Tuesday, March 25, 2008

This Day in Agriculture

A few items today (1) raised guidance from Monsanto (MON) on the heels of yesterday's analyst upgrade (2) impact of central plains flooding on the corn crop (3) more stories of world shortages of food. Now if the hedge funds are done with their speculative locust behavior I'd be happy to raise my stakes in agriculture much higher.... again, the fundamentals are quite clearly those of a massive secular bull. Why fertilizer stocks sell off when wheat drops is beyond me, but that's the lame logic we have in these "high level analysis" of Wall Street. Instead they run into "early cycle" retailers because that's what the "playbook" says to do. Even in a US consumer recession. That's the herd at it's best.

Once again, one benefit of an investor of agriculture is problematic weather - bad weather = higher prices = better for investor. Not so good for worldwide consumer of said food. But since I am a heartless American socialist... err I mean free market capitalist because that's what we are in the USA, I can only focus on making money and have to ignore the plight of hundreds of millions/billions...

Monsanto substantial increase in guidance
  • Agricultural products company Monsanto Co. on Tuesday raised its 2008 earnings per share guidance and predicted its second-quarter profit will rise above Wall Street analysts.
  • The company said it now expects second-quarter earnings per share of $1.98, including a gain of 23 cents per share for a settlement of claims related to a subsidiary's emergence from bankruptcy. Excluding that gain, the company expects earnings of $1.75 per share.
  • Analysts polled by Thomson Financial expect earnings per share of $1.34.
  • The company said its seeds and traits business will contribute more than expected to profit due to brand share growth and increased volume in the soybean business.
  • Monsanto added its Roundup and other herbicide businesses have also performed well in the quarter with demand exceeding supply.
  • For the year, Monsanto now expects earnings per share between $3.38 and $3.48, including the gain of 23 cents per share. Excluding that gain, the company expects earnings between $3.15 and $3.25.
  • The company previously expected earnings in the range of $2.70 to $2.80 per share. Analysts anticipate earnings of $2.87 per share.

I have previously held off on holding Monsanto in the fund due to valuation but with such large increases in future guidance it suddenly gets much cheaper. Will have to rethink. The fear with Monsanto is its dependence on corn but we see they have some benefit from soybeans as well... also, as for corn we might be headed for a shortage there this year - my thesis (I'm not a farmer but thinking like an economist) is the huge year in wheat will drive a lot of acreage to shift from corn to wheat this spring leading to.... shortages of corn NEXT year... despite the ethanol boondoggle.... and the weather is not helping.

Wheat, Corn, Soybeans Advance on Supply Risk (mind you this supply risk did not suddently disappear last week and then reappear - it simply speculation moving these commodities and stocks up/down 20% for no good fundamental reason - gold I can understand - but not these agricultural products but again to Wall Street corn = oil = wheat = coffee = gold = copper = soybeans = iron ore = all just a fun plaything for hedge funds levered 30:1)

  • Wheat, corn and soybeans rose for a second day on speculation demand for grains in food and fuel will outstrip supply as poor weather cuts U.S. crop yields. Corn and soybeans may keep rising because output is lagging behind demand, said Morgan Stanley, the second-largest U.S. securities firm.
  • ``U.S. production in the near term is inadequate to meet growing ethanol and export demand,'' Morgan Stanley analysts led by New York-based Hussein Allidina, said in a report e-mailed today. The fundamentals are ``very constructive,'' he said.
  • The price decline last week resulted from a strengthening dollar and reduced inflation expectations, ``rather than a change in the underlying supply and demand fundamentals,'' said Morgan Stanley's Allidina.
  • Rising prices of food commodities have fueled inflation from the U.S. to China and India. China has increased imports of raw materials and boosted stockpiles to cool prices. South Korea and India announced the removal or reduction of tariffs on some food commodities in the past week to keep inflation in check.
  • Wheat jumped the most in more than a week yesterday on speculation dry weather in the western U.S. Great Plains will reduce yields. Soybeans climbed the most in almost nine months, and corn rose, on speculation flooding and rain in U.S. growing areas may delay planting, eroding potential yields.

Will La Nina further penalize the US growing season? (already off to a shaky start, but these guys cannot forecast a week out so I take any long term assessments with many grains of salt)

  • U.S. farmers in the Midwest and Plains risk drought this summer while those in much of the eastern half of the U.S. could face flooding similar to what has battered the nation this week, government forecasters said on Thursday.
  • There is an "enhanced risk" of drought going into spring and even summer for the Corn Belt, largely because of a fading La Nina, said Doug Lecomte, a meteorologist for the National Oceanic and Atmospheric Administration's Climate Prediction Center.
  • But he added: "The first thing is to worry about getting rid of the wetness" that is "is unprecedented for this time of year."
  • Forecasters said a major concern this spring is the threat of flooding across much of the country as a result of record rainfall and melting snow packs, which are causing rivers and streams to overflow.

It's easy to talk about this stuff academically from NYC or heck Michigan, but what is it like from a local perspective?

  • As flooding continues to torment southern Missouri, weather watchers in Kansas City are not just worried about what is happening today. They are worried about what could happen tomorrow. Here.
  • “The next couple of months,” said meteorologist Mark O’Malley of the National Weather Service in Pleasant Hill, “could really be problematic.” Why?
  • Soils, even here, are saturated. Ponds are full. Streams are running strong, sometimes too strong. Add it all up, and even average rainfall totals for the next several months could spell disaster.
  • “We’re on the edge of what could become a major problem,” said Gary Lezak, meteorologist at KSHB. “No doubt about it, there’s a very, very high likelihood of above-average precipitation. “We got wet in October, and it hasn’t stopped yet.”
  • “With our heavy clay soils, if we get in there and work them when they’re wet, they just become clods,” he said. “They ball up. That destroys the structure of the soil, and it can present problems for the rest of the growing season. “Whether you’re doing 300 acres of corn or six tomato plants in your backyard, it’s the same thing. You destroy that structure, and the roots don’t go deep into the soil. If you don’t get a good root system, you don’t get a good plant.”

Or maybe here

  • Flooding has some Arkansas farmers worried that they may have no wheat to harvest later this spring. Some are concerned about having enough time to plant their other crops, after the waters recede and the fields dry out.
  • Stephen Wyatt, who farms near Rosie in Independence County, said all 800 acres of the soft red winter wheat he planted in the fall are underwater from the White River overflow. Some of the 6- to 8-inch tall plants are submerged in more than 10 feet of water, Wyatt said.
  • “The million-dollar question is: How long can wheat survive underwater ?” The answer depends on several factors, he said. Cooler water and running water are probably less damaging, and the smaller the plants are, the more likely they are to survive, Kelley said. The longer the water is on the wheat, the more likely damage is, he said. Some plants may be able to live for as long as three to seven days.
  • Arkansas farmers have planted an estimated 870, 000 acres of winter wheat, according to the U. S. Department of Agriculture. That would be 6 percent more than the 820, 000 acres planted in 2006.
  • “I’ve heard that people haven’t seen it this bad in 80 years,” Vangilder said.
  • Soybean agronomist Jeremy Ross said flooding and heavy rains are hampering farmers who want to get out in their fields and prepare them for planting. “If they’re behind on getting their corn planted, it’s going to push the soybeans back, too. It’s kind of a domino effect,” Ross said.

Last, in our weekly review of the coming global food crisis that no one pays attention to in the US. The social unrest will grow as foodstuffs continue to increase by the week/month/quarter. Trust me, this is China's greatest fear...

  • If you're seeing your grocery bill go up, you're not alone. From subsistence farmers eating rice in Ecuador to gourmets feasting on escargot in France, consumers worldwide face rising food prices in what analysts call a perfect storm of conditions. Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India.
  • The world's poorest nations still harbor the greatest hunger risk. Clashes over bread in Egypt killed at least two people last week, and similar food riots broke out in Burkina Faso and Cameroon this month.
  • But food protests now crop up even in Italy. And while the price of spaghetti has doubled in Haiti, the cost of miso is packing a hit in Japan.
  • "It's not likely that prices will go back to as low as we're used to," said Abdolreza Abbassian, economist and secretary of the Intergovernmental Group for Grains for the U.N. Food and Agriculture Organization. "Currently if you're in Haiti, unless the government is subsidizing consumers, consumers have no choice but to cut consumption. It's a very brutal scenario, but that's what it is."
  • No one knows that better than Eugene Thermilon, 30, a Haitian day laborer who can no longer afford pasta to feed his wife and four children since the price nearly doubled to $0.57 a bag. Their only meal on a recent day was two cans of corn grits. "Their stomachs were not even full," Thermilon said, walking toward his pink concrete house on the precipice of a garbage-filled ravine. By noon the next day, he still had nothing to feed them for dinner. Their hunger has had a ripple effect. Haitian food vendor Fabiola Duran Estime, 31, has lost so many customers like Thermilon that she had to pull her daughter, Fyva, out of kindergarten because she can't afford the $20 monthly tuition. (Haiti seems to be extremely hard hit as a very poor nation - Jan 30: Hungry Haitians Resort to Eating Dirt)
  • However, consumers still face at least 10 years of more expensive food, according to preliminary FAO projections.
  • What's rare is that the spikes are hitting all major foods in most countries at once. Food prices rose 4 percent in the U.S. last year, the highest rise since 1990, and are expected to climb as much again this year, according to the U.S. Department of Agriculture.
  • As of December, 37 countries faced food crises, and 20 had imposed some sort of food-price controls
  • For many, it's a disaster. The U.N.'s World Food Program says it's facing a $500 million shortfall in funding this year to feed 89 million needy people. On Monday, it appealed to donor countries to step up contributions, saying its efforts otherwise have to be scaled back.
  • In Egypt, where bread is up 35 percent and cooking oil 26 percent, the government recently proposed ending food subsidies and replacing them with cash payouts to the needy. But the plan was put on hold after it sparked public uproar.
  • In China, the price hikes are both a burden and a boon. Per capita meat consumption has increased 150 percent since 1980, so Zhou Jian decided six months ago to switch from selling auto parts to pork. The price of pork has jumped 58 percent in the past year, yet every morning housewives and domestics still crowd his Shanghai shop, and more customers order choice cuts. (Americans, this is your new global competition for resources ... like food) And it's not just pork. Beef is becoming a weekly indulgence.
  • "The Chinese middle class is starting to change the traditional thought process of beef as a luxury," said Kevin Timberlake, who manages the U.S.-based Western Cattle Company feedlot in China's Inner Mongolia.
  • At the same time, increased cost of food staples in China threatens to wreak havoc. (again class warfare - the poor struggle with basics while the emerging middle class are becoming richer by the day, and driving prices up across the food chain - fascinating from an economics standpoint)
  • Chinese Premier Wen Jiabao says fighting inflation from shortages of key foods is a top economic priority. Inflation reached 7.1 percent in January, the highest in 11 years, led by an 18.2 percent jump in food prices.
  • The oil spike has also turned up the pressure for countries to switch to biofuels, which the FAO says will drive up the cost of corn, sugar and soybeans "for many more years to come."
  • In Japan, the ethanol boom is hitting the country in mayonnaise and miso, two important culinary ingredients, as biofuels production pushes up the price of cooking oil and soybeans.
  • Food costs worldwide spiked 23 percent from 2006 to 2007, according to the FAO. Grains went up 42 percent, oils 50 percent and dairy 80 percent.
  • Economists say that for the short term, government bailouts will have to be part of the answer to keep unrest at a minimum. (sounds familiar!) In recent weeks, rising food prices sparked riots in the West African nations of Burkina Faso, where mobs torched buildings, and Cameroon, where at least four people died.
  • But attempts to control prices in one country often have dire effects elsewhere. China's restrictions on wheat flour exports resulted in a price spike in Indonesia this year, according to the FAO. Ukraine and Russia imposed export restrictions on wheat, causing tight supplies and higher prices for importing countries. Partly because of the cost of imported wheat, Peru's military has begun eating bread made from potato flour, a native crop. (and that's the key to it all)
  • "We need a response on a large scale, either the regional or international level," said Brian Halweil of the environmental research organization Worldwatch Institute. "All countries are tied enough to the world food markets that this is a global crisis." (Here is one solution - let's give the largest corporate farmers in America subsidies to make corn into ethanol... yes, bright idea!)
  • Days after the riots, Pascaline Ouedraogo wandered the market in the capital, Ouagadougou, looking to buy meat and vegetables. She said a good meal cost 1,000 francs (about $2.35) not long ago. Now she needs twice that.
  • Irene Belem, a 25-year-old with twins, struggles to buy milk, which has gone up 57 percent in recent weeks. "We knew we were poor before," she said, "but now it's worse than poverty."

Keep inflating Ben - the world's poor salute you. At least you are making multi millionaires on Wall Street happy. That's the important thing. When do we start the drumbeat for 50 basis points next meeting? Do I hear another 75? More liquidity injections? I mean we are well over half a trillion - can we double it? More paper money is needed Ben.

As for the federal government - I will continue to say, while everyone thinks Iraq is the biggest disaster of this administration - when we look back in 25 years I wonder if it will be the corn ethanol push.... which has more of an effect on the global population? Anyhow the beat goes on... ignored... as I keep saying, maybe we'll start seeing some of this in the mainstream press by late 2008 or early 2009. Maybe mass starvation will wake people up. I wonder if any of the multi millionaires will donate to the food programs - after writing the thank you letter to Uncle Ben and Uncle Hank. I know, I know - I am such a socialist by these rants but guess what - so is our federal government now. So we're all socialists now together.

Long Powershares DB Agriculture Fund in fund and personal account

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