Commodities: Agriculture Fundamentals Are Favourable

Over the last few weeks or even months, all I have been reading and hearing from the news wires is how bad the outlook is for Agricultural commodities. In my opinion, that is total non sense. First of all, despite recent increases in Corn, Wheat and Soybean stockpiles, supplies still remain at historical lows. That is quite a worry for the world, because any further shocks to inventories will create price spike with dramatic fashion from these levels. So how possible is this price shock? In my opinion, it is just a matter of time really.

As the world hit 7 billion people over the last few months, we can safely say that population has doubled over the last 30 years, the world GDP has gone up from $10 trillion to over $60 trillion, while arable land has not increased at all (chart above). There is only so much technology can do to improve harvest yield. On top of that, prices of all Agricultural commodities remain at pretty much the same prices as they did during 1970s. So, just imagine how much the Dollar has been devalued since those days and what farming margins look like when Corn is sold at $5 per bushel in the 70s and compared to today. Most people do not know this, but if we were to adjust Wheat for inflation, it is very very close 200 year lows!

So with prices depressed on historical factors, farmers do not have favourable conditions to plant and grow supplies to the point where the world has more than it needs. Furthermore, not only is arable land not expanding as we saw in the chart above, but we also have a shortage of farmers too. Agricultural industry has some of the highest suicide rates from India to UK, while farmers from Australia to Japan, and from India to the US have an average age of 55 plus. We are not only running empty on inventories, we are also running low on farmers.

Now take into account Asia and its opening up towards the world since the start of the millennium. At the start of the millennium, China was quite self sufficient in feeding itself, with plenty of Grains, Meats, Fruits and Vegetables to export. Surplus trade lasted for awhile, however since the last several years, things have started to change dramatically. China is becoming more and more hungry. The super bears keep hammering the point that deflation will take food prices to very low levels, but they need to understand that Agriculture is run by basic demand and supply, so even if the Chinese property market implodes into itself, the Chinese will not stop importing food.

Furthermore, not only are Emerging Markets like the BRICs hungry, but they also want to eat better food like we do in the West. That requires a higher protein diet, which in turn means more Grains to feed the Live Stock. Yes... you heard right, more Grains - the same ones that the world has been neglecting for decades and currently has very short supplies off. Please note that basic mathematics states that if China was to increase its Livestock by 10%, all of the US Corn supplies will be eaten up automatically and huge shortage crisis would unfold. This does not factor any other problems like weahther creating a bad harvest.

As already covered on this blog before, sentiment is extremely negative on Agriculture with futures positions at the lowest level since March 2009, while DSI survey's on individual commodities have all reached single digit bull readings in recent weeks. Looking at the chart above, Agriculture is very very oversold while the bearish momentum is slowly weaning off as we diverge. This is your typical run of the mill bear market which has declined for over 10 months and almost 30% from the peak in February 2011. If investors are meant to buy value at cheap prices, than Agriculture with its strong fundamentals and discounted price presents an amazing opportunity right now.

With the Euro sentiment extremely negative and US Dollar sentiment extremely positive, eventually over the coming days or weeks or months the US Dollar will top (do not ask me for a exact date). At that point all commodities, including Agriculture, should get a great boost. Finally, another boost might also come from global money printers, all of whom just cannot help themselves (chart above). It is a fact that we have literally printed trillions of Dollars, Euros, Yen and Pounds to "save" our economies, but historically whenever banks and governments printed money, price of food and energy always increases but economic prosperity never returned...