Index Option Trader

Global Agriculture Inflation – A Brief Overview

Excerpt from “Waves of 2008″ written by our Chief Research Strategist Anthony Tsung.

Feed Grains–Corn:

• Ample supplies together with a continued lack of competition and firm demand overall, have boosted U.S. corn export prospects to a record 62.0 million. The record was reached in 1979/80 with 61.8 million.
• In China, strong demand for feed grains coupled with persistent food price inflation will keep exports to the lowest level in over a decade, despite good production in the last 2 years.
• Argentina exported at a record low pace for the first half of its marketing year, but a cap on both old and new-crop export registrations leave 2007/08 shipments uncertain at this time.
• The EU is facing a shortage of feed grains; while much of the corn is most likely to be outsourced from Brazil, this will allow the United States to backfill in certain markets or to increase share in others. Other minor exporters such as Ukraine, Serbia, and Croatia have had varying restrictions on exports this year, adding to uncertainties of supply and sustaining high prices.
What we are seeing here is persistent high demand despite rising prices for Corn. In addition, varying restrictions on exports are artificially sustaining high prices, thus posing a risk to the overall health of the agricultural market in regards to Corn. Yet it isn’t simply corn that is the main focus. It is everything else that investors may have to concern themselves with in the near future.

Oilseeds:
In addition, explosive growth in Chinese demand for vegetable oils, attributed to changing consumer preferences as income rise, is causing both soybean and vegetable oil imports to surge to record levels as the market attempts to balance amid rising prices. There is a huge spread between production and consumption that is attributed to urbanization and falling water tables that could very well push this gap between supply and demand to a record 19 million tons as processors bring in more beans for crush. However, the Chinese vegetable oil market is growing so fast that even the unprecedented growth in soybean imports will not satisfy the total demand for vegetable oil.

Wheat. Rice. And Everything Else:
Projected U.S. wheat ending stocks for 2007/08 are lowered 32 million bushels this month reflecting higher expected domestic use and exports. At 280 million bushels, this year ending stocks are the lowest in 60 years. Domestic use is projected to be higher by 5 million bushels. In addition, global imports are projected to be higher with increases for Bangladesh and Egypt. A number of lesser increases in small import market countries account for the rest of the projected rise in world imports. Global exports are lowered by approximately 1.0 million tons tightening the gap between projected marketing year exports and imports as world supplies tighten with lower production in major exporting countries. What this may translate into is higher overall food prices and food inflation pressures that will affect emerging markets where wage increases are marginal and fail to keep pace with the rise of cost of living.

Cattle slaughter forecasts are increased as packers have bid aggressively for relatively tight supplies of fed cattle, and cow slaughter remain large. Overall production in meats remains relatively unchanged in a year over year basis. What is important is the rise in dairy prices, and how that will bring strong demand for substitutes such as powdered forms of nutrients for both soy and milk based liquids as the populous in emerging markets cope with rising commodity costs.

Keeping in mind these rampant rises in costs, it should make investors wary about the leniency central banks take in their policy of low interest rates that are rather benign and beneficial to liquidity and to induce demand into the supply/demand economic model. But at what costs does this come with? While most CPI and inflationary index’s exclude food and energy inflation—it is an important factor as it competes with consumers for their income expenditures. With food costs rising in emerging markets —globally—we should be cautious and ask “does the rest of the world income inflation match and exceed food inflation to the point to leave enough reserves to expend on everything else?” and “what happens to leverage when rates increase not only in the U.S. potentially, but also in Hong Kong and other high growth countries?”.