Gold Bugs, and others deemed misguided by the Street, missed out on another one. If they had listened to really smart people, they would have had their money with Bernie Madoff. Are Gold Bugs ever going to truly understanding real investing? You kept your wealth in Gold coins locked away at the bank or in a Gold ETF. You could have had your wealth with some really big name hedge fund-of-funds instead. You too could have had your wealth vaporized. Oh well, maybe you will get it right next time.
Those hedge funds that have been struggling to survive have, as we all know, wreaked havoc throughout the markets. One sector that seems to have witnessed the end of that selling is Gold. Another, that complements Gold investing, is Agri-Food commodities. Repeatedly journalists, untrained in reading charts, talk about commodities going down. No, that is incorrect. They have gone down, as in past tense. Most, if not all, have put in place important bottoms.
In our first chart this week is portrayed the cash price for U.S. soybeans. After having been run up during the commodity binge by hedge funds, soybean prices were run back down. Prices have now walked through the down trend line reflecting that sell off, and it is no longer controlling. The stochastic reached deeply over sold. That stochastic and the move through the down trend line taken together suggest that soybeans, and other Agri-Food commodities, have put in place important bottoms. They are now looking to establish new up trends.
With the exception of one, the prices of all of the important Agri-Food commodities we follow are up from their lows. On average, prices for the important Agri-Food commodities have risen 16% from their lows. Agri-Food stocks are up more than 50% from their lows.
A number of factors are contributing to this turn in the prices for Agri-Food commodities. First, demand for food is not so sensitive to shifting economic conditions. Chinese consumers, all 1.3+ billion of them, are still going to eat in the coming year. And given current trends, Chinese consumers will be buying an additional $40-60 billion of food each year. That is amount that each year that will be added to cumulative annual demand for Agri-Food by Chinese consumers alone.
Global grain production will probably be down in the coming year. In many countries, the credit crisis is denying farmers the most essential input for planting a crop. Good land and adequate water are little more than interesting concepts without money. Without the money to put the crops in the ground this coming year, grain production will fall. Other factors also will contribute to this tendency as the bounty of 2008 was somewhat of a fluke. Oh, and we have inept little governments such as Argentina meddling in the agricultural sector. Farming is not a factory operation, and that needs to be recognized.
Further, as the second chart below shows, the U.S. dollar has broken the up trend in which it had been trading. That up trend was destined to be broken as it was artificially induced by the collapsing hedge fund industry. As the dollar falls in value, Agri-Food commodities become cheaper to the rest of the world. Given the dollar's return to a bear market, prices for Agri-Food commodities can again rise. Those higher dollar prices will then benefit all involved in Agri-Food sector.
Rising demand and an increasing inability to satisfy that demand because of a shrinking inventory of productive land globally is a rare combination. Never in history has global demand for Agri-Food been so strong and the prospects for adding incremental farm land been so low. Agri-Food investors have never had such a positive environment unfolding without a world war.
Growing demand from Chinese consumers alone over the next decade will likely absorb the entire surplus of grains on a global basis. As the Global Agri-Food Shortage unfolds over the next decade, investors exposed to the Agri-Food sector should reap the benefits of a rare, structural long demand and short supply situation. Will your portfolio share in the wealth to be created by the very simple act of billions of consumers eating?
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 this publication, use this link: http://home.att.net/~nwschmidt/Order_AgriValueSALE.html.