By Ned Schmidt
We have always wondered if the Street had two businesses, trading securities and raising poultry. The Street has had a long successful history of serving up “turkeys”1 to investors. In the past year it has been very good at doing so. Last we visited Facebook was our topic. That large thud heard on the Street earlier this year was FB coming out of the gate. Zynga, a purveyor of imaginary farms on the net, is another from the poultry subsidiary. After reaching a high of $15.91 the stock is trading at $3. Investors might do better raising a few real turkeys in the backyard rather than buying one from the poultry merchants on the Street.
As some portfolios were being Zynga’d, our Agri-Food Price Index was moving higher, as shown in the chart above. Igniting the most recent rally in Agri-Commodities was a drought in the Midwestern United States. Unlike smart phones which can be made in unlimited quantities, corn and soybeans can only be produced in dirt when water is applied. Importantly, in most regions of the world those crops can only be produced one time a year. Miss part of a crop, and the world must wait an entire year for another.
However, investors must come to realize that droughts are not an unusual event in history. Those weather events have occurred many times. In history, the drought induced loss of crops was largely a regional, or local, tragedy. They did not threaten the global balance of food.
In the modern era, the historical surplus of Agri-Commodities has disappeared. Today, a shortfall in production of grains has global ramifications. When a harvest is weak in South America, as it was this past Spring, the world is vulnerable to shortages. Analysts knew at that time that soybeans were a high risk grain due to the global demand for that grain.
The above chart, using data from the elves at the USDA, portrays on a global basis the number of days of soybean consumption in storage at the end of the indicated crop year, 31 August. In 2011 the world had more than 100 days of soybean consumption in storage. That was the highest level in the 8 years shown in the graph, and an aberration. For sometime we have known that soybean inventories would fall to ~75 days by the end of this coming August.
Hope had been that the North American crop would be sufficient to turn the soybean supply situation. The Midwestern U.S. drought has buried that hope. When U.S. soybean crop was damaged by drought, a short soybean situation became unavoidable. That difficulty, coming after a weak South American harvest this Spring and less than needed planting of soybeans in the U.S., simply exacerbates the soybean situation brought about by the historical global surplus disappearing
The days of a bountiful surplus of Agri-Foods are gone. The world is going to have to adjust to a situation where food is expensive for the foreseeable future. Obesity in the West may become a problem of yesterday. So, if an investor does not want a portfolio Zinga’d, doing some research into Agri-Equities and other Agri-Investments might be wise.
Editorial: In the past year the gullible public, thinking their money safe, lost ~$1.8 billion at commodity trading firms. Then, as we are writing these comments, we read:
“CME Group Inc. Reports Second-Quarter 2012 Financial Results. CHICAGO, July 26, 2012 /PRNewswire via COMTEX/ -- CME Group Inc. . . .today reported revenues of $796 million and operating income of $469 million. Second-quarter net income attributable to CME Group was $245 million . . .(marketwatch.com)”
If CME is making that kind of money why have they not made investors whole again? Greed?
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- A turkey is a large native American bird. Due to its size, the bird is near flightless. Aburst of wing fluttering may send it in to the air for a moment, but then it returns rather quickly toearth. If Les Nessman could come to understand turkeys don’t fly, so should most investors. Bythe way, Les, after a long successful career at WKRP, is now head of programing for CNBC.
AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA publisher of The Agri-Food Value View, a monthly exploration of the Agri-Food grand cycle being created by China, India, and Agri-Energy. To contract Ned or to learn more, use this link: www.agrifoodvalueview.com