We all know a lot of advisatory letters are picking up on the Ag boom but "Farmageddon" made me chuckle. And this is from a group of letters that includes OI, the top 5 year letter from Hulbert's.
This is from Kevin Kerr of Agora Financial (and Bryan Scott?):
"As you know, Byron and I have been pretty outspoken that corn-based ethanol is no long-term solution, and clearly, it has many undesirable consequences. The fact remains that ethanol is the law of the land, and as big as it already is, it's getting bigger.
The numbers are staggering by any measure. Ethanol production in the United States has increased exponentially over the past several years, according to the UDSA, from less than "3 billion gallons in 2003 to over 6 billion gallons in 2007. Expansion in the industry is projected to continue, particularly over the next few years, exceeding 12 billion gallons by 2010."
These projections assume the tax credit available to blenders of ethanol and the 54-cent-per-gallon tariff on imported ethanol will remain in effect. More ethanol production means, of course, more corn consumption. Ethanol, which already consumes more than 20% of the U.S. corn crop, is on pace to consume one third of the corn crop by 2010!
If you knock out one third of the supply of anything, prices are almost certain to respond. In other words, corn prices seem very likely to remain high for as long as the U.S. government continues to subsidize ethanol. But that's not the end of the story. In the agricultural sector, the "corn-bone" is connected to the "wheat-bone" and to the "drought-bone" and to the "soaring-global-demand-bone."
In other words, high corn prices cause farmers to switch from growing other crops like wheat or soybeans, which causes the supplies of those crops to dip. Toss in a little bit of drought and a lot of demand and, voila, you've got a booming bull market in ag products.
Sure, a lot of speculative money has rushed into these markets lately. So a sharp correction could arrive at any time. But longer term, the bull market in ag commodities should continue for quite a while.
Prepare for Farmageddon...You might actually enjoy it.
