rates observed above are inordinately good for staple grains. These are not the latest generation of cell phones. And that growth is organic, not requiring another product innovation or creation of frivolous apps.
Second factor pushing grain prices higher has been, surprisingly, the availability of the Fall harvest in North America. Historically, arrival of Fall harvest has pushed grain prices lower. However, in a world generally short of Agri-Food commodities, that pattern exists less and less. In short, buyers have to buy when the grains are available. A buyer cannot wait, hoping for lower prices. The grains may not be available.
Third factor that has helped grain prices move higher is the Bernanke Currency Bubble. As the Federal Reserve has attempted to devalue the U.S. dollar, U.S. grains became a relative bargain on world markets. That connection between demand for U.S. grains and the dollar is both real, and in the imagination of traders. Many traders, rather than trading the U.S. dollar, have been buying corn and tractor stocks.
That brings us now to the red line in that second graph on the first page. It is a stochastic built on the Agri-Food Price Index. As both the second and third factors are leading to a short-term corrective process, an opportunity may be building for those that have thus far missed out on the gains in Agri-Equities. With the North American harvest complete, little news on the size of the next crop, Fall of 2011, is available. That may lead to further development of the corrective process. Additionally, the U.S. dollar is strengthening as it exits an inverted parabolic formation. That should cause traders to be far more cautious in grain markets.
All of this seems to be coming together to create an opportunity in Agri-Equities for investors in the months ahead. Short-term considerations have recently been lowering grain prices, and that pressure may continue in the weeks of Winter ahead. However, underpinning Agri-Food prices is the longer term, secular growth of China, India, et al. Now is the time for doing your research as Winter closes in on North America, and the fields become covered with ice and snow.
