Agri-Food's Investing Bypasses Illusory Stimulus Driven Economic Growth

By: Ned_W_Schmidt

Some, and perhaps more than we imagine, economic sectors are immune to the failing economic policies of the Obama Regime. Those industries being driven by the dominant global trends should be somewhat resilient to the ongoing economic problems of the U.S. However, none will totally escape as the U.S. is such an important economic center of consumption. How do investors escape this reliance on U.S. economic activity level? The answer is, quite simply, Agri-Food.

Investors, particularly those in the U.S., are being exposed to a grand period of illusory economic statistics. The U.S. Federal Reserve has injected more than a trillion dollars into that financial system. Doing so has managed to halt the process of economic collapse. The U.S. economy now bobbles up and down at the bottom of the abyss. However, no energies have been released that will cause true growth, not illusory growth, to manifest itself. Obama Regime’s high tax, anti growth approach will not do the trick.

An example of the economic statistics likely to be used to fool investors is that of U.S. economic growth. Note that an out of work individual unable to buy an imported television or foreign-made clothing could cause U.S. GDP statistics to appear as if improving. Due to magic of the math of economics, an out of work individual NOT buying an imported television causes U.S. net exports to be less negative and, therefore, U.S. GDP growth becomes positive. Obama Regime and investment hucksters will make much of this.

Agri-Food is an economic sector more driven by global trends, and not overly reliant on Western economies. As shown in our first chart above, the Agri-Food stocks corrected, and then rose to slightly more than the most recent short-term high. Actually, the correction was more than that shown in the graph. Individual issues, especially, experienced more corrective action than implied by the average. At the same time, while well off the bottom, the market for stocks of the last decade continues to languish if put into historical perspective.

Most interesting though is the strong divergence between the performance of the Agri-Food stocks and the S&P 500. While the general stock market remains mired in the mess created by the Federal Reserve and the Obama Regime, the Agri-Food stocks have shown more independence. In part, the reason for that development is that the fundamentals are strongly influenced, and perhaps dominated, by global factors.

Global demand for Agri-Food by consumers living in BRICA, that is Brazil, Russia, India, China, and ASEAN, is only minimally influenced by high unemployment and dismal economic activity in Western economies. BRICA’s economic growth, while benefitting from globalization, is increasingly organic. That  growth is creating consumers with more income that have a desire to eat better. Demand for Agri-Food from BRICA, as well as other parts of the globe, is increasingly independent of economic growth in the Western economies.

We have talked about the price of sugar, shown in the above chart, in previous discussions. As can be readily observed, the price of Sugar is not mired in the Obama Recession. After trading for some time in the range $12-16 Sugar has broken out, moving to near $20.

A multitude of factors have come together to force the price of sugar higher. First, and most important, sugar is not made in a factory. It is derived from plants that grow in fields. Someone must have the money with which to plant the crop. Then, the rains must come at the proper time and in the appropriate quantity.  In India, a major consumer and producer, these factors have not come together as needed this year. Additionally, ethanol competes with sugar for cane production.

Further, as incomes rise, the demand for sugar increases. Sugar, not a food necessity, is an indicator of future conditions in Agri-Food. Income growth in BRICA will be driving  Agri-Food prices higher in the next decade, especially in any period of production shortfall. Due to shrinkage of the surplus production gap, production shortfalls, anywhere in the world, will be reflected quickly in prices.

Our final chart, which can be found below, this week portrays an index of Agri-Food prices with the S&P 500. With the enthusiasm that normally comes with planting season in North America, Agri-Food prices declined on excessive optimism over the potential for this year’s crop. Forecasters of this Fall’s crop production have been racing to issue the next more optimistic forecast. That bounty of optimism caused Agri-Food prices to become over sold. However, July is a long way from the combines coming out of the field. With some looking beyond these forecasts, our stochastic oscillator has turned bullish, as noted in the chart.

A multitude of irrelevant questions still are before investors, in general. Will housing prices recover? What will GDP growth be? Will GOOG beat the estimates? Will bank stocks continue to recover? Those are all questions of yesterday, rather than being questions of tomorrow. Globally, investors recognize the economic damage being done by the failing policies of the Obama Regime, and have moved into Gold. Swiss banks are reported to be running out of vault space in which to store Gold for investors.

That move to Gold is fine, but an offensive component is needed in portfolios. The outlook for BRICA over the next ten years is one of continued growth in consumer incomes. From that income, the spending on Agri-Food will strain the capabilities of the world’s Agri-Food production system. Never in the modern era has the world faced a growing structural shortage of Agri-Food. Is your portfolio ready for the next decade, or is it still trying to recover from the errors of the past decade?

Read more at http://home.att.net/~nwschmidt/Order_AgriValueRECENT.html

By Ned W Schmidt CFA, CEBS

AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA,CEBS, publisher of The Agri-Food Value View , a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To receive the most recent issue of this publication, use this link: http://home.att.net/~nwschmidt/Order_AgriValueRECENT.html

Copyright © 2009 Ned W. Schmidt - All Rights Reserved

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