The Agri-Food Value View: Fundamental Demand Determines Price

By: Ned W. Schmidt | Tue, Jun 5, 2007
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The price of everything is determined by the supply and demand for that everything. In the Agri-Food markets demand is increasing more rapidly than supply, causing prices to rise. Given Asian-Pacific economic growth, that will likely continue to be the situation.

Chinese consumers, now with higher incomes, wanting to buy more food of some type simply go to nearest grocery store. Those purchases increase the demand for whatever they buy. The producer of that food item cannot increase supply rapidly. Going from sow to pork chop cannot be done any faster than nature allows. Price is the variable that responds when demand changes and supply is inflexible.

Food prices are indeed rising and China's demand is part of that development according to "A commodities boom makes itself felt in the supermarket" by J. Wiggins in The Financial Times.

"The 6.7 per cent annual growth in food prices tracked in the US at the beginning of this year, if it continues would be the biggest annual increase since 1980. The UK is witnessing comparable increases, as is China, where food is up annual 6.2 per cent in the first quarter of this year. In all these countries, food prices are rising more quickly than overall prices. . . China's total agricultural imports have grown more quickly than anticipated, more than doubling between 2001 and 2004 to $33 billion. (24 May 2007,13)"[Emphasis added]

Indeed, food prices around the world are rising faster than most other prices, as indicated by the previous quotation. Demand for agri-food products is pushing prices up. Most economists ignore this situation because they are mired in the economic environment of more than a decade ago.

Around two billion consumers, in China and India, are entering an era of economic prosperity. Not since Europe was rebuilt after World War II has the world experienced such an economic upheaval of such a positive nature. For that reason food prices are rising, and will continue to rise as long as this income miracle is in process.

CHANGING CONSUMPTION OF AGRIFOOD PRODUCTS: The U.S. government is not alone in its interest in the production of alcohol. That government wants to put it in cars while others want to put it inside themselves. What brought this subject to our attention was "LVMH soaks up Wenjun" in the Financial Times.

"Not content with exporting Don Perignon champagne, Hennessy cognac and Glenmorangie whiskey to China's elite, France's LVMH has taken a majority stake in Wenjun, a Chinese distillery. Its decision to buy 55 per cent of the business for an undisclosed sum highlights the desire of international drink groups to win a foothold in the fast-growing market for Chinese clear grain spirites, known as baijiu or "white alcohol". . . . Company officials declined to comment yesterday but local media have said Wenjun produces 30,000 tonnes of alcohol a year for sale under more than 100 of its own brands as well as a further 2,800 tonnes of raw alcohol sold to other drink companies.(17 May 2007,p.25)"

The graph at the upper right is of consumption of alcohol for the world, China, and India. Measurement is in liters per adult, and the data comes from the World Health Organization. One would have to assume that the WHO is not in favor of alcohol consumption as they tend to oppose most of the enjoyable parts of life. The line of red squares is the estimated global per adult consumption of alcohol. That line is fairly flat from about 1995 on, at a little more than 4 liters per adult per year.

The solid blue circles are for Chinese consumption of alcohol. Clearly, Chinese consumers like to partake of alcohol. The nation consumes almost 25% more per adult than the world average. LVHM apparently sees this rate of consumption as attractive. As incomes rise in China, consumers will move up the alcohol pyramid to the pricier blends and away from baijiu. LVMH will, as we talked about last month, be able to increase market share in a likely growing alcohol market.

The solid green line is for India, and suggests that alcohol consumption is not material in India. Cultural and income factors are the dominant forces in causing Indian alcohol consumption be at such a low level. Will Indian alcohol consumption rise as incomes increase in that country? Lifestyles tend to change with the level of income. Wealthy Arabs, for example, do not fully subscribe to the abstinence advocated by their religious rules. One of those situations that will have to revisited.

Have never had the opportunity to consume baijiu, or Chinese white alcohol, but can imagine that it is an acquired taste. Consumers have begun to move up the quality scale for the same article says, "Though much of the baijiu sold in China is still cut-price firewater, the industry's profits have soared in recent years as newly affluent urban drinkers focus on more premium brands." We note too that tequila was not first thought of as a chic drink.

LVMH, the acquiring company in the article, is Lymh Moet Hennessy Lou Vuit, a French company. U.S. symbol is LVMU.Y We are going to have to add that name to our "to do research" list for future consideration. We may someday find baijiu in "Ming like" bottles for $40 at local stores.

The Agri-Food Value View Philosophy: The consumption of food and agricultural products is a function of the size of the population and the per capita disposal income. These two factors determine Global Agri-Food Revenues. Economic expansion in the Asia-Pacific region combined with the demands for renewable energy sources will greatly increase the growth of Global Agri-Food Revenues. Investors that position themselves in front of this growth dynamic are likely to benefit from it. The Agri-Food Trinity, prices of food and agricultural products, the economics of companies involved, and the value of agricultural land, should enhance investor wealth.

Schmidt Base Food Index Components
Pricing in U.S. dollars at historic U.S. locations. Cash, spot, prices where possible.
Data Sources:;; Base for all calculations is 2 Feb 2007
Component Price Current Price High Price Trend Trend Rank
Jun / May
Butter $1.55 $1.55 + 1 / 1
Hogs $0.709 $0.721 + 2 / 9
Barley $4.50 $4.50 + 3 / 8
Rice, rough $10.90 $11.30 + 4 / 6
Wheat $5.77 $5.84 + 5 / 7
Soybeans $7.75 $7.75 + 6 / 10
Broilers $0.802 $0.802 + 7 / 5
Steers, feeder $1.23 $1.26 + 8 / 2
Beef carcass index 143.38 156.14 + 9 / 3
Oats $2.95 $3.09 + 10 / 4
Corn $3.77 $4.08 - 11 / 13
Sugar, world $0.111 $0.124 - 12 / 12
Eggs $0.765 $0.895 - 13 / 11

Our chart on the first page continues to show an interesting story. Admittedly the time period is short, but that time period includes extremely strong performance by the U.S. equity markets. That said, the Base Food Index has performed better than U.S. stocks.

When risk is considered, the impressive nature of these results becomes more apparent. The graph to the right is of the ratio of mean return to the standard deviation of return. The Base Food Index gives far superior return per unit of risk than U.S. equities. The covariance of the Base Food Index with U.S. equities is zero, meaning their returns are unrelated. Benefits from diversification into agri-foods are, therefore, significant.

What all this means is that the base source of returns for agri-foods investment is extremely attractive to an investor. Direct investment in the sources of these returns, basic food components, is not easily done. The trick will be to find investments that derive value from these characteristics but do not have other factors interfering with the manifestation of those returns.

As can be observed in the table on the previous page, corn price while improving somewhat in the ranking continues to have a negative trend. Expectations that corn will be in ample supply this fall continues to dominate. Corn is one of three prices with a negative trend, while all others are in positive trends. Soybean prices continue to improve on belief that too much acreage has been shifted to corn. Likely ample corn supplies are causing expectations of greater supply of beef which in turn is causing beef prices to weaken. Perhaps we will have cheaper steaks later in the year. Hog prices are probably reflecting the summer demand relative to a supply that had not expanded earlier due to high corn prices.

Note: The pricing data and analysis on the table, Schmidt Base Food Index Components, are intended as an aide to investors in understanding agri-food price trends. This information is not intended to support the trading of futures. Futures and options can be utilized in a conservative manner as part of a portfolio if an individual exercises self control. Most individuals should not trade commodity futures, and we do not recommend that individuals trade commodity futures for short-term profits.

The Agri-Food Value View is published monthly, and delivered via email to subscribers. Annual subscription rate is US$199. Make checks payable to Schmidt Management Company, PO Box 846, Boca Raton FL 33429-0846. An internet subscription page is available at

EXCHANGE TRADED AGRI-FOOD INVESTMENTS: The tables that follow include companies that have exposure to the trends of interest. We are seeking companies that are close to the dirt, but most importantly those that will have rising sales from the positive agri-food cycle that has developed. Firms that sell food products through retail stores are not particularly of interest. An international orientation to a company's operations is preferred to a purely domestic business, whatever domestic might mean. Some of these companies may be niche firms we come across that might be of interest.

In these tables and the discussion of them, we will focus on price. The internet today provides such timely information that we cannot possibly provide the most breaking news on these companies. For each company we estimate an investment value based on the fundamentals of the company, and these values are in the column labeled "Value." Each stock's price is then compared to that value, and the potential change is in the final column. Your search for investment opportunity should start with those having the highest potential. Since the table is sorted by the right-hand column, the more attractively priced companies in any one month should be at the top of the table. Prices need to be what drives us to action, not the story.

The Tier One companies are more established firms. These names will be ones in which many will be familiar. Fundamentals of these companies do not change dramatically in the short-term or unexpectedly from the immediate trend. Economic shifts do occur over time, but we should be able to anticipate those developments.


Both DAR and CQB advanced nicely during the month. Those strong moves pushed the stocks up relative to their value estimates, and that pushed down the potential gain. In the case of CQB, the Street seems to have suddenly become enamored with bananas. The company has also recently developed some new packaging and bananas that allow for longer shelf life. You may notice in the stores these new packages of bananas. Some believe that this effort will increase the consumption of bananas. Maybe, and maybe not.

KUB released latest financial report which included an estimate for 2007 that was rather conservative. Street, with its growth fetish, wanted stronger forecast, and pushed the stock down. KUB now likely undervalued. ADM slid on some fund selling and is now offering somewhat greater opportunity. As price declines, the future potential of a stock should rise.

AGCO CORP.(AG) is being added to the Tier One List. Many of the divisions of this company have a long history of producing farm equipment, though the company as it is today is relatively young. AG was created out of what was the old Allis Chalmers farm machinery company. Along the way, AG has collected a stable of product lines, each with a customer franchise. They include Massey Ferguson, Valtra, Fendt, AGCO Tractors, Challenger, Farmhand, Gleaner, Glencoe, Hesston, LOR*AL, New Idea, RoGator, Spra, Coupe, Sunflower, TerraGator, Tye, White Planters, Willmar, SisuDiesel Engines. Traveling through "farm country" without coming across one of these brands would be difficult.

Information on regional distribution of company's sales is in following table. South American sales, with a 27% increase in fourth quarter of 2006, are clearly attracting investor attention. Brazil is attractive because of its agriculture and economic potential. Asian & Pacific sales exist, but like most foreign companies are a small percentage and volatile. The attraction to these companies is not what sales were but what they will be in the future. AG has 3200 dealers in 140 countries that represent their product lines. Headquarters for the East Asia & Pacific region is in Melbourne, and the company has a sales office in Beijing.

Europe, Africa & Middle East 61%
North America 24%
South America 12%
East Asia & Pacific 3%

The investment theme for the companies like DE and AG is popular on the Street. They are conceptualized to be "agriculture service" companies like in "oil service" companies. That means such stocks are not cheap relative to their financial histories. AG's financial history is not one that would necessarily draw investor attention if it were not for the favorable environment ahead. In other words, when we look back on AG's financial history in years ahead the history will look far better. While owning the company longer term would be desirable, due to the high institutional ownership we want to be particularly sensitive to price.

Recommend a visit to the company's website,

TIER TWO COMPANIES: The companies in Tier Two tend to be younger and smaller companies. Prices of these stocks will be more volatile than those in Tier One and stocks in general. However, they may be more exciting over time. Do not buy these stocks expecting them to double in "two" weeks. Treat them as an investment that must be planted and reaped over time. They do seem, though, to have fundamentals that may be rewarding when viewed over time.

Zhongpin, Inc.(ZHNP)
is an addition to the Tier Two list this month. ZHNP specializes in pork and pork products in China. The company is an integrated pork producer in that it is involved in pig production though slaughter to distribution. The intent of this approach is not only to capture profits in whatever segment they might exist, but equally important to control the quality issues, such as hygiene and sanitation. As the company exports pork, such issues are important. The customer base in China includes Lianhua Supermarket Group, Carrefour, Metro AG, McDonald's and Kentucky Fried Chicken. These customers are not likely to tolerate quality issues of any kind.

Chinese revenues for pork and related products were estimated at $84 billion in 2004 and are projected to reach $120 billion in 2010. ZHNP's revenues for the year ending March 2007 were about $169 million. Those numbers suggest that ZHNP's market share has substantial potential to grow. Across the entire spectrum of products in China a shift away from fragmented production to larger integrated companies is developing. ZHNP operates in a market niche that has significant growth potential.

Small companies operating in foreign countries, especially in a nation going through dramatic change as is the case with China, offer potential but also the obvious risks. Always keep that in mind when looking at companies in the Tier Two list. Caveats aside, the sales per share for ZHNP for the year ended March 2007 were 17% above the year ago level.

ZNHP trailing twelve month return on equity is 15.4%. Since the company pays no dividend, the internal growth rate is approximately 15%. While we want to always be cognitive of risk and price, ZHNP is a company with which becoming more familiar is likely to be worthwhile.

The company's website is

PRICE-TO-SALES PER SHARE RATIOS FOR COMPANIES: As an aid in selecting companies, the following table on the ratio of price-to-sales per share is included. Of the various measures of a stock's value, this ratio has been shown to be most reliable. The lower the ratio the more under valued the company is likely to be. Sales is the financial statement line with the least accounting judgement. The further one moves down the income statement and onto the balance sheet the greater the level of accounting fantasy and creativity.

The Agri-Food Value View is published monthly, and delivered via email to subscribers. Annual subscription rate is US$199. Make checks payable to Schmidt Management Company, PO Box 846, Boca Raton FL 33429-0846. An internet subscription page is available at


Agri-Food Exchange Traded Funds
PowerShares DB Agriculture Fund Amex: DBA ETF attempts to replicate returns from an equal weighted portfolio of corn, wheat, soybeans, and sugar, using futures and Treasury securities. See $338

AGRI-FOOD EXCHANGE TRADED FUNDS: Still not having a great deal of success finding ETFs that fit the desired investment style. For example, DBA, shown above, only has exposure to three grains and sugar. Where is the beef?

A popular mistake made by many of today's rocket scientists is the fallacy of correlation. They run a statistical analysis that produces a high correlation. Statistically the two series appear to move together, and an assumption is made that one is a substitute for another. In the case of the above ETF, the creators of it apparently found a relationship between these four commodities and the index they are trying to replicate.

However, insufficient effort was placed on the theoretical part of the exploration. While a high correlation might have been found over the period of time explored, the resulting four commodities do not adequately cover the spectrum of basic food commodities. Again, where is the beef?

We will have to continue looking for more desirable choices. If one is interest in exposure to the four commodities in which DBA invests, it may be suitable for one's purposes. If one is interested in broad, diversified exposure to the basic food commodities, it does not satisfy that desire.

The Brown Gold discussion is now going to turn to exploring the diverse nature of agri-land. Agri-land has different purposes for which each type is best suited. Additionally, a variety of forces influence the use and value of agri-land. This discussion is not going to be completed in one issue, several will be required.

The types of agri-land would include the following:

  1. Crop land - natural : Land used to produce annual crops such as corn and soybeans which does not require irrigation to produce a normal crop.

  2. Crop land - irrigated: Land used to produce annual crops which requires man-induced irrigation. For reasons discussed later, this category is not of interest.

  3. Pasture: Land that is used to graze animals, such as cattle, or land that is used solely to produce hay, or other forage, to feed to animals. For investment purposes, little difference exists between these two uses.

  4. Timber: Land that is planted primarily in forest intended to be harvested for use in construction or for the fibers of the tree for some other purposes, such as making paper. In general, this classification is of little investment interest. Funds, pension and endowment for example, have been active investors in this sector. We will describe in a later issue the implications of this group of investors on values, and their general misunderstanding of present value techniques as they apply to timberland.

  5. Tree & Vine: Land best suited for planting as orchards to produce fruit, in trees to produce nuts, or vineyards. A major differentiation in this classification is that of current producer or future producer. The time between "installation" of the crop generator, the orchard or vines, and the production of a cash crop can take considerable years.

  6. Vegetable: Land used to produce annual vegetable crops such as tomatoes, lettuce, etc.

  7. Other: Land of a unique nature producing a specialized crop that does not fit in one of the other classifications.

Within any classification, the marginal profitability of land under discussion is an issue. By marginal profitability we mean the incremental profits created by taking the land from being idle to producing a crop. Those marginal profits are the incremental revenues from the crops minus the incremental costs of production.

All land is not equal. In a previous issue we discussed the spring report on crop planting intentions in the U.S. Corn planting were expected to rise significantly. Much of that incremental land being devoted to corn in that report is not best suited for corn. The expected incremental production from that land is less than the average production of the land normally planted in corn. The reason for this discussion is that when looking at a brown gold investments taking into account the marginal productivity of that land is extremely important.

One of China's problems in the production of food is that about a quarter of their land used for agricultural purposes is marginal. That means that inordinate amount of fertilizer and other inputs are necessary for the land to produce. Over the centuries that situation was tolerable because little value was placed on the labor necessary for the land to produce. In the modern era, the value of labor is rising as well as is the value of fertilizers and other inputs. Importing food will increasingly become more economic than producing food.

This section is intended to be a collection of information from articles and news releases. As news is a random variable, so will be this discussion. Comments will be immediate rather than a long discussion, and we may change our mind later. Stimulation of thought and reflection is the goal.

To stimulate your thinking:
Part of the motivation for these items of randomness is to stimulate your thinking and expand your understanding. As that happens the potential rewards from investments that you may come across will be more readily apparent.

"India's GDP expanded at fastest pace in 18 years" by V. P. Kumar,, 31 May 2007.

"India's economy expanded at its fastest pace in 18 years during the financial year ended March 31, led by robust performance of its manufacturing and services sectors, according to official data released Thursday. But economists expect growth to moderate this year due to higher interest rates and a strong rupee. . . expects India's GDP growth to moderate to between 7.9-8.4%."

From AFVV: That level of economic growth should allow India to achieve the all-important goal of raising per capita disposable income. As of yet Indian capitalism is still in infancy. Economic growth still takes a second place to other factors. However, as the taste of the better life spreads, the joys of capitalism will become more popular. As that happens and economic prosperity gains momentum, the "religion of consumption" will take hold.

"World Bank raises China growth forecast" from China Economic Review, 31 May 2007.

"The World Bank raised its forecast for China's economic growth this year from 9.6% to 10.4%, indicating the country's GDP expanded 11.1% from a year earlier . . . The projection for China's current-account surplus was also raised to US$340 billion, or 10.8% of GDP, from an 8.3% share of GDP in the previous forecast."

From AFVV: That kind of economic growth should raise the all important determinant of consumption, disposable personal income. Additionally, the size of the current account surplus should mean that China can import any agri-food product it consumers might want. Chinese consumers, and those that supply their wants and needs, should surely enjoy the coming decade.

"Cadillac Floors It In China" by D. Roberts, Business Week, 4 June 2007, p.52.

"The Cadillac charm offensive starts at the front door. . . Cadillac is counting on its brash brand of American luxury to differentiate it from the pack. . . it has more than doubled the number of showrooms on the mainland in the past year. And it offers five models in China, ranging from the $46,000-plus CTS sedan to the $140,000 Escalade SUV and the $160,000 XLR convertible roadster.(Sticker prices run higher than in the U.S. because China slaps a 25% tariff on imported cars.). . . Then in February, Cadillac introduced a China-designed and -built version of its SLS sedan. The car is four inches longer than the U.S. model, a nod to Chinese customers, who like a roomy backseat since they tend to have chauffeurs. The model powered a 62% jump in Cadillac's sales in the first quarter, compared with a 19% increase for all of 2006."

From AFVV: When incomes rise, the demand for higher quality goods also rises. This is the phenomenon about which we are writing. Just as the Chinese are demanding luxury cars, they will also demand agrifood products higher up the chain. A graph in the article shows luxury car sales rising from less than 40 thousand units in 2002 to 160 thousand units in 2007. The Chinese consumer, with rising income, is preferring Cadillacs and "steaks" to a bicycle and "bowl of rice" of days and year past. This pattern of shifting buyer preferences in China is the motivation for LVMH buying the baijiu, "white alcohol", producer, as mentioned earlier. As Chinese trade up in automobiles so will they trade up in their adult beverage preferences.

"Pumping Cash, Not Oil" by C. Palmeri, Business Week, 28 May 2007, p. 34-5.

"With gas prices hitting record highs, Exxon Mobil Corp. ought to be drilling like mad and refining more of that black gold, right? As it turns out, the world's largest oil producer thinks it is smarter to use more of its resources to buy back stock. The indirect result: increased pain at the pump for consumers. . . . CEO Tillerson[of Exxon] has also indicated publicly that he won't build a new refinery in the U.S. . . . So, Exxon is partnering with two companies, one Chinese and one Saudi Arabian, to build a $3.5 billion refinery in China, where demand seems more assured."

From AFVV: Ethanol producers benefit from the high price of gasoline which, along with tax benefits, provides a pricing umbrella that may help to maintain profitability. If petroleum companies such as Exxon are unwilling to invest in refineries within the U.S., the U.S. gasoline markets will likely remain supply constrained. Importation of refined products will become increasingly the norm.

Transportation costs of the gasoline to the U.S. will have to be born by the gasoline consumer. U.S. gasoline prices, like all prices, are set by the cost of the marginal, or next barrel, of gasoline. As a consequence of this situation the price of gasoline in the U.S. is likely to remain high and move higher. A situation that is beneficial to ethanol producers and corn prices.

Second, note Exxon's decision to opt to build a refinery in China. Gasoline demand in China is going to grow far faster than demand in mature markets like the U.S. Gasoline demand is influenced strongly by economic and income growth. Economic growth consumes gasoline just to move the "widgets" around. As incomes rise, the Chinese consumer is buying cars, and once one has a car a person wants to drive it. Exxon has identified in gasoline the same demand drivers on which we are expecting to enhance agri-food profits.

"Consumers set to feel the bite as fears grow over food price inflation" by J. Wiggins, Financial Times, 24 May 2007, p.1.

"Retail food prices are heading for their biggest annual increase in as much as 30 years, raising fears that the world faces an unprecedented period of food price inflation. Prices have soared as the expanding biofuels industry, climate change and the growing prosperity of nations such as India and China push up the costs of farm commodities including wheat, corn, milk, and oils."

From AFVV: As the saying goes, "Ain't no free lunch." That reality is becoming more obvious as prosperous Asia-Pacific consumers bid up the price of agrifood products. The situation described in this article is exactly the trend we hope to exploit. Could the price of producing biofuels be what keeps the price of oil high?

"China Investigates Contaminated Toothpaste" by D. Barboza & W. Bodganich, The New York Times, 22 May 2007.

"Chinese authorities are investigating whether two companies from this coastal region exported tainted toothpaste as more contaminated product, including some made for children, has turned up in Latin America. A team of government investigators arrived here Sunday afternoon and closed the factory of Danyang City Success Household Chemical Company, a small building housing about 30 workers in a nearby village, according to villagers and one factory worker. The government also questioned the manager of another toothpaste maker, Goldcredit International Trading, which is in Wusi, about an hour's drive southeast of here."

From AFVV: Under the totalitarian regimes in China and the Soviet Union, consumer and environmental concerns were not high priorities. Since the demise of "old Communism" in China some individuals and firms have pursued profits at the peril of consumers. The recent stories on tainted wheat glutton from China that was used in pet food was another recent example of this problem.

First, the Chinese government does appear to be moving on such threats to consumer health. The manager of the wheat glutton firm was arrested by Chinese authorities. Now all we know is stories, but being arrested in China probably has some dire consequences. That manager's situation is likely to be an example to others that might be tempted to cross the unhealthy line.

Second, brand recognition and brand quality are going to become important issues with the Chinese consumer and consumers of Chinese exports. The instant news environment in which we now live will not tolerate quality questions that threaten consumers' health. Those companies that can establish high quality brand names will take the market share from the undesirable firms. That is, those the Chinese government does not put in jail.

The Agri-Food Value View June 2007 The Agri-Food Value View is published monthly, and delivered via email to subscribers. Annual subscription rate is US$199. Make checks payable to Schmidt Management Company, PO Box 846, Boca Raton FL 33429-0846. An internet subscription page is available at Our email address is

"undefined[Chinese food prices]" from, 23 May 2007.

"Prices for pork and eggs kept soaring over past weeks on Chinese markets due largely to tight supply and increasing production cost. . . . CPI reached the alarm level of three percent in April. . . According to the Ministry of Agriculture, in April live pigs nationwide were 71.3 percent higher than a month earlier, and pork, 29.3 percent higher. Meanwhile, price of eggs rose 30.9%."

From AFVV: The title on this English language version of the article was "undefined." That could be for several reasons. Xinhuanet did not take the time to translate the Chinese title. Or quite possibly, the Chinese title did not translate well into English.

Second, we do not expect food prices to move on a regular basis by such dramatic percentage amounts. These price increases do show that demand and supply are very close to being in balance. The supply curve, if you remember back to economics, is the one that is slopes up to the right. In the case of food, it is fairly steep. What this means is that the supply of pork, for example, is price inelastic in the short-term.

An increase in prices does not immediately translate into more pork. The piglets have to be born, fattened and converted to table pork. That cycle takes some time. Regardless of what price does in the short time, the piglet-to-pork cycle cannot be hurried much.

With supply and demand for many agri-food products in near balance, increasing demand is going to cause higher prices. In the U.S. for example, for thirty years the agri-food base has been hampered by land conversions, environmental totalitarianism, political intolerance, and other factors. Rather than invest in agri-food capacity, billions of dollars were invested in subdivisions.

"With Corn Prices rising, Pigs Switch to Fatty Snacks" by L. Etter in Wall Street. Journal, 21 May 2007, p. A-1.

"When Alfred Smith's hogs eat trail mix, they usually shun the Brazil nuts. 'Pigs can be picky eaters,' Mr. Smith says, scooping a handful of banana chips, yogurt-covered raisins, dried papayas and cashews from one of the 12 one-ton boxes in his shed. . . Mr. Smith is just happy his pigs aren't eating him out of house and home. Growing demand for corn-based ethanol, a biofuel that has surged in popularity over the past year has pushed up the price of corn, Mr. Smith's main feed, to near-record levels. Because feed represents farms' biggest single cost in raising animals, farmers are serving them a lot of people food, since it can be cheaper. Besides trail mix, pigs and cattle are downing cookies, licorice, cheese curls, candy bars, french fries, frosted wheat cereal and peanut butter cups. Some farmers mix chocolate powder with cereal and feed it to baby pigs."

From AFVV: In years past, rising corn and grain prices might have had a far more detrimental impact on agrifood producers. Farmers are more responsive to their cost structures today. Additionally, producers all along the chain are more cognizant of the value of waste. What might have been waste at the cereal factory decades ago is now a product to be sold to pig farmers.

The entire agri-food production system is becoming more like a system every day. What is meant by that is that more "feed back" loops exist for product waste than ever before. In 1800 the only recycling done was if the cows walked across the field sometime during the year. Today, the broken cookies leave on trucks to start the whole cycle over again.

Additionally, the higher demand for higher tier foods by consumers in the Asia-Pacific economy means that the higher costs of production can be passed on to consumers to a far greater extent than in years before. Agri-food production will always have cycles. But, higher demand from Asia-Pacific area means that the cycles will likely be around a trend line with a higher slope.

"The craze for maize; Iowa's ethanol economy" from The Economist,12 May 2007, p.48.

"You might think that the opening of a new ethanol facility in Nevada, Iowa - a town of 6,700 in the centre of the state - would be of interest mainly to the local farmers who supply the corn that the factory turns to car fuel. . . You would be wrong. Investors in the refinery include the person who delivers fuel to it, a couple of local partssuppliers for John Deere, and the local school-bus driver, among 900 or so other small investors. . ."

"Corn-based ethanol is neither cheap nor especially green: it requires lots of energy to produce. Production has been boosted economicallyquestionable help from state and federal governments, including subsidies, the promotion of mixing petrol with renewable fuels and a high tariff that keeps out foreign ethanol. . . Iowa, in the heart of the region, already has 28 ethanol refineries, producing 1.9 billion gallons of the stuff a year, nearly a third of America's total capacity."

"Although agribusinesses such as Archer Daniels Midland have built many ethanol refineries, farmers' co-operatives and local investors have also been busy building as well. The first local groups to do so were in remoter areas where farmers could not get the best prices for their corn because of the high cost of transporting it to market. In Iowa, that region is the north-western part of the state, which enjoys high crop yields but gets 25-50 cents less per bushel because it is too far from the Mississippi river barges. . . Land prices in Iowa rose 10% last year, and are still climbing."

"Some people in Iowa are also beginning to talk about livestock. Besides extracting corn's starch content to be turned into fuel for cars, ethanol refineries convert the rest of the crop into distillers' grains. These contain the corn's protein and other nutrients and are increasingly fed to cows, pigs and chickens near ethanol factories around the country."

"However, though Iowa has lots of pigs, distillers' grains work much better as feed for beef and dairy cows. . . the state's[Iowa] refineries already churn out more than five times as much of the stuff as its small stock of dairy cattle can eat."

"Most of those refineries, therefore, have to use a great deal of energy drying the distillers' grains so what they can be shipped to Texas and other cattle states in the South. Feeding the by-product directly to local animals would cut energy use at the refineries and transport costs for the feed. Midwesterners think this logic will drive a boom in the region's beef and dairy industries."

"Plenty of investors, however, view it as an excellent reason to start building ethanol refineries in Texas, which has plenty of hungry cattle."

From AFVV: Suppose an important question is whether the corn producer-ethanol distiller integration will be more profitable than corn production alone. At the present the assumption is being made by many of these investors that the answer to that question is yes. Inclined to agree with that conclusion at the present time. However, still suspect that ethanol may be long in supply. Definitely a lot of excitement on the prospects continues to be generated.

"New Knocks Against Ethanol" by A. McConnon, Business Week, 7 May 2007,p. 79.

". . . a study from Stanford University suggests ozone produced by ethanol-fueled vehicles might end up killing more people than emissions from gas vehicles. Ozone is a component of smog that's produced in a chemical reaction involving hydrocarbons and nitrogen oxide in the presence of sunlight. . . a computer simulation to compare air quality in the U.S. - and specifically, in Los Angeles - in the year 2020 under two different scenarios. . . the switch to an ethanol fleet could result in a 4% increase in U.S. deaths overall, and a 9% increase in L.A."

From AFVV: Do not know if these professors are right or not. But, it is apparent more people die from computer simulations than any other cause.

"Conaway, A&M officials plan million-acre Chinese ranches" by B. Campbell, Midland Reporter-Telegram, 6 May 2007, obtained from

"Congressman Mike Conway of Midland met recently in Beijing, China, with officials of Texas A&M University and the People's Republic of China to lay plans for modernizing the beef cattle industry in the world's most populous nations."

"The stakes - and the steaks - are intriguing for A&M, which reported Friday that it will be involved for at least the next few years; China, which wants to feed its increasingly affluent society better; and a Seattle company wants to set up five one-million-acre ranches and even a horse racing endeavor."

"'The cow-calf operations and packing houses would be state of the art and an opportunity for American companies to sell a lot of equipment to China,' said Conway . . ."

From AFVV: Imagine a lot of crazy schemes will be pitched to the Chinese. Apparently, they may be listening. Keeping the people's bellies happy may be more effective control than was Communism.

Publication Schedule: 4-6th of the month.

Odd thoughts:
An interesting collection of thoughts and ideas this month. Potential of the Agri-Food cycle continues to unfold. The previous decades were a consumer technology era, focused on the personal computer. With Dell now moving to sell through Wal-Mart, the PC is now coming to be the commodity we always expected it to become. The investment world will have to move on to something else. The Chinese and India consumption miracle may indeed be that something else.

Remember to send in your questions and ideas as they develop.

Till next month,

The Agri-Food Value View June 2007 The Agri-Food Value View is published monthly, and delivered via email to subscribers. Annual subscription rate is US$199. Make checks payable to Schmidt Management Company, PO Box 846, Boca Raton FL 33429-0846. An internet subscription page is available at Our email address is



Author: Ned W. Schmidt

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 The Value View Gold Report. 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

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