Bear Market Deleveraging Producing Incredible Value in Agri-Foods
Commodities / Agricultural Commodities Oct 27, 2008 - 01:40 AM GMT
While a bear market is not fun, we should acknowledge the benefits. First, it will eliminate much of the “hedge” fund industry, those that helped create the mortgage debacle and artificially inflated so many asset prices. Investing will be so much better after they are gone. Second, incredible values are being created in markets as these leveraged funds are liquidated. Investors should be looking at these values, rather than in lemming fashion following those mistaking today for 1930. Agri-Food, for example, is not in any way in the same condition as it was in that era.
Out first chart this week is of the USDA's forecast for global corn stocks. Yes, production will rise this year from inadequate level of last year. However, ending stocks relative to consumption, the red line, will rise only modestly. More importantly, look to the coming year. USDA forecasts that global stocks of corn will fall to barely above 1.6 months. Any shortfall in production or reduction in planting intentions could cause a global shortage in corn.
Now, take a look at the second chart which reflects the ravaging of corn prices by liquidating, we happily note, speculative funds. U.S. corn prices probably should not have risen to more than $7 per bushel. Only the speculative activity of the funds did that, not the fundamentals. Corn prices today would not be under $4 were it not for those same funds and those funds being liquidated.
Corn prices, as suggested by the stochastic, are deeply over sold. On a fundamental basis, current prices will not profitably support a considerable amount of acreage that has been, or might be, planted in corn. In all likelihood, corn prices are poised for a significant advance in the years ahead as planting intentions are scaled back and consumption continues to expand. For if a Chinese consumer, earning higher income, switches consumption from one pound of rice to one pound of pork or simply consumes another pound of pork, consumption of grain rises by five pounds. That happens regardless of the Street's delusional forecast on the Chinese economy.
Agri-Food investments will benefit from this trend. The joyous liquidation of speculative funds has crushed some of the associated stocks. Investors should be taking advantage of these forced sales and harvest some of those values for their portfolios.
By Ned W Schmidt CFA, CEBS
Copyright © 2008 Ned W. Schmidt - All Rights Reserved
AGRI-FOOD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of Agri-Food Value View , a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To review the most recent issue go to http://home.att.net/~nwschmidt/READFOOD.html
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