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May 05, 2009

Agri-Food Thoughts
by Ned W. Schmidt

Sufficient time has passed since the joyful bursting of the hedge fund bubble to allow for us to begin to assess what is rising from the ashes, and what will not. We can be fairly confident that what went on before will not be what goes on next. Financial markets rarely repeat the same mistakes immediately. Enough time must pass to allow all to forget the previous transgressions. Technology stocks did not rise again to lead in the last run in the financial markets. Banks and finance companies will not lead in the next. Financial markets will be seeking out new themes. Investors need to dig around, perhaps in the dirt, for the those next sets of investment ideas.

Our first chart this week, above, presents the percentage change over the past six months of the more important Agri-Food commodity prices. Like all portfolios, not all are up. However, enough of them were up to turn the mean return positive, +5%. That compares to -6% for the S&P 500. As oil prices are down for the same period, we can conclude that what is being observed is not a return to the commodity play period of last year. Rather, the unique and structurally positive environment for Agri-Foods is manifesting itself.

Winners in the past six months have been palm oil, cotton, and sugar. Each of these are Agri-Food commodities having unique factors, or forces, that drive their prices. All have shaken off whatever impact the global recession might have had on their prices. The independent character of the supply and demand for each means that at this time their prices are fairly immune to short-term problems in Western economies.

Already signs are appearing that the Chinese economy is shedding the problems brought on by the Obama Recession and those in other Western economies. Domestic economic activity in China is accelerating. Exporters are reporting that the worst of the export slump has passed. Taken together, the indicators suggest that the Chinese economy will grow at a rate far in excess of that being reported in any of the important Western economies. That is true for this year, and likely for many years to come.

Further, investors should turn their attention to those sectors that will benefit from China's economic growth. The Obama Regime seems now determined to destroy U.S. international businesses through irrational tax policies. Why have your portfolio exposed to such wealth destroying schemes? The first Juan Peron only destroyed wealth in Argentina. "Juan Peron II" in the U.S. will do the same. Why not reorient your investment attention to those sectors that have the potential to participate in economic growth?

Our second chart is of the price of sugar, the number three winner in the previous chart. As apparent, price of sugar has moved up strongly in recent weeks. Also apparent is that the price of sugar has been where it now is before. If we viewed a longer term chart, sugar has seen this price level many times before. Why should a retreat not again occur?

Or, is this time different? First, sugar is over bought on production problems in India which means a retreat in the short-term is indeed likely. However, in the past seven years sugar has made a succession of higher lows. Is perhaps today different for sugar? The answer to that question is yes, as it is for most Agri-Food commodities.

Historically, sugar consumers have not had to compete with ethanol. Some of that competition is direct, and some is indirect. Brazil, as most should know, has an extensive ability to use cane for either ethanol or sugar. Brazilians will produce whichever generates a greater profit. Further, a significant part of the corn crop now goes to ethanol production. That means corn sweeteners must compete with ethanol. Corn sweeteners are in competition with sugar. A set of complexities exist never before faced by sugar consumers.

Sugar demand is somewhat income elastic, as it is not a necessity. As incomes rise, consumers tend to consume more sugar. As their incomes rise, consumers can afford those foods that tend to have more sugar in them. And where in this world are consumer incomes rising the greatest amount? As we have talked before, China is the answer to that question.

China ranks number four in the world for sugar production. However, that production cannot meet domestic demand. Annual per capita consumption is 11 kilograms. While we have trouble with such comparisons, per capita consumption in Pakistan is 25 kilograms, 29 kilograms in the United States, and Mexicans consume 20 kilograms per capita. We have no idea what China's future demand for sugar will actually be, and will not pretend that we do. But, we know two things about it. One, it will be more than today. Second, the increase in sugar consumption will come from importing sugar. China does not have the land on which to grow sugar cane rather than grains.

The list of Agri-Food commodities that China must, one, import, and, two, import in increasing quantities is only going to grow over the next few years. That situation is a given, and gives a structural setting to Agri-Food supply and demand that cannot be denied. The rate as which China's economy grows this year is largely irrelevant. What is relevant is that China's economy is going to grow over the next two decades. China's demand for Agri-Foods and the consequent need to import Agri-Foods are going to rise. That situation contrasts with policies of stagnation being implemented by, for example, by the Obama Regime and the UK government. Discussion on China's growth is over. It will happen.

Some companies and investors are benefitting from renewal of the structural bull market in Agri-Food commodities. Our final chart above portrays the year-to-date performance of selected Agri-Food stocks. Why continue to expend brain cells on mindless and pointless discussions of bank stocks and disappearing U.S. auto stocks? By the way, China is building a domestic auto industry while Obama is liquidating a domestic auto industry.

As we have said before, Gold is an absolute necessity to defend your wealth against the wealth destroying policies of the Obama Regime, the UK government, and others. That necessity is undeniable. However, your portfolio should also have an offensive element. Agri-Food investments are likely good candidates to be part of that offensive component of your portfolio. Where else than China can one find a government trying to make 1.3+ billion people wealthier? Where else will you find an investment sector set to benefit from the spending of those 1.3+ billion soon to be wealthier consumers?

AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA,CEBS, publisher of The Agri-Food Value View, a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To receive the most recent issue of this publication, use this link http://home.att.net/~nwschmidt/Order_AgriValueRECENT.html.

Ned W. Schmidt,CFA,CEBS
THE VALUE VIEW GOLD REPORT

Ned W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT and author of "$1,265 GOLD", published in 2003. A weekly message, TRADING THOUGHTS, is also available to electronic subscribers. You can obtain a copy of the last issue of THE VALUE VIEW GOLD REPORT at http://home.att.net/~nwschmidt/Send_Last_Report.html Ned welcomes your comments and questions, and tries to answer most all. His mission in life is to rescue investors from the abyss of financial assets and the coming collapse of the U.S. dollar. He can be contacted at nwschmidt@earthlink.net.

Copyright © 2003-2009 Ned W. Schmidt

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