I love this excerpt: "Manifestly, I believe that we are in the early stages of the greatest agricultural bull market in history."
------------------------------------------------- Price Hikes in Food and Energy Jeff Saut MV Respect Jul 16, 2007 10:54 am
Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut.
“A man lived by the side of the road and sold hot dogs. He was hard of hearing, so he had no radio. He had trouble with his eyes, so he had no newspapers. But he sold good hot dogs. He put up a sign on the highway telling how good they were. He stood by the side of the road and cried, ‘Buy a hot dog, mister.’ And people bought. He increased his meat and bun orders and he bought a bigger stove to take care of his trade.
He got his son home from college to help him. But then something happened. His son said, ‘Father, haven’t you been listening to the radio? There’s a big depression on. The international situation is terrible, and the domestic situation is even worse.’ Whereupon the father thought, ‘Well, my son has been to college. He listens to the radio and reads the papers, so he ought to know.’ So, the father cut down his bun order, took down his advertising signs and no longer bothered to stand on the highway to sell hot dogs. His hot dog sales fell almost overnight. ‘You were right son,’ the father said to the boy. ‘We are certainly in the middle of a great depression!’” (Author Unknown)
I recalled the aforementioned story as I got off of the plane at LaGuardia last Monday and sauntered up to a hot dog stand. I said, “One hot dog, please.” The vendor said, “That’ll be $3.49.” I said, “Isn’t that a lot for one hot dog?” He said, “Just wait until next year!” After climbing into a cab and heading for Manhattan, I warped into my email and the hot dog vendor’s comments became clearer. One email read:
“I bought the last 140 bales of hay in Hume this morning. The hay people in Pennsylvania are out, the hay people in Ohio are out and the Maryland people have been out for a while. The cattlemen are worried because the Rappahannock and the Jordan rivers are dried up, as are most of the ponds. We will have cheap steaks as they take this year’s cattle to slaughter and expensive steaks next year. We really need rain. Water is a valuable commodity, just in case you didn’t know!”
With that, I looked at gain prices y/y only to find corn up 40%, soybeans up 50%, and wheat surging 67%. Upon arriving at my hotel, I called the ex-CEO of a major meat processor that I used to cover as a research analyst. “Joe,” I said, “What’s going on with the price of grains and the meat processing business?” His answer was succinct:
“So far the explosion in grain prices hasn’t really fed through into the price of meat because we have had commodity hedges in place, whereby we bought corn for future delivery when prices were low. However, those hedges are now expiring and nobody, but nobody, can feed a hog and bring it to market profitably at $0.70 a pound with corn above $3.00 a bushel. Consequently, it’s just a matter of time until we get a big upside move in meat prices as they have already seen in China (food prices in China account for over one-third of the CPI, but here they are only 14%).”
Disingenuously, however, the US government excludes food and energy in the nation’s “core” inflation statistics because of their alleged “short-term” volatility. But consider this: Since August of 2004 crude oil has averaged well above $50 per barrel. Surely three years is long enough to admit that maybe, just maybe, high oil prices are here to stay and ought to be included in the CPI, a point well argued in last Wednesday’s Wall Street Journal. Speaking to grain prices, while their price rise is only a year old, it is hard for me to envision that higher food prices are not permanent as well. Indeed, when you examine the Producer Price Index (PPI) you find that the raw food component was up 25% in April and up more than 30% in May. Ladies and gentlemen, when you get these sorts of price increases it is merely a matter of time until they bleed over into prices at the supermarket. I think you are going to see this trend increasingly reflected in 4Q '07 and continuing for the foreseeable future.
For the last six years I have been an energy “bull” and remain so even though I think in the short-term that money flows, seasonality, and tough earnings comparisons are likely to provide a challenging backdrop for energy stocks over the next few months. Likewise, I have been an agriculture “bull” since Bunge Corporation (BG) and Potash (POT) were “teenagers” and Caterpillar (CAT) sported a 5% dividend yield. Unlike energy, however, I don’t think the next three to four months will prove difficult for the agriculture complex.
Manifestly, I believe that we are in the early stages of the greatest agricultural bull market in history. Even the government’s understated inflation figures suggest this could be the case as food inflation is rising at its fastest pace in 15 years. As these increased cash flows accrue to the farming complex, spending on farming equipment, irrigation gear, fertilizer, etc. should continue to rise.
