Agriculture – ripe with opportunity

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The article below is a guest contribution by Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors.

Bushels of corn reached their highest prices in nearly three years this week after the U.S. Department of Agriculture (USDA) reported that corn inventories will fall to levels not seen since 1996.

We’ve witnessed nearly a 100 percent surge in the price of corn over the past year as increased demand has been met with diminishing supply. Dry weather conditions due to La Niña in Argentina and other disruptions have shriveled supply despite a near record amount of acreage being planted. Globally, corn consumption has increased 10 percent over the past five years to reach record levels and stock-to-use ratios for corn suggest we’re currently experiencing the tightest global corn market since the late 1970s, according to Macquarie.

This jump is due to increased corn consumption for ethanol and greater demand for feed grain. The USDA estimates that just under 40 percent of U.S. corn production will be consumed for ethanol, up from 31 percent in 2008-2009. China will likely need to import 5 million tons of corn in 2011 in order to meet the country’s booming need for feed grain. In the U.S., an additional 60 million bushels will be used for feed despite a reduction in livestock, according to the Des Moines Register.

Corn is just one part of the food pyramid that is rising. Around the world, prices for wheat, soybeans, cocoa and other grains have jumped in the last 18 months in conjunction with the global recovery. Prices have jumped because demand outstripped supply.

This chart from Potash Corp. shows that grain production has failed to meet consumption in seven of the past 11 years. This is despite producing a significantly larger amount of grain in 2009 than in 2000. Potash Corp. estimates world grain production declined more than 4 percent in 2010. An extreme drought in Russia chopped grain production in the country by 38 percent and 13 percent in neighboring Ukraine.

These tight supply/demand fundamentals reflect the impact of a growing global population and increasing economic strength in emerging markets, Potash says.

As per capita wealth has grown in other countries, there has been a huge jump in demand for grains. This chart shows the amount of bushels consumed as GDP per capita rises.

Much of the rise is due to people consuming more meat as their fortunes rise. To meet this higher protein diet, more chickens, cows and hogs are fed grains and demand skyrockets. You can see that China and India are still in the very early stages of increased consumption.

We think the agricultural space is ripe with opportunity. With global grain inventories relative to demand at multi-year lows and the rising emerging market middle class showing a healthy appetite for more meat and dairy products, demand for increased crop yields should remain strong.

Source: U.S. Global Investors – Weekly Investor Alert, February 11, 2011.

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4 comments to Agriculture – ripe with opportunity

  • james herman

    There is no, repeat no, food shortage on the planet today. Sort of… Using the United Nations suggested daily calorie intake there is more than sufficient foodstuffs produced annually, globally. Period. Now then, the question is how you use them….for example, if you wanted to bring the daily calorie level in both China and India up to the U.N. level it would take an additional, not total but additional, 31 million tons of foodstuffs. To put that in perspective the U. S. ethanol fraud consumed 165 million tons of corn during 2010. China has 2.3 trillion dollars in Treasuries but chooses not to expend it on foodstuffs for its own population. India was a net exporter of wheat in 2010…..I had the opportunity to have dinner with the Chairman of one of the largest commodity/food processors in the world over the holidays….there is no food shortage…and the American ethanol scam has absolutely destroyed relationships with food importers from the U.S. , like Egypt for example, that took decades to develop….and now for some Physics: if ethanol were in fact a “sum positive” they would use ethanol as the energy source to produce (boil/distill) more ethanol/corn mash…..and they, the ethanol producers, don’t……because it consumes more energy to make a gallon than you get out of it (referred to as the “thermal load factor”)….It’s nothing like an oil refinery that uses part of the barrel of crude oil to power the refinery. For that matter the caloric content of corn ethanol is only 1/8 of cane sugar ethanol but of course the import duties prevent any importation of cane ethanol. When the economics don’t add up, when the environmental advantages don’t exist then of course it becomes an issue of national security.

    Nearly all ethanol “factories” pipe in natural gas to boil their corn mash, the rest burn coal (clean burning coal I’m sure…). The majority of farmers add anhydrous ammonia fertilizer (to gain the nitrogen nutrient) which of course is made from…..natural gas. The environmentalists who pushed for the ethanol program to begin with have absolutely become opposed to it now. If you make an exhaustive check of the EPA’s own information websites there is no place where they are counting either the fertilizer or boil heat source(s) gases in their carbon foot print calculation. Worse, the additional acreage added for corn production in the last 5 years has come from, in part, taking “CRP”-conservation reserve program acreage-out of the program. Basically the federal government spent billions to set this less desirable, easily eroded farm land aside-and paid the farmer to do it- and now watches as the taxpayers investment literally disappears. Oddly, the little production on this type of poor farmland that is gained is guaranteed by ….federally subsidized crop insurance. Amusingly it takes about 7 gallons of fresh water to make 1 gallon of ethanol at the factory with this water normally coming from a water treatment plant, well or pipeline paid for by a “Rural Development Grant” from the U.S.Dept. of Agriculture. Actually it makes the E.P.A. requirement of 1 ½ gallons per flush on new toilets seem even more hilarious (the fresh water requirements for ethanol is roughly equal to every man woman and child in the U.S. each flushing the toilet once a day).

    Just think- 40% of the American corn crop now goes for the 10% gasoline EPA mandated blend rate yet the EPA is pushing to raise the blend rate to 15%–or 60% of Americas corn crop. As an aside 80% of the canola crop, a premium cooking oil, is used for bio-fuels in Germany. Double the price of corn and bull doze another million acres of Amazon jungle to plant; triple the price of tortillas and watch the Mexicans pour north across the border. Noted: Chuck Grassley, the erstwhile Republican Senator, is the mouthpiece for the ethanol scam. He farms 4,120 acres of Iowa corn ground. My source tells me that without the ethanol scam (and it was renewed for only 1 year…) the price of wheat goes to $4.35 and corn to $3.85.

  • @ 1st comment.
    BS!!! Demand will continue to outstrip supply. What you fail to see is that most graph studies are based feed grains supply and demand. Feed grains are NOT for human consumption. This assertion should of be based on high quality grain for human consumption….a BIG difference. High quality grains for human consumption is the issue. The Potash study more likely to based on acres and demand for High Quality grain…rather than low quality used for ethanol and animal feed.

  • che

    is it my imagination, or is China already close to South Korea, a country with similar diet and a GDP per capita higher than for instance Spain?

    also, hilarious how you can put India on the same chart and imply that it will go to where the level of say EU. 20% of Indians are vegetarian for cultural and religious reasons, it’s like expecting a Hindu to eat a cow!!!

    but of course, the cookie goes to US with heavy subsidies to corn as mentioned in the previous post.

    finally, it’s not like all of these emerging markets all of a sudden discovered meat august last year. and it’s not a coincedence that commodities started to rally after Jackson Hole and the Chinese pulled the stops on the lending.

  • Very interesting reading! Actually both “articles”! However the other one deny the first one. I guess that every decision made by governments of each nation may have an influence on producing and exporting foodstuff to other particular places. By my opinion governments should cooperate more together to find the best solution how to use foodstuff in the most efficient way. Well, unfortunately everything depends on financial situation of each government and of course on the prices on the food market.

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