The prices of soy and corn continue to spiral upwards, based in part on biofuels, with a healthy dose of Chinese/Indian consumption increases, methinks. 20 year rally? Good for farmers, bad for the poor. Link here.
If Soy Is Expensive, Why Does Goldman Say Nevermind?
By Saijel Kishan
Jan. 2 (Bloomberg) -- Selling soybeans at their highest
prices in three decades and corn while it flirts with the 1996
peak is a money-losing trade, according to Goldman Sachs Group
Inc. and Deutsche Bank AG.
Corn at $4.55 a bushel is ``cheap,'' Frankfurt-based
Deutsche Bank says. Goldman Sachs in New York expects soybeans
to rise 29 percent in 2008, the best investment in commodities.
Investors who followed the banks' advice and bought raw
materials last year profited as the Standard & Poor's GSCI Index
advanced 33 percent, beating the 3.5 percent gain in the S&P 500
Index and the 9.1 percent return from U.S. Treasuries, according
to data compiled by Merrill Lynch & Co.
Rising wealth from Shanghai to Sao Paulo is leading to
better diets and straining corn and soybean supplies just as
record energy prices boost sales of biofuels. Even after rising
17 percent in 2007, corn costs about $2 a bushel after adjusting
for inflation, compared with a $7.80 high in 1974.
``We are in the early stages of a rally that could last 20
years'' in agriculture, said Christopher Wyke, product manager
at London-based Schroders Plc, which manages $3.5 billion in
commodities and is buying more corn and soybean contracts while
reducing energy holdings. ``Prices are historically cheap.''
Not since the Soviet Union harvest failures of the 1970s
have food prices risen so quickly. European Central Bank
President Jean-Claude Trichet said Dec. 19 that the region faced
a ``more protracted'' period of elevated inflation than expected
because of food and oil prices.
Falling Inventories
World soybean inventories will plunge 23 percent in the
2007-2008 marketing season to 47.3 million tons from a record
61.1 million the previous year, the U.S. Agriculture Department
estimates.
Soybean consumers face a ``large deficit'' in supplies
because of increasing sales to China and production of biofuels,
according to Goldman Sachs, the world's biggest securities firm.
``There are still good investment opportunities in the
oilseed,'' Goldman analysts led by Jeffrey Currie said in a Dec.
11 report.
Goldman predicts soybeans will reach $14.50 a bushel.
Investors who buy $10 million of November contracts on the
Chicago Board of Trade would earn $2.9 million should the
forecast prove accurate. A hedge fund that borrowed money to
increase the bet using margin could turn that $10 million into
about $59 million.
Corn Versus Wheat
Soybeans for March delivery jumped as much as 31.25 cents,
or 2.6 percent, to $12.455 a bushel today on the Chicago Board
of Trade and were at $12.40 as of 8:51 a.m. local time.
The bank forecast December 2008 corn prices will increase
12 percent to $5.30 a bushel from $4.735 now. Goldman
recommended buying corn and selling wheat in a ``spread'' trade
to exploit changes in the relative value of the crops.
Corn for March delivery climbed as much as 6.5 cents, or
1.4 percent, to $4.62 a bushel today in Chicago, the highest
since June 1996.
Rallies in agricultural markets historically last about two
years, boosting prices by 135 percent, according to Michael
Lewis, the London-based global head of commodities research at
Deutsche Bank. Prices may climb as much as 250 percent during
three to four years in this cycle, he said. The rally in
agriculture markets started in the fourth quarter of 2006.
Farmers are planting more acres to take advantage of the
price rise, which could damp gains. The U.S. national corn yield
has more than doubled to 153 bushels an acre in 2007 from 71.9
in 1974, while the soybean average has jumped 74 percent to 41.3
bushels from 23.7 in 1974, government statistics show.
`Battle for Land'
Droughts from Ukraine to Australia have cut crop yields,
sending prices for wheat to a record in December and soybeans to
a 34-year high. Corn rose to $4.62 a bushel in Chicago trading
today, the highest since 1996. Farmers are planting more wheat
at the expense of corn, soybeans and cotton.
Wheat farmers worldwide may increase plantings by 4
percent, the London-based International Grains Council said in
November. In the U.S., the world's largest wheat exporter,
growers will sow 64 million acres (26 million hectares) in the
year ending May 31, up 6 percent, the Agriculture Department
said in October.
``We'll continue to see a battle for land between the
grains,'' said Matthew Sena, an analyst at New York-based
Castlestone Management LLC, which oversees $800 million. ``The
run-up in wheat prices will prevent a dramatic supply response
for soybeans and corn.''
Biofuels Demand
Castlestone invests about $100 million in commodities, and
Sena said the fund has been adding to its corn and soybean
holdings while cutting investments in wheat.
Demand for biofuels, made from corn, oilseeds and sugar, is
growing as countries seek to cut their dependence on fossil
fuels after oil rose to a record $99.29 a barrel in November.
Demand is straining the availability of farmland as well as
water supplies.
``The severity of these factors means that there's a better
chance of this being the longest and biggest agricultural rally
ever,'' said Colin Waugh, portfolio manager at New York-based
Galtere International Fund, which manages $1.3 billion in
commodities and related investments.
The biggest winners from the U.S. energy bill signed by
President George W. Bush on Dec. 20 may be companies including
Archer Daniels Midland Co. of Decatur, Illinois, and Sacramento-
based Pacific Ethanol Inc. The legislation requires biofuels
production to increase to 36 billion gallons in 2022 from 7.5
billion in 2012.
Population Growth
U.S. ethanol prices at $2.2157 a gallon on average are 11
percent cheaper than New York wholesale gasoline futures at
$2.4908 a gallon.
Crop prices ``will show a tendency to go up, and the reason
is the growing world population, changing food patterns and
limited availability of land,'' said Martin Richenhagen, chief
executive officer of Agco Corp., the second-largest U.S. maker
of tractors and combines after Deere & Co. ``This is good news
for the farmer.''
Higher food prices may cause faster inflation. U.S.
consumer prices increased 0.8 percent in November, the most in
more than two years. Inflation in the 13-nation euro region
accelerated to 3.1 percent in November, the fastest since 2001,
according to Eurostat. Japan's core consumer prices rose at the
fastest pace in more than nine years in November.
Tortilla Prices
Developing nations will feel the greatest pain. The cost of
corn tortillas in Mexico, where shortages in 2006 boosted
inflation, may rise 13 percent this year, according to Gruma
SAB, the world's largest maker of corn flour. Food prices in
China, the fastest-growing economy, increased 18.2 percent in
November.
The rise in crop prices is creating the ``risk of social
unrest,'' said Roland Jansen, whose $129 million Mother Earth
Resources fund in Liechtenstein gained 28 percent in 2006, more
than double the returns of commodity indexes. ``We've already
seen it happen, like in Mexico. China will probably release
stocks to pacify the population. There's a real danger of unrest
there.''
To contact the reporter on this story:
Saijel Kishan in London at
skishan@bloomberg.net
