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Ned W. Schmidt

Ned W. Schmidt

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…

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Agri-Food Thoughts

Are investors still looking over their shoulders? Many seem to still being doing so. They are still focused on where the markets have been, rather than where elements of the market might be going. Rather than looking for tomorrow, they are mired in yesterday. Who cares which Western bank remains in trouble? Those market prices of a year ago, inflated by the hedge fund mania, are interesting, but irrelevant. New sectors and industries, such as Agri-Food, are already arising from the market carnage. Investors should focus on that which will be rather than that which has been.

Center of the economic world has shifted. China today, perhaps to be joined tomorrow by India, is the new epicenter of economic activity. As an indicator of that shift, Reuter's has reported that Snow's is the new number one beer in the world in the number one beer market of the world, China.(31 March 2009) Beer sales in China, per that report, increased by 19% in 2008. While myopic journalists continue to report one side of the statistics on an economy they do not understand, factual reports tell of continued strong economic fundamentals in China. Beer sales up 19%! Those are not the results for an economy faltering. How many sectors in the Western economies had any growth, much less 19% growth?

As incomes rise, consumers satisfy their desires for higher quality, higher value foods. Snow's beer is an example of that tendency. Only with higher incomes do consumers divert spending to premium brands of adult beverage. While China's beer market has been larger than that of the U.S. for some time, it is now 50% larger. At that same time China beer was experiencing dramatic growth, the rest of the field was up less than 3%. Time has arrived to quit dwelling on the consumer markets of yesteryear, and move onto that which is arriving.

Higher beer consumption is a part of the longer term structural shifts in the global Agri-Food market. That structural shift is reasserting dominance, as shown in this week's first chart, on Agri-Food prices. Agri-Food commodity prices have put in place a bottom as longer term demand growth finally over powered the hedge fund induced collapse. Secular shifts eventually over power short-term market conditions.

Part of that structural situation is that demand for Agri-Food commodities will rise in the coming year, while production of Agri-Food commodities will decline. The U.S. Department of Agriculture forecast, in its report last week, that the number of acres to be planted in corn, soybeans, and wheat will fall by 2%. That will be the first drop in planted U.S. acreage since 2005. How many consumer markets will experience rising demand while at the same time production will be reduced in the coming year?

In the chart above, a move in the Agri-Food Price Index above 140 would bring confirmation that the new price trend has emerged. As we wrote in our last discussion on this matter, Agri-Food commodity prices are likely entering Wave III of an Elliot Wave structure. That move should carry the Agri-Food Price Index to a level more than 50% higher than previous high. We also note in that graph continued superiority of return on Agri-Food commodities over a popular stock market index.

Dynamic driver for future Agri-Food demand continues to be the rising economy of China. While Western economies remain mired in a financially induced mega-recession, China does not suffer the same banking problems. As reported by Financial Times, "Today Chinese banks are the most profitable in the world.(1 April 2009, 21)" How can that be? Well, they just did not join in the financial party. They missed the wonderful world of financial trickery, foolery, and shenanigans. China's banks are now in a position to take part in the growth of the Chinese economy. Also note, that many of the interesting Chinese companies have little debt.

Strategists and media commentators continue to moan and groan over the lack of growth in Western economies and companies. As above chart portrays, growth has not been a serious problem for those serving the positive structural environment unfolding in the Agri-Food sector. In that chart is plotted twelve-month percentage change in sales per share for a basket of Agri-Food companies.

The mean twelve-month change in sales per share for this list of companies is 30+%. How many companies in your portfolio accomplished that in the past year. Please note though, as the hedge fund induced rally continues to move out the back door of time some of the companies should show slower growth until that digestion is completed. At that time, the structural cycle should again dominate.

Growth in the Western economies was built on a financial mirage. China's growth is built on an ongoing structural change in the social and political environment, as discussed in the latest issue of the Agri-Food Value View. That structural change is creating a level of income for China never previously experienced. From that income the Chinese will buy more and higher value Agri-Food. Your portfolio need not await the recovery of Western banks or for dubious government stimulus plans to have an impact in order to participate in the future growth of Agri-Food.

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.


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