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Amidst Financial Turmoil, Agriculture is a "Good Place to Be"

Global macro trends continue to strengthen the case for agriculture investing, despite the sputtering global economy.

During these times of market instability, “real assets” such as metals, land and agricultural commodities have become more attractive to investors wary of putting their money into financial assets.

“When there is long-term instability there tends to be a flight to real assets,” said Mike Boehlje, an agricultural economist at Purdue Extension.  “People move away from financial assets.  Agriculture is a real asset industry, so that does offer some protection.”

Population growth and dietary changes across the developing world are increasing the demand for meat and livestock.  This in turn increases the demand for grain to use as feedstock.  Growing production of ethanol is contributing to demand as well.

The agriculture sector remains strong, particularly in light of conditions across other industries.  “Other industries are downsizing, some even permanently,” Boehlje continued. “Relatively speaking, agriculture is a good place to be.”

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Rapidly growing middle class could fuel another rally for commodities, is water and energy next?

The pattern of rising commodity prices over the past decade supports our view that the rapidly expanding global middle class has a strong appetite for commodities.

This growing body of more prosperous consumers could have significant impact on global demand and supply. Rising incomes generally lead to increased use of transportation, greater energy demand, and increased consumption of milk and meat which brings additional demand for grains, and thereby dramatic water use increases.

Yet demand for key commodities such as oil and copper are already close to full capacity utilisation rates. At the same time, oil discoveries have lagged oil production and oil continues to decline as a percentage of total energy consumption. There are implications for the ability of central banks to hold back inflation.

Further, the world population is aging, while the labour force looks set to shrink. This would result in a strong rise in the dependency ratio, both in the developed world and emerging economies.

Predictably, the rise of a global middle class will cause a fresh round of accelerating price increases in commodities, resulting in a new spike in the next few years.

Energy, Water & Commodities are undeniably linked and are some of the core themes of our Earth Wind & Fire and AquaTerra portfolios. It is thus that we keep e keen eye on these mega macro trends as they emerge.

Please contact us if you would like to receive a PDF version of our latest global macro viewpoints presentation.

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Coffee prices top $3/lb in 34-year high

Rapidly rising coffee prices may lead to consumers worldwide paying more for their daily caffeine fix.

For the first time in 34 years, prices for coveted arabica beans have broken through what analysts call a “psychologically important” $3 per pound level.  Coffee prices were last in this range in 1977 after a deep frost destroyed the Brazil crop.

Since the beginning of 2011, coffee prices have risen 23.6% and are up a staggering 117.2% since January of 2010.  The International Coffee Organization (ICO) warns that the tight market will likely continue to “support high price levels,” especially considering coffee inventories are at 50 year lows.

Columbia, the world’s largest producer of Arabica beans, is forecasting a lower than expected harvest, as are Brazil, Mexico and other coffee producing Central American nations.

The tight market has translated into direct price increases for consumers.  JM Smucker, the US company that makes Folgers coffee, has raised retail prices three times over the past year and may do so again if prices continue their rise according to a report from the Financial Times.  Read more…

 
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Posted by on April 21, 2011 in Commodities

 

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Food Prices Shock Nations as Global Food Crisis Looms

The United Nations Food and Agriculture Organization (FAO) has warned of a looming global food crisis as food prices approach 2008 highs.

Food prices have spiked as a result of weather disruption, market speculation and poor crop yields in major production regions.  The effects have been severe around the world.

The United States, which as the world’s largest supplier of corn supplies 50% of global demand, recently cut forecasts for many key crops.  Likewise, droughts in Brazil and Argentina have hurt crop yields and contributed to rapidly rising prices.  Corn and soybeans have traded at their highest levels in 30 months.

Corn is an important source of animal feed, and demand has grown as levels of meat consumption rise, especially in developing countries.  Record ethanol production levels are also consuming nearly 40% of the U.S. corn crop.

High prices have helped the booming agribusiness sector in the U.S., but have had severe policy implications in many other parts of the world:

  • With high unemployment and poverty levels, Mozambique and Algeria have experienced riots as basic commodity prices have risen.
  • Libya has removed taxes and custom duties on locally produced and imported food products to ensure steady supplies of wheat-based goods, vegetable oil, sugar and infant milk.
  • Jordan has responded to high food prices with tax cuts on fuel and some foodstuffs.
  • Morocco will institute a compensation system for producers of soft milled wheat to maintain a steady domestic supply.
  • Food price inflation in Egypt reached highs of 22% in 2010, resulting in repeated protests.
  • In India, the typical consumer spends about 50% of his income on food. At the end of last week, food inflation hovered around 16.9% after having reached 18.3% at the end of 2010.
  • Prices of onions and vegetables, the main drivers of food prices in India, are still on the rise after extreme weather destroyed crop yields.  The government may impose controls on exports, reduce tariffs and ease import restrictions as necessary to ensure sufficient domestic food supplies in the face of high prices.
  • South Korean President Lee Myung-bak has declared a “war” on inflation with the price of food a top political priority.  The South Korean finance ministry announced it would nearly double domestic supplies of 16 essential foods to stem price inflation.
  • Over the course of the past year, vegetable prices have swung wildly in South Korea, at times spiking by 300%-400% in price following cold weather snaps.

The costs of global food imports  in 2011 will likely reach a record high, says the FAO.  Last year, global food imports topped the $1 trillion mark for only the second time in history.

As the new year gets underway, food supply, demand and price will clearly be a top political, social and economic issue.  We are keeping a close eye on new developments.

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Commodity AUM Soars to Record $320 Billion in Sept

According to Barclays Capital data, commodity assets under management reached a record $320 billion in September 2010, rising from $293 billion in August 2010.  Investment inflows in September were $8.5 billion, the largest figure ever recorded.

“The fundamentals of most commodities, many of which remain fraught with supply-side issues, continue to act as attractive magnets for long-term asset allocation,” reads a note from Barclays analysts.  Read more…

 

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Commodities tumble amid global flight from risk

By SETH SUTEL (AP) – 2 hours ago

NEW YORK — Commodities prices fell sharply Tuesday as new doubts about Europe’s ability to resolve the Greek debt crisis sparked a global flight from risky investments.
Crude oil and other energy contracts tumbled, a day after oil hit an 18-month high. Prices for copper and other industrial metals also fell sharply.
The declines in commodities were made worse by a spike in the dollar as investors sought safe places for their money. The rising dollar tends to sap demand from foreign investors for commodities, which are priced in dollars.
Oil fell 4 percent, as did heating oil.
Copper fell more than 3 percent, and silver prices were off nearly 5 percent.
The dollar rose sharply against other currencies, especially the euro, which has been battered by the Greek debt crisis.

The ICE Futures US dollar index, which measures the dollar against six other currencies, jumped 1.2 percent to 83.26.
The seemingly endless saga of finding a solution for Greece’s debt crunch has unnerved investors, sending stock prices down around the globe Tuesday. The Dow Jones industrial average was down as much as 283 points, its biggest drop since Feb. 4, before it closed down 225.

“There seems to be a wholesale run for the exit for risky assets,” said Evan Smith, co-manager of U.S. Global Investors’ $800 million Global Resources Fund. “It appears to be concerns about Greece and the impact on the euro zone. We thought that fire had been put out, but it keeps reigniting, it seems.”

European nations agreed to a bailout package for Greece over the weekend, but street protests broke out in Athens Tuesday as unionists opposed the sweeping budget cuts the country agreed to in order to qualify for the aid. Standard & Poor’s downgraded Greece’s debt to junk last week and also lowered its ratings on debt issued by Spain and Portugal, confirming fears that Europe’s sovereign debt woes were spreading.

Copper’s decline was made worse by another factor: China. Beijing imposed more restrictions on its banks, leading investors to worry that its hunger for copper, oil and other industrial commodities might wane as its economic growth moderates. July copper dropped 11.5 cents to $3.1785 a pound.

Other metals also tumbled.
Platinum fell $43.10 to settle at $1,685.80 an ounce, while palladium for June delivery fell $33 to $515.25 an ounce. Both are used in making catalytic converters for cars and therefore respond to shifts in sentiment about economic growth.
July silver fell 99.8 cents to $17.842 an ounce. Gold was the least hurt among metals in the selloff, falling $14.10 to settle at $1,169.20 an ounce.
In energy trading, crude oil prices dropped $3.45, or 4 percent, to settle at $82.74 on the New York Mercantile Exchange.
Crude had traded at its highest level in a year and a half on Monday. Oil prices are also taking a hit from growing crude inventories, which may have gained an additional 1.5 million barrels last week, according to a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos.

In other Nymex trading in June contracts, heating oil fell 8.56 cents to settle at $2.2595 a gallon, and gasoline lost 11.29 cents to settle at $2.3222 a gallon. Natural gas added 1.3 cents at $4.013 per 1,000 cubic feet.
Agricultural commodities were mixed. Wheat for July delivery rose 9 cents to settle at $5.1075 a bushel. June soybeans rose half a cent to $9.87 a bushel, while corn fell 2.5 cents to $3.69 a bushel.

Copyright © 2010 The Associated Press. All rights reserved.

 
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Posted by on May 4, 2010 in Investments, Oil

 

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