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The Agflation outlook
Supply in ag markets is inherently volatile due to weather. With record low stocks for many commodities, price spikes are likely in the event of any supply disruptions.
So wrote Morgan Stanley’s equity strategy team led by Teun Draaisma at the beginning of the week.
By Thursday, rice futures - which hit a record last month - rose for the fifth day as the devastation wrought by Cyclone Nargis in Burma became clear. The storm struck the country’s main rice-growing area last weekend, raising the prospect of Burma, expected to export 600,000 tons of rice this year, would become a net importer.
Asia rice prices have almost trebled this year. So, explains the MS team:
The spike in prices in the last 6-12 months has been due to inventories being very low, meaning many ag markets are at the pinch point where prices can go vertical in response to any big supply/demand shifts.
The structural bull argues that rising incomes, population growth, urbanisation, high oil prices, low inventories and political interference will conspire to keep prices of agricultural products and food high for the next three to five years. Measure to boost supply will likely take several years to materialise.
But Morgan Stanley argue that in the near term we’re facing a period of volatility - speculators could accentuate any swing in prices which results from a production surprise on the upside, while political priorities appear to be shifting.
Their commodities man thinks the pullback in wheat prices, already 30 per cent off their highs, will continue.
Morgan Stanley’s stock conclusions:
We have constructed two baskets of stocks to express a bullish or bearish view on the theme. The ‘winners’ - mostly suppliers to agriculture - have outperformed significantly and now enjoy a record 110% PE premium to the market. However, the fundamentals may remain strong for several years and these stocks have not yet reached Nasdaq like bubble territory. The ‘winners’ include Bayer and BASF which are in the European Model Portfolio. Our ‘losers’ basket includes food, beverage and food service stocks.
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Burma death toll could exceed 100,000 - FT.com
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poor farmers only benefit from higher food prices if they have surplus to sell and can get it to market ie if they can realise the higher prices. Also higher fuel and fertiliser costs would hurt them so not necessarily guaranteed that higher food prices mean less poverty for smallhold farmers…
One thing the meedja should remember:
higher food prices tends to help the poor because most of the world’s poor are farmers. Its the very poorest that suffer.
This shift in the terms of trade helps farmers everywhere, rich and poor.
Ordinary analysis by blokes in suits, who’ve never seen a rice paddy. This time last year, there was plenty of rice. This year, a confluence of weather-related events mean there’s a shortage.
Unless they’ve invented an accurate weather-prediction program, all they’ve proven is that they have a ruler in their top drawer. Brilliant!
Provimi could be a good buy if you think meat is going to triple in value. They supply nutrient mixes and complete feeds to increase the efficiency/speed of animal growth and meat quality
And the second generation biotech crops could be very interesting to watch as they start to be rolled out and the current price rises force Brussels/EU govts to accept them or watchthe price of meat triple in Europe next year (I kid you not).
Think I agree - more people and less planted land does not necessarily mean less output, in fact, it probably means yields will have to increase dramatically. So suppliers to farmers seems the best bet - would also think Monsanto and syngenta are interesting, they are “purer” plays than either Bayer or BASF - which have other sizable businesses. re previous post - I totally agree, yield is the key part missing from the chart/post.
Re Exhibit Seven: They conveniently forget to factor in yield growth, so for this graph a doubling of yields from 1960 to the present would be typical (for example US maize). Now as production tends to expand in the lowest cost regions (i.e. where it’s production is most efficient), the production response from higher prices currently seen might help to drive down soft commodity prices. And instead of just stating rising incomes increase ag commodity demand, try breaking it down to where in the income cycle these demand shifts occur and the results do change subtly esp. for China.
Re Exhibit Seven: They conveniently forget to factor in yield growth, so for this graph a doubling of yields from 1960 to the present would be typical (for example US maize). Now as production tends to expand in the lowest cost regions (i.e. where it’s production is most efficient), the production response from higher prices currently seen might help to drive down soft commodity prices. And instead of just stating rising incomes increase ag commodity demand, try breaking it down to where in the income cycle these demand shifts occur and the results do change subtly esp. for China.