Peak soil: the next market killing?

You know it's time to worry when market analysts see 'opportunity.'

From 'Peak soil' and the agriculture re-boom are coming:

...We are talking about a commodity which is equally as important as oil. A commodity which has not been hit nearly as hard as almost every other one during this downturn. A commodity that is already in short supply. And one which will have a far greater run up this Summer (and more profitable for investors) than oil probably will.

A perfect storm for agriculture

The commodity is food. This Summer has the potential to be a very big one for agriculture commodities. The prices of everything – wheat, corn, barley, sunflower, among others – are on the verge of going much, much higher.

We all know the long-term case for agriculture. The “Peak Soil” crisis is something that has been followed closely in the Prosperity Dispatch for a long time. The combination of declining crop yields from overused soil and rising demand from a wealthier and growing population.

We are not going out on a limb and saying the long-term outlook for agriculture commodities and stocks is outstanding. Today though, we want to focus on the short-term prospects for agriculture. More specifically, how two big issues could launch agriculture commodity prices back to last year's highs and
beyond.

Just like every other commodity, agriculture commodity prices are driven by supply and demand. The catalysts for agriculture commodities in this summer rest on the supply side.

The first factor is grain stockpiles. They're at record lows. Corn is the perfect example. Corn stockpiles in the US have currently fallen to a 33-day supply. That means if there was no corn production this year, the US would be out of corn in a little over a month. This is the lowest on record since the old record of 34 days' supply set in 2003.

It's not just a problem in the US though. The rest of the world is probably not going to make up for the shortfall. Allendale, a commodities research firm, says: “Equally alarming is the lack of help from major world suppliers such as China, Brazil, Argentina and South Africa. US Department of Agriculture (USDA) projects the world end stocks [are at] 128 million tonnes, down 8.6% year on year. This would imply the world's reserve supply of corn at 53 days, one day lower than the old record dating back to 1999.”

Sounds pretty bad right? Stockpiles are low and only another record-setting year of production will help ensure stockpiles remain at their current low levels. That's where the second factor could create some real fireworks over the next few months in the agriculture sector.

Another bumper crop this year is highly unlikely. And it has nothing to do with farmers getting financing, fertiliser shortages, or anything which can be compensated for. The problem is completely out of the control of the agriculture industry.

The sunspot cycle

A few weeks ago we had the chance to sit down with John Embry, the chief investment strategist at Sprott Asset Management. Embry has been a commodities analyst and portfolio manager for decades and has done exceptionally well during this commodities boom.

In our conversation, Embry brought up a very important point about agriculture. He said: “I think the real arbiter in the short run might be the climate. I see a lot of industry people bringing this up, changing sunspots. These changes in the sunspots suggest that we may be facing drought conditions in a lot of the world all at the same time.”

If that's the case, I think you are going to see massive food shortages which would underrate a considerable price appreciation in the food because there will be a real fight for it. ...

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From Peak soil investment: This quiet land grab is just beginning:

According to the Economist, Saudi Arabia, Kuwait, and China have been “quietly” buying up more than $20 billion of this asset.

It's not oil or natural gas assets though. And it's not the molybdenum they need to build thousands of miles of new pipelines. They're buying up one of my favorite long-term investments, farmland.

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Right now, official estimates for this year's crop are far too optimistic. Currently, the U.S. Department of Agriculture (USDA) expects world grain production to rise 4.9% this year. And they're expecting an increase of 3.1% in 2010.

Granted, that sounds reasonable to most people. But they're not reasonable expectations at all.

You see, these are very rosy expectations for so many reasons. First, you have to consider that 2008 was one of the top three crop production years in history. The sharp rise in crop prices over the past few years sent farmers around the world into full production mode. The past two years were exceptional. Even though, demand still outstripped supply and food riots broke out around the world.

Also, agriculture production doesn't grow that fast. It grows at a snail's pace. An average year will see about 1% to 2% growth - maximum. The past few years have been an exception, not the norm.

The final thing the USDA is missing is agriculture production goes hand in hand with the economy. According to a recent report by Credit Suisse, “[2009] would be the first global recession to coincide with increased crop production.”

So the USDA growth estimates are downright laughable.

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From Buying farmland abroad - Outsourcing's third wave:

EARLY this year, the king of Saudi Arabia held a ceremony to receive a batch of rice, part of the first crop to be produced under something called the King Abdullah initiative for Saudi agricultural investment abroad. It had been grown in Ethiopia, where a group of Saudi investors is spending $100m to raise wheat, barley and rice on land leased to them by the government. The investors are exempt from tax in the first few years and may export the entire crop back home. Meanwhile, the World Food Programme (WFP) is spending almost the same amount as the investors ($116m) providing 230,000 tonnes of food aid between 2007 and 2011 to the 4.6m Ethiopians it thinks are threatened by hunger and malnutrition.

The Saudi programme is an example of a powerful but contentious trend sweeping the poor world: countries that export capital but import food are outsourcing farm production to countries that need capital but have land to spare. Instead of buying food on world markets, governments and politically influential companies buy or lease farmland abroad, grow the crops there and ship them back.

Supporters of such deals argue they provide new seeds, techniques and money for agriculture, the basis of poor countries' economies, which has suffered from disastrous underinvestment for decades. Opponents call the projects “land grabs”, claim the farms will be insulated from host countries and argue that poor farmers will be pushed off land they have farmed for generations. What is unquestionable is that the projects are large, risky and controversial. In Madagascar they contributed to the overthrow of a government.

Investment in foreign farms is not new. After the collapse of the Soviet Union in 1991 foreign investors rushed to snap up former state-owned and collective farms. Before that there were famous—indeed notorious—examples of European attempts to set up flagship farms in ex-colonies, such as Britain's ill-fated attempt in the 1940s to turn tracts of southern Tanzania into a limitless peanut prairie (the southern Tanganyika groundnut scheme). The phrase “banana republics” originally referred to servile dictatorships running countries whose economies were dominated by foreign-owned fruit plantations.

But several things about the current fashion are new. One is its scale. A big land deal used to be around 100,000 hectares (240,000 acres). Now the largest ones are many times that. In Sudan alone, South Korea has signed deals for 690,000 hectares, the United Arab Emirates (UAE) for 400,000 hectares and Egypt has secured a similar deal to grow wheat. An official in Sudan says his country will set aside for Arab governments roughly a fifth of the cultivated land in Africa's largest country (traditionally known as the breadbasket of the Arab world).

It is not just Gulf states that are buying up farms. China secured the right to grow palm oil for biofuel on 2.8m hectares of Congo, which would be the world's largest palm-oil plantation. It is negotiating to grow biofuels on 2m hectares in Zambia, a country where Chinese farms are said to produce a quarter of the eggs sold in the capital, Lusaka. According to one estimate, 1m Chinese farm labourers will be working in Africa this year, a number one African leader called “catastrophic”.

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