Agricultural Opportunities
September 23, 2009 by Vagabond Investors · 1 Comment
I have previously pointed out that the monetary and fiscal policy, which has been going on for decades, creates inflation. Aside from asset price inflation, which - if we are being completely honest - the richest 1% of population is after, consumer price inflation severely stresses the most vulnerable groups of the globe. The rich elite is hardly concerned about rising fuel and food prices, but the average person on the street may feel differently.
Today, I wish to address certain underlying causes of high food prices. Frequent readers will detect investment opportunities although I am not providing any investment advice.
World cereal stocks have been falling over the past few years. The current stocks for rice, wheat and corn are estimated to have fallen by 40% between 2002 and 2008. As to cyclical factors, depreciation of the US dollar against currencies of major Asian rice exporters has had the effect of raising dollar prices. The decline in US dollar has contributed to increase in the prices of soft commodities, whose prices are denominated in US dollars.
As to structural factors, rising energy prices and energy intensity of the agricultural sector have increased the cost of critical inputs like fertilizer, fuel and power. Both fertilizers and irrigation are critical inputs to the production of food. These are very energy intensive.
The diversion of cereal use from food to produce biofuel is increasing as oil prices become higher. Annually 100 million tons of food grains are being converted into biofuel. Since 2000, cereal use for food and feed increased by 4% and 7% respectively, while cereal demand for industrial purposes like biofuels jumped by more than 25%.
Moreover, since the 1990s the growth of yields have slowed significantly. In most countries, the yield gap between actual and potential is high. One reason for low food grains productivity is the low rate of capital accumulation in agriculture. However, I should wish to stress that this trend could reverse, if the bull cycle in commodities continues as Mr. Bernanke’s freshly printed dollars look for ways to making profits to their owners.
Then there are the coming economic powerhouses in Asia. Rising incomes in Asia have driven up food consumption significantly over the past decade. The demand for meat, milk, eggs and other livestock products have increased dramatically.
Food prices are expected to moderate somewhat later due to supply responses. However, presently farmers cannot get loans to even buy a fertilizer. At the same time, central banks and their agencies around the world are printing money to combat the financial crisis (which, in my opinion, they created exactly with the same measures that they are using to fight the crisis now). This increase in money supply along with out-of-balance in supply and demand should indicate classic investment opportunities in agricultural commodities in the coming decade.
I have to confess that I have no idea how long the crisis will last, but I am 100% certain that it will end up in inflation. Inflation can be created, if fiscal and monetary planners so decide. Presently, Mr. Bernanke is sowing the seeds of the next crisis. I wonder if they hired him because of his abilities to destroy the dollar or instead it.
I encourage everybody reading this post to be on the cutting edge instead of the bleeding edge of it. One of the ways to respond to his insanity may be to invest in agricultural commodities. As always, the choice is yours.
Jaakko
