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TMFDeej (99.47)

Barron's is Wrong Series Post 2: Increasing Consumption from Emerging Markets

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April 01, 2008 – Comments (10)

My first post about how wrong Barron's commodities bubble article is focused on how the U.S. ethanol boondlggle is going to force the price of corn to continue to rise over the next year:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=44164&t=01001019292467236494

Today I am going to quickly talk about the increasing demand for food from emerging markets.  The International Herald Tribune published an excellent article on this subject this morning:

http://www.iht.com/articles/2008/03/31/business/food.php 

Here are a few of the key points that illustrate why the demand / supply dynamics of rising grain prices are real, and not just some short-lived bubble caused by speculators:

- "Damaged by severe weather in producing countries and plundered by a boom in demand from fast-developing nations, global wheat stocks are at 30-year lows." (emphasis added)

-  "World population is set to hit 9 billion by 2050, and most of the extra 2.5 billion people will live in the developing world. It is in these countries that the population is demanding dairy and meat, which require more land to produce."

- "In the next decade, the price of corn could rise 27 percent, oilseeds like soybeans by 23 percent and rice by 9 percent, according to tentative UN and OECD forecasts in February."

- "China's population is proportionately much larger than the countries that industrialized in earlier periods and is almost double that of the current G-7 nations combined"

- "The Chinese, whose rise began in earnest in 2001, ate just 20 kilograms, or 44 pounds, of meat per capita in 1985. They now eat 50 kilograms a year."

- "Each pound of beef takes about seven pounds of grain to produce, which means land that could be used to grow food for humans is being diverted to growing animal feed."

Sure the commodities markets have gotten a little frothy because regular investors like you and I now have the ability to come along for the ride, but to me it is unbelievably obvious that supply shortfalls, not rampant speculation, are driving up prices.

Deej

10 Comments – Post Your Own

#1) On April 01, 2008 at 10:40 AM, leohaas (93.17) wrote:

"Sure the commodities markets have gotten a little frothy..."

If you are arguing that prices of corn, grain, etc. are going up long term, you are absolutely right. The same is true for home prices, by the way...

Whether or not there is a bubble depends on the pace at which prices go up. If you were to draw prices on a logarithmic scale, you expect to see a straight trend line. If prices move above the trend line, and go up sharply from that line, prices are going "parabolic". Parabolic trends NEVER continue. They do one of two things: either they find a new trend line, or they collapse. Going parabolic followed by a collapse is a bubble.

Considering your statement "In the next decade, the price of corn could rise 27 percent, oilseeds like soybeans by 23 percent and rice by 9 percent..." you expect the prices of these commodities to rise by less than 3% a year on average. We can only get to that average if the recent parabolic trend will be followed by a collapse. In other words, we are in a commodities bubble!

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#2) On April 01, 2008 at 11:00 AM, TMFDeej (99.47) wrote:

The whole point of the Barron's article is that commodites will fall between 30% and 50% over the next year.  The point of my post is that there is absolutely no way that is going to happen.  The price forecasts I mentioned in my post were calculated by the United Nations, not me.  I personally feel that they are way too convervative.

Deej

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#3) On April 01, 2008 at 11:45 AM, leohaas (93.17) wrote:

"The whole point of the Barron's article is that commodites will fall between 30% and 50% over the next year."

If we are in a bubble, then that is exactly was is going to happen.

"The point of my post is that there is absolutely no way that is going to happen."

I understand that that is what your post was about. But the arguments you make mostly support that commodities will go up long term, not necessarily short term. After all, they are for the "next decade" and "2050", and they all rely on trends. Short term, we are in a bubble because we are so far ahead of the long term trend line...

"The price forecasts I mentioned in my post were calculated by the United Nations, not me.  I personally feel that they are way too convervative."

Hey, you felt it necessary to include this quote.

Bottom line: both Barron's and you can be right. Short term we may see Barron's "bubble" deflate, but long term the commodities uptrend will resume. I am not so sure Barron's is right about the short term, but you are definitely right about the long term!

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#4) On April 01, 2008 at 12:05 PM, TMFDeej (99.47) wrote:

Thanks for the comments, leohass.  I enjoy a good debate :).  Commodities markets seem to be pulling back a little this morning.  Perhaps Barron's article triggered a little unwinding.  As I said earlier, speculation may have help fuel the rally in grains and caused them to get ahead of themselves a little, but the underlying cause for the sharp price increase in grain and soybeans the past six months is our government’s policy on ethanol.  There are currently 62 million acres or 20% of our nation’s crop acres diverted away from food and feed production to the production of fuel ethanol and the Conservation Reserve Program.  There is more demand for than supply of these commodities right now.  The long-term bull run in the prices of them will be fueled by demand and supply dynamics, regardless of short term (the next couple of months) movements in price.

Deej

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#5) On April 01, 2008 at 1:14 PM, kdakota630 (32.79) wrote:

So TMFDeej, if you believe (as I do) that commodities prices will continue to rise for the foreseeable future, where do you see the best places to put your money to profit from the increase?

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#6) On April 01, 2008 at 1:39 PM, leohaas (93.17) wrote:

kdakota630, for the long term you may want to look in to companies producing seeds (MON is my favorite), fertilizer (I am hoping for a good entry into POT), farming equipment (DE might be a good pick), and transporters (the much-hated DRYS, recent SA pick CNI, and Buffett favorite BNI come to mind).

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#7) On April 01, 2008 at 2:51 PM, TMFDeej (99.47) wrote:

Hi kdakota630.  I agree with a lot of the ideas that leohaas mentioned, sush as seeds and farm equipment.  I wrote a post about my favorite ag plays right now last month if you're interested.

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=40565&t=01001019292467236494

Deej

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#8) On April 01, 2008 at 3:18 PM, leohaas (93.17) wrote:

Deej,

Love your EATME ETF!

All others: follow the link in Comment #7. Worth reading! 

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#9) On April 01, 2008 at 6:09 PM, AnomaLee (29.26) wrote:

Ditto.. 

The world population is growing and we're rapidly introducing more middle-class consumers to the world, and all consumers do is... consume

Global climate change is not a fictitious scenario. Many areas of the world have experienced droughts and rain short-falls for the past 7 years or more. It's very easy to find articles as I have about the water shortages in California, Arizona, Nevada to water disputes between South Carolina, Georgia and Nigeria. 

There are water issues are very apparent in Asia(China and India) and in large parts of Africa and the Middle-East. These are all things that make growing crops more and more difficult.

Potash is over-valued but it is a great way to play the growing needs to supply food, and Veolia Enviroment is a very good way to play the growing need to develop water infrastructure throughout the world.

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#10) On April 02, 2008 at 10:43 AM, kdakota630 (32.79) wrote:

Thanks guys.  Mostly you two just confirmed what I was thinking already.  I was considering both MON and POT, but recently put money into TRA.

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