by Tony D’Altorio, Investment U Research
Friday, March 4, 2011
The chief economist at the U.S. Department of Agriculture (USDA) has spoken. Joseph Glauber issued a stark warning at the organization’s annual outlook forum recently.
He sees record prices for corn, wheat and soybeans in the crop year ahead, beginning with the 2011 harvests. Farmers of those commodities can expect an average of $5.60, $7.50 and $13 a bushel, respectively.
Glauber says higher plantings for most of those crops won’t make enough of a difference. Prices will move up anyway, due to huge export demand and ethanol production.
He also warns that the grain and oilseed markets are “still forecast to be tight” in 2012. Glauber doesn’t expect that to ease over the next two growing seasons.
Food inflation will also surge after June, as costs filter through the supply chain. Those prices should rise 3-4% in 2011 in the U.S., and likely worse elsewhere…
The USDA’s warning will likely fuel global concerns about rising inflation, especially in developing economies. The likelihood of subversive food price hikes and political turmoil isn’t looking good for those countries.
Fortunately, the USDA’s outlook is less than certain. It largely depends on uncontrollable variables, such as good weather during the spring and summer.
Plus, the Department expects current high prices to spur farmers to sow 9.8 million more acres with crop seeds this year. If so, that brings the total planted acreage to 255 million acres for the eight major field crops.
But again, this is all subjective and there are other forces at play.
A Closer Look at Corn: The Grain Market’s Golden Goose
To get a feel for the grains market, just check out corn, its most important commodity.
That’s not just because the U.S. exports around 60% of global supplies. Used to fatten livestock, corn filters quickly into food supply chains, affecting meat and poultry prices.
The commodity cost 90% more than it did a year ago, hitting a 2.5-year high of $7.24 a bushel last month. That happened when the U.S. produced a large but still disappointing corn harvest in 2010, as demand for animal feed grew sharply in emerging economies.
This year, farmers will likely plant 92 million acres of corn, the most widely grown U.S. crop. That’s 3.8 million more than in 2010, a massive increase by historical standards.
But industry insiders caution that it depends on ideal weather during the planting season. Besides, even if farmers do deliver a record crop, demand for corn won’t slacken.
Even with rising supplies, the closely watched inventories-to-use ratio will probably rise to a mere 6.4% by the end of the 2011-12 crop year. That’s better than the current critical low of 5%, but still far below the more comfortable 10%, which usually brings down prices.
Part of that problem comes from the heavily subsidized U.S. ethanol industry. That business will probably consume about 36% of the domestic corn crop this year.
It makes sense, then, that critics blame ethanol for rising food prices. Logic dictates that the government should cut back on the fuel during times like this.
But U.S. Secretary of Agriculture Tom Vilsack ruled that out. “There is no reason,” he claims, “for us to take the foot off the gas.”
Two Agricultural Commodity Investments
Between the USDA forecasts, demand and inventory numbers for the 2011-12 season, and Vilsack’s stupid comment, agricultural commodity prices are definitely going up this year.
For the average consumer, that makes for a bleak outlook. But investors, at least, have reason to rejoice with a few different profitable picks.
- 35% to second-to-expire corn futures contracts
- 30% to third-to-expire corn futures contracts
- 35% to corn futures contracts expiring in the December following the expiration month of the third- to-expire contract
Van Eck Market Vectors Agribusiness (NYSE: MOO) also looks good going forward. The ETF’s portfolio contains a variety of agriculture-oriented companies, from seeds to farm equipment to fertilizer and farming.
Either investment will provide solid growth opportunities in the upcoming years.