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Agriculture's Sweet Future

oil&gas

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Apr 16, 2002
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by Jennifer Barry

In December 2008, I discussed the rebound in world food stocks. Excellent
weather in the second half of the 2008 growing season led to near-record
yields. The fall saw a bountiful harvest, especially in grains. At the
same time, the global economic slump had crushed crude oil futures,
dampening the associated biofuel demand. Most agricultural commodities,
including the grains, fell sharply in price.

Nevertheless, I thought the sentiment was too bearish, and there was
reason to predict a rebound in the agricultural sector in 2009. The ending
stocks in corn were expected to be the tightest in three decades. Some
experts deduced that old crop soybeans would be nearly gone by the time
the fall harvest occurred, due to stockpiling by China and drought in
the Southern Hemisphere. Wheat also was affected by poor weather and
historically low supply.

My essay seemed prescient, as the grains formed a bottom just a few days
after publication. The soybeans, corn, and wheat rallied vigorously into
the new year.

However, these gains were not to last. The grains were dragged down by the
sell-off of assets in generalized market anxiety in March 2009. After a
spring recovery, growing conditions for the grains improved. A shockingly
higher USDA forecast caused corn, wheat and soybeans to drop.

Unfortunately for global households, I doubt these low prices will
last. India seems to be overly optimistic about its wheat stocks, and
will probably need to import grain next year. China has a near-insatiable
demand for US soybeans, buying in eleven weeks nearly as much as they
purchased all 2008/9 crop year. Cocoa and sugar have already reached
multi-decade highs this year, spurred by bad weather and disappointing
yields. If these trends continue, a big harvest in the Southern Hemisphere
will be required to keep prices from surging.

No Real Relief

While food production is currently meeting global needs, the fundamental
problems in agriculture I’ve written about have not been fixed. Even
though wheat yields increase 1% per year on average, this progress
doesn’t keep up with demand which rises 1.5% annually. Recessions
around the world are currently dampening per capita demand for more
expensive foodstuffs, but the global population is exploding, expanding
the need for food overall. The Earth will hold 7 billion humans in less
than three years, and surpass 9 billion before 2050.

As the population soars, arable land is shrinking. National Geographic
highlighted many of the difficulties in its June issue. Monoculture
cropping has made formerly productive areas infertile. Intensive
cultivation in dry areas causes steep drops in the water table and as well
as salty soils. Fully 40% of global farmland is “seriously degraded,”
and desertification in Africa is projected to make the continent 75%
dependent on food imports by 2025 if this trend is not checked.

The population boom was made possible by the “green revolution,”
as famines used to regularly kill millions in agrarian nations. This
revolution was largely spearheaded by one man, Dr. Norman Borlaug, whose
innovative breeding techniques developed high-yielding, disease-resistant
wheat and rice varieties. Along with better seeds, Dr. Borlaug encouraged
the adoption of modern agricultural methods such as the use of machinery,
irrigation, fertilizers and pesticides. His revolution in farm output is
calculated to have saved over a billion people from starvation, an amazing
accomplishment and a feat for which he received the Nobel Peace Prize.

Unfortunately, this revolution wasn’t very “green” as it relied
on cheap fossil fuels for inputs from fuel to chemicals. As petroleum
becomes scarcer and more expensive, poor farmers in undeveloped nations
will find it difficult to maintain production. The G8 has promised aid
to African agriculture, but this won’t prevent over 1 billion people
from suffering from malnutrition in 2009.

Mysterious microbes are an uncontrolled threat to food stocks as well,
attacking pollinators which are necessary for 9.5% of total agricultural
output. A new species of fungus was identified as the cause of white nose
syndrome in bats, but no cure is in sight. Another fungus, Nosema ceranae,
is suspected to contribute to Colony Collapse Disorder in honeybees,
but the full cause is not known.

Although demand for ethanol and biodiesel have dropped due to lower energy
prices and economic contraction in the West, government mandates will
still cause food to be diverted to transportation needs. In the United
States, the biofuel industries have strong advocates in Congress, insuring
continued subsidies. Both the EU and India have committed to obtaining 10%
of their vehicle fuel from biological sources. Malaysia plans to require
all the nation’s diesel be blended with 5% palm oil-based fuel by 2010.

Agricultural Black Swans

Since December, new threats to food security have emerged. The El
Niño-Southern Oscillation (ENSO) developed during the Southern Hemisphere
winter, and strengthened in October. ENSO conditions occur every 3-8
years, and usually last 9-12 months. This weather pattern involves
warmer water in the Eastern and Central Pacific Ocean, and the decrease
or reversal of prevailing easterly winds. This phenomenon predictably
causes droughts in Australia, India, Southeast Asia and southern Africa.
 

oil&gas

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Apr 16, 2002
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As billions of farmers depend on rain for crop production because they
don’t have access to irrigation, global food production is likely to
drop noticeably. Palm oil has already risen on the expectation of lower
yields in Malaysia next year. This summer’s disappointing monsoon
in India could indicate a severe ENSO like the one that occurred in
1997-98. At that time, the Australian wheat crop withered, vegetable
prices in California spiked, and huge forest fires raged in Indonesia
which produces 30% of the world’s vegetable oil. Shockingly, even
the Panama Canal had to close as it lacked enough water to operate the
locks! Drought-stricken countries may not be able to afford imported
food if crops fail - especially as global credit is still tight -
throwing them on the mercy of food aid.

A potential for a “black swan” event in agriculture was discovered
in Uganda in 1999, but it received very little attention until this
year. A new variety of stem rust fungus named Ug99 can devastate wheat
crops. It’s resistant to both fungicides and Sr24 and Sr36, the genes
that protect most of North American wheat from rust. Approximately 80%
of this staple is globally vulnerable, yet little research has been
conducted for decades as the disease seemed to be vanquished in the
1960s. Scientists’ alarms about Ug99 were ignored, so Dr. Borlaug was
forced to come out of retirement in 2005 at the age of 91 in order to
galvanize effort around the rust threat. Fortunately, this research will
continue although he passed away in September.

Ug99 is no longer confined to Africa, as it’s recently moved past
the Red Sea barrier into Iran. As this fungus is wind borne, it’s
expected to enter the prolific wheat growing regions of India and Pakistan
soon. Professor Jim Peterson of Oregon State University termed Ug99 “a
time bomb." Stem rust is a serious threat, as past outbreaks in the US
have destroyed 20-40% of wheat crops. Genetic modification to produce
high yielding resistant varieties that are acceptable to industry takes
9-12 years, and scientists have expended just three years of serious
effort to date. In addition, only two labs on the planet to have agreed
to study this dangerous pathogen, and then only in the depths of winter,
further thwarting progress. With ten years time to interact with wheat
crops, the fungus has already mutated once, making it even more virulent.

Sweet Future

I am still bullish about the future of agricultural commodities. This
sector did not experience a true bubble, with the vast majority of the
public never participating in the gains.

Grain futures are currently very cheap on an inflation adjusted basis,
and higher oil prices and government mandates could spur demand for
grain-based biofuels. Although sugar appreciated substantially in 2009,
the sweetener is onlyat 34% of its nominal 1974 high. Cattle prices fell
sharply in 2009 due to the flooding of the market with culled dairy
cows, but it looks like a bottom has formed. Pork supply was sharply
reduced as millions of pigs were destroyed worldwide due to fears of
the H1N1 epidemic, and demand is picking up. The US cotton output is the
smallest in 24 years, as many former producers have switched to a more
profitable crop - soybeans. These commodities are priced in US dollars,
so debasement of the currency can only push prices up in the long term.

Agriculture has lagged the broad commodities index as represented by
the Reuters CRB. In contrast, base metals have surged in 2009, with
lead jumping more than 47%, and copper up 157% from last Christmas’
lows. Crude oil has more than doubled since February. Even the precious
metals are soaring after a volatile summer. This indicates that food
will be the next impressive commodity move, as speculators swap their
depreciating US dollars for anything tangible.
 

21pro

Crotch Sniffer
Oct 22, 2003
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Caledon East
maybe time to by Viterra again. It's a company I know well and have owned it on a few occasions in the past as formerly known Saskatchewan Wheat Pool. I owned that stock in the mid 2000's around $5 and sold in summer '08 for $14. It's at a bargain right now... down almost 5% today at around $10. I'd put a sell target on it at about $12.50.
 
Ashley Madison
Toronto Escorts