Connect the dots

One of my favorite bloggers, Professor Joseph Dancy of the SMU School of Law pointed out the following agricultural data points recently:

“The boom in biofuels is boosting demand and constraining food supplies; 20% of the US corn crop is already used to produce ethanol. Agricultural commodities are the subject of a growing battle between energy demands and food demands of the world’s population. The UN's World Food Organization predicts that demand for biofuels will grow by 170% in the next three years.

Wheat prices surged to record highs last month. Expectations are that rising global demand for U.S. wheat will deplete inventories, leaving them at the lowest level in three decades. Wheat prices on the Chicago Board of Trade topped $9 a bushel for the first time ever.

The U.S. Department of Agriculture cut its estimate of Australia's wheat crop to 21 million metric tons from last month's estimate of 23 million tons. Australia was expected to be the world’s second largest wheat exporter. The USDA’s estimate of Canada’s wheat crop also declined 5.6 percent last month.

The USDA raised its’ forecast of expected wheat exports as foreign buyers are flocking to the U.S. The world market expects poor harvests in major producing regions, and rising demand from industrializing nations such as China.

The USDA estimates crop-year ending stocks of wheat will fall to 362 million metric tons in 2007- 2008, down from 456 million metric tons a year earlier. This is the lowest inventory level since 1973-1974.

Ukraine was the world's seventh-biggest wheat exporter last year. The Ukraine government said it will restrict grain exports last month to moderate domestic food price increases.

Russia, last year's third-largest wheat exporter behind the U.S. and Canada, said it may impose a 10 percent export tax on the grain in November and a 30 percent export duty on barley.

Global wheat inventory stockpiles at the end of June in the five biggest-exporting countries fell to 107 million tons, a 34-year low. Wheat was the fourth-biggest U.S. crop in 2006, behind corn, soybeans and hay, according to government data.
The higher wheat prices have increased the cost of staple foods such as bread and pasta. Higher pasta prices prompted consumer groups in Italy to launch a one-day boycott of pasta last month. Prices there have soared as much as 20 per cent over the last several months.

Corn prices hit a three-month high last month after China signaled that it could become a net importer for the first time in more a decade. One of the world's four biggest corn exporters last year, China will encourage more imports of the grain, and discourage domestic output of crop-based fuels, in an attempt to keep food inflation under control.

The amount of U.S. lands planted in corn has increased 18.5 percent this year, from 78.3 million acres last year to 92.9 million acres. The USDA forecast that fertilizer use should increase by 5 percent overall, with use on corn up 9.5 percent.

The USDA is forecasting record fertilizer expenditures for 2007. Fertilizer accounts for roughly 20% of a corn farmer’s operating cost.

Over the last year the price of eggs went up by 33.7 percent, whole milk 31.1 percent, and navel oranges were up by 13.6 percent in the U.S. according to a government report. Other dramatic increases included fresh chicken up by 8.4 percent, apples up by 8.7 percent, and dried beans up by 11.5 percent.

Barley prices in Winnipeg, Canada, gained 41 percent in the past year on increased demand for animal feed and for brewing beer. Canada is one of the world's biggest barley producers. Corn has gained 53 percent in that market as demand for grain-based ethanol surged.

Driven by a combination of trade policies and competition for cattle feed from biofuel producers, global milk prices have doubled over the last two years. There are reports of cows being stolen from Wisconsin dairy farms.

Developing countries face serious social unrest as they struggle to cope with soaring food prices, the United Nations’ top agriculture official warned last month. While food may be less than 10 per cent of the household budget in the developed world, in poorer countries it is 65 per cent.

The USDA is expecting a record breaking year for agricultural exports from the U.S. Exports are expected to reach a record $79 billion in fiscal year 2007, topping the old record set the previous year. USDA says sales are expected to reach another record in 2008.

The value of all U.S. crop production this year is forecast to rise 14 percent from 2006, to $136.2 billion. The value of production from cattle, hogs, chickens and eggs will increase 18 percent, to a record $140.2 billion

Rising prices for livestock and grains should push U.S. net farm income to a record high in 2007, 48 percent greater than a year earlier according to the USDA. Farm income is expected to rise to $87.1 billion from $59 billion last year. "This is a great time to be a farmer," said Christopher Hurt, an economist at Purdue University in West Lafayette, Ind. "Farming may be the healthiest sector of the economy."

A rise in agricultural income could boost sales of farm machinery, seeds, and farmers will also be able to afford more fertilizer according to agricultural economists.

A boost in farm income this year has accelerated agricultural equipment sales according to representatives of the equipment manufacturing industry. Combine sales are up so far this year by nearly 9 percent according to Russ Green, president of Caterpillar’s North American operations. “Obviously there is reason for optimism,” Green said. “Usually 14-18 months after an upturn in commodity prices we’ll see an upturn in equipment sales.”

Ag Equipment Newsletter, a publication for agricultural equipment marketers, in its Sept. 15 issue reported results of its annual survey of North American equipment dealers, noting, “It’s difficult to find a product category that dealers aren’t enthused about next year.” From Joseph Dancy

Professor Dancy is not offering opinions here, just reporting the facts as they are in the agricultural commodities markets.
Enough of the facts; let’s move on to the really important issue: My opinion.

(Just kidding. Remember that commercial for the “Real Yellow Pages” a decade or 2 ago? Under the heading “Headcases” the scene cut to a hip New York City party, and one character leans over to the person she is talking to and says: “Enough about me, darling. Let’s talk about you. What do YOU think of my new hairdo?”)

Well, I am only partially kidding. In any event, it is my assertion that most, if not all of the changes noted above have been brought about by the increased costs of fertilizer, pesticides, diesel for farm equipment, as well as transportation fuel to ship foodstuffs across continents and oceans to the final consumer. The trend “is what it is” and for investors “the trend is your friend”. Of course, for poor folks here and the world over, this trend is no friend. Any impartial analysis of world Wheat inventories and supplies would not the analyst with a warm and fuzzy feeling as it applies to actually feeding people. Though investors that have been long Wheat might feel warm and fuzzy about the positive impact on one’s portfolio.
There is little or no additional acreage available with which to increase industrial production levels of Wheat, Corn, Soy Beans and other grains. Increasing acreage in one means decreasing acreage in another, and we know how musical chairs works out in the end. There are only two ways to increase the amount harvested: Increase crop yield per acre and/or increase acreage planted.

My argument stands that while this is no Armageddon, it is no walk in the park, either. As these trends compound like interest on a mortgage, or creep up on you like the Alternate Minimum Tax, even in wealthy countries like the U.S. people will have to respond (or else it would be Armageddon).

What will the response be? Good question – and perhaps a very complicated, difficult answer. Or maybe as simple as an increase of a couple percent in local food production per year until, 40 years or so hence, nearly all food supplies are produced regionally. I think the simple answer is the most likely outcome, and that is why I believe the energy crisis, while brutal economically, will not be the Apocalypse.

Mentatt (at) yahoo (d0t) com