Regards,
Theo Casey
For The Right Side
The Biggest Reason to Get Excited About Investing in Agriculture
BY CHRIS MAYER
There is some mind-bending stuff percolating in the agricultural markets. In fact, the setting recalls the one that set off the big move in oil prices in recent years...
"Investing in agriculture today will be like investing in the oil sector in 2001-2002," writes Mark McLornan in the May issue of Marc Faber's Gloom Boom & Doom Report. McLornan runs a fund that invests in farmland. Some of his on-the-ground observations confirm many of the things I've been telling my readers for the past several years.
As for likening agriculture today to oil in 2001-2002, an investor's pulse quickens. We all know the great run oil stocks had as the price of oil sprinted from under $30 to a peak of $143 per barrel. Investors made hundreds-of-percent gains – even thousands-of-percent gains. What most investors forget is that oil prices halved from 2000 to the bottom in 2001 before the great run-up. The same sort of setup seems to exist in agriculture.
In agriculture, most commodities are half or so of their June 2008 highs. This is the pause that refreshes. All the kindling that turned them ablaze in 2008 – rice was trading for $1,000 per ton – are still in place for a much bigger surge this time around…
"I believe one should look for areas in which there is underinvestment, low leverage and undersupply," McLornan continues. "Agriculture is one of the very few sectors globally that currently face supply shortages." The biggest reason to get excited about agriculture is to look at the stocks-to-use ratio, which measures how much supply is on hand versus how much we use.
A supply famine will boost the market
Higher ratios imply a fully supplied market. Lower ratios hint at possible shortages. McLornan provides two charts that show how the stocks-to-use ratios look for wheat and corn, respectively.
The Cupboard Is Almost Bare 
Those ratios today are lean. You have to go back to the 1970s to find inventories this low.
The kicker to all this is that last year, we had a record crop and the stocks-to-use ratio barely budged. There is no way we are going to top that harvest this year with all the drought hitting different parts of the world.
In fact, the International Grains Council (IGC) predicts a fall in total wheat output in 2009-10. The IGC predicts global wheat output of 650 million tons, down by 5% from the previous year. The largest declines are seen in the European Union, the U.S., China, Russia, and Ukraine. "Although conditions in the Northern Hemisphere are generally favorable," the IGC says, "production is likely to fall sharply."
There is other ancillary evidence that we can't meaningfully boost crop yields easily at this point, either. China has the highest levels of fertilizer use in the world and its crop yields are still not even average. McLornan says that global yields for wheat hit a plateau in the 1980s and "gene modification technology has been unable to improve what natural selection has achieved over the past centuries." So we already have tight supplies. And they look to get tighter. What about demand?
The demand side is also supportive
Demand for grains is not likely to fall. Population growth is the biggest driver. Globally, between 2000-2012, we'll add some billion people to the world's population. "Coincidentally," McLornan writes, "2000 was the year in which global grain stocks peaked and then began their rapid decline."
Dietary patterns also have a big impact on grains. As more people eat meat, as the increasingly wealthy Chinese are doing, the pull on grains for livestock goes up exponentially. The USDA projects global consumption of wheat will increase 6% in 2009, with a large part of this as feed wheat to cattle.
Adding to the impending crisis is the insistence of governments around the world to prop up biofuels. This puts the production of food in direct competition with the production of energy. Just when we need all that acreage for food, we've got acres of, say, corn for ethanol. There is even talk of raising the ethanol blend from its current 10% to 15%. So while the economics of making ethanol are abysmal right now, it seems the ethanol industry still has government in its back pocket. I think we're getting close to when all of this becomes front-page news. We have another few months before the reality of a lousy fall harvest sets in. Agriculture stocks should do very well from that point – for everything from fertilizer stocks like Potash (POT) to agricultural equipment makers to the grains themselves.
As always, I recommend buying assets like these before the crowd sees it on the news.
Good investing,
Chris Mayer
For The Right Side
Chris Mayer is the editor of Capital and Crisis and Mayer's Special Situations. This article first appeared in Daily Wealth on 20 May 2009.
MARKET NOTES
The dollar’s downtrend looks alarming
BY SHIVVY ARORA
Investors’ appetites for risk are improving, and this is bad news for the US dollar. Only yesterday, we learnt of major US banks’ plans to repay 45 billion dollars worth of state funds from the Troubled Asset Relief Programme (TARP). And the Financial Times reported that China and Brazil are in discussions to use their own currencies for trade, relying less on the dollar.
All this is greatly hurting the ‘greenback’. At the onset of the crisis, it was seen as a safe haven investment, but its lure is slowly fading.
The chart below shows the US Dollar Index (blue line), tracking the dollar’s performance against six other major currencies from November 2008 to date. During its recent attempt at a rally (circled), it failed to revisit its March levels. Not only that, since then, it has broken below its 200-day moving average (DMA; green line). This is a bad technical sign.
The US dollar index is taking a tumble
Chartists say the dollar index is ‘on track for its third consecutive close below the 200 DMA’ which is now acting as ‘technical resistance’ (black line). This is a level showing the price at which the index has trouble breaking above. If it does trade at this price, it is unlikely to exceed it for a certain amount of time.
The US’s stimulus spending and rising budget deficit are sending the dollar tumbling. As money supply rises, the currency’s value plummets.
The dollar’s downtrend shows that investors are losing faith in the currency. It now remains to be seen whether it will succeed in holding onto its dominant status.
The Daily Reckoning – The US stimulus program is a scam on top of a scam
BY BILL BONNERBaltimore, Maryland
Thursday, 21 May 2009
Is it on... or off?
The bear market rally, that is? The Dow was down again yesterday, but by just a little... 52 points.
The short-covering rally is finished, says David Rosenberg, formerly one of Merrill’s top analysts. “Everyone I know is laying people off... cutting back... and generally struggling to survive,” said a colleague from Florida. “I don’t believe this recovery story. The stock market might be up, but the real economy is still sinking.”
Yesterday, we went to get our teeth checked out.
“Hey... I’m a Daily Reckoning reader,” said our dentist. “So, I knew you were in town.
Asked about the state of the economy, he had this comment:
“Our business is a little counter-cyclical. People get laid off from work, but they still have their health benefits – at least for a while. They want to make use of them while they can. And they’ve got the time to do it. So, our business actually goes up.
“But then, when the recovery comes they go back to work... they’re busy... and they’ve already had their teeth fixed. We’re not seeing that yet.”
House prices are still falling. The average house in Southern California has fallen to $247,000 – a big drop from the top set two years ago. Toll Bros., one of the country’s biggest builders, reports revenues down 51%.
If the US economy is really following Japan, things are going to get a lot worse. Japan’s output is collapsing – at a 15% annual rate last quarter. The Land of the Rising Sun is a major exporter. For the first time ever, exports are falling... taking the Japanese economy down with it.
Read on...
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