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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Agri-Foods Long-term Opportunities Amidst Hedge Funds Deleveraging

Commodities / Agricultural Commodities Nov 09, 2008 - 04:27 PM GMT

By: Ned_W_Schmidt

Commodities Best Financial Markets Analysis ArticleDespite ravages brought on by joyful liquidation of hedge fund industry, Agri-Food prices continue to show superior relative performance when compared to equities. That conclusion is readily apparent from this week's first graph. In it are plotted our Agri-Food price index and the S&P 500. As ignorance of complexity of commodities is widespread among investment community and in particular the business media, investors need to make an effort to be better informed. Commodities are both not a homogeneous asset class and an incredible investment opportunity.


Second chart portrays the stochastic built on the Agri-Food Index. It had become deeply over sold as hedge funds were being liquidated, an otherwise joyous event despite the short-term pain inflicted, and the apparently good 2008 global grain harvest. That stochastic is starting to turn upward, indicating that the over sold condition may be weakening and an upward move in Agri-Food price is likely. The base is being built. With global grain production likely to fall in the 2009 crop year, the prospect for higher prices is excellent .

Commodities, as we said above, is not a homogenous asset class . Commodities includes (1) energy, such as oil and coal, (2) mineral ores, such as iron and copper, and (3) Agri-Foods, such as corn and rice. Each of the individual sectors is driven by different forces. GDP's real growth rate might drive the price for mineral ores like copper, but has little or nothing to do with the price of rice. Investors need to discriminate among these different sectors during this period when economists, strategists, and media commentators are spreading their ignorance of commodities . Remember that the driving forces for Agri-Foods is growing consumer income in China and India, and a shortage of productive farm land.

Greatest source of demand growth for Agri-Foods is coming from China, with India in the back stretch. China, contrary to the misinformation being spread by Street, is not plunging into a near depression as is the case with the United States and Canada. China's growth rate may slow, but the nation's economic size will still expand by more than $200 billion per year for some time . By definition, the income of China will grow by a like amount. A significant and material portion of that income growth will be spent on Agri-Food. The Chinese may consume less copper, but they are not likely to eat less with incomes expanding.

China is moving to stimulate domestic consumer demand . Their government fully understands that the crumbling U.S. economy will not permit continued over reliance on an export model. On that front, the government has announced an almost $600 billion stimulus plan for the domestic economy. That stimulus will bolster economic growth which will further raise incomes . As incomes rise, the demand for Agri-Foods increases. Remember, if the Chinese substitute one pound of pork for one pound of grain, demand for grain rises by five pounds . The Street still fails to comprehend that food does not come from a factory.

In a world where financial failures are causing economic growth to collapse, Agri-Food investments have positive fundamentals. With China's income continuing to grow , global grain production likely to fall in the coming year , and with global stock piles moving toward desperately low levels , Agri-Food is likely to be one of the few sources of investment gains in years ahead.

By Ned W Schmidt CFA, CEBS

Copyright © 2008 Ned W. Schmidt - All Rights Reserved

AGRI-FOOD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of Agri-Food Value View , a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To review the most recent issue go to http://home.att.net/~nwschmidt/READFOOD.html

Ned W Schmidt Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Agcapita
11 Nov 08, 17:55
Upstream Ag Investing - Farmland

The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by our firm, Agcapita Farmland Investment Partnership (www.farmlandinvestmentpartnership.com, Calgary, Canada based agriculture private equity firm) shows investors must be prepared to rotate into asset classes with different characteristics. During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland.

- Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms);

- Cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return); and the

- S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)

We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:

- Corn is US$ 4/bushel currently compared to US$16/bushel in 1974,

- Wheat is US$ 6/bushel currently compared to US$27/bushel in 1974

- Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

Another interesting metric is the long-term average ratio of the Commodities Research Bureau Index versus the S&P 500 which is currently around 1.5 times. Simplistically, this ratio indicates how much S&P 500 stock you can buy with a fixed basket of commodities. Some important points:

- During the commodity bull market of the 1970s, the ratio was consistently higher than 2 times for over 10 years – it peaked at almost 4 times.

- The ratio is currently at around 0.5 times - significantly below the 1.5 times long-term average, just slightly above the 0.15 all time low reached in 1999/2000 and still very far below the almost 4 times multiple reached in the last commodity bull market. We still appear to be at an all time low relative valuation between “hard assets" versus "stocks.”

- If history is a guide, the ratio of hard assets to stocks will have moved much higher before this commodity bull market is over.

- How? Stocks will continue to fall and/or commodities will continue to climb – most likely a serious combination of both as investors, fearing inflation, rotate out of stocks into commodities – the cycle of “inflation, rotation, hard assets”.

Agcapita allows farmland investors to cost effectively allocate a portion of their portfolios to hard assets in the form of Canadian farmland via its professionally managed Agcapita Farmland Investment Partnership. Agcapita Farmland Investment Partnership is the third in a family of private equity funds which has grown to almost $100 million in assets under management.

Agcapita’s investment team has over 40 years private equity and fund management experience and over $1 billion in total career transactions and previously managed a group of emerging market funds with almost C$500 million in assets for one of the largest banks in Europe.

Agcapita’s advisory Board is composed of accomplished agriculture entrepreneurs and academics, high profile political figures and investment experts including the former UK Chancellor of the Exchequer, Rt. Hon. Ken Clarke and Jim Rogers, co-founder of Quantum Fund. Jim was recently quoted at the annual CFA dinner in Toronto as suggesting to the assembled investment bankers that they “sell their houses in the city, move to Saskatchewan, buy tractors and farmland and start farming.” Our adviosry board members bring a deep knowledge of the factors driving agriculture and farmland values – including rapidly growing emerging economy food demand and inflation.


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