Tuesday, September 11, 2007

Aginflation, Food and Agriculture Inflation

Aginflation: China's inflation rate rose to 6.5 per cent in August - the highest in 11 years - driven in part by a 49 per cent surge in the price of pork and meat from the same month a year ago. http://tinyurl.com/2lmr8e This inflation has many significant implications, but concentrating on food items only the Financial Post today has a full page chart on food inflation, more or less as follows. The article does mention India and China's populations eating better too as one of the causes.

Oil Price: +157% since 2002
Corn Price: +134% since 2005.
Barley: +51% since 2006
Wheat: +83% since 2006
Soybean: +50% since 2006
Canola: +32% since 2006
Cattle Price +12.5% (cattle displaced to scrublands)
Crop receipts: +25.6% (grain growers' revenue)
Tortillas: +400%
Brewers' Barley: +100% (German beer: +40%)
Piranhas attacks: 40,000 head of Argentinean cattle have died this year alone from bites and starvation (moved to bad lands)
Tractors: Farmers use their fat earnings to buy tractors (see Deer & Co. share price, 200% since 2004.
Mexicans take to the streets to fight tortilla prices
Drinkers protest: Germans are angry about beer prices.

If people go hungry, that is scary. By the way, in China, the PPT is not the Plunge Protection Team, but the "Pork Protection Team".

Here is my Yahoo food portfolio:


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John said...

hey man, I can't believe you don't have SWP.TO, with its buyout of Agricore, they've got 40% of the canadian grain market sewn up. great balance sheet, this is one to keep, sorry about the tout like tone, but do you DD.

The Shocked Investor said...

John, thank you for the comment. Viterra/Saskatchewan Wheat Pool should definitely be added to an agri portfolio, quite relevant given the new records for whet prices. I had been somewhat keeping track of this elsewhere. So, added to the official list it is. Thanks again.

Richard L said...

Hi, it is now almost 2008 and I still like the ag-portfolio you posted in September. Any changes?

Agcapita said...
This comment has been removed by a blog administrator.
The Shocked Investor said...

Reposting a comment left here, without the ad:

The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research shows investors must be prepared to rotate into asset classes with different characteristics.

During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland. Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms), cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return) and the S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)

We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
 Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
 Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
 Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

The Canadian farmland investment premise is driven by several key points:

1. Canadian farmland is high quality: Canada is the third largest wheat exporter in the world and in aggregate one of the largest agricultural producers in the world. The three western Canadian provinces alone have approximately 135 million acres of farmland and produce approximately 20 million tons of wheat a year.

2. Canadian farmland is low cost: Saskatchewan farmland in particular is an undervalued asset. With an average price of $390 per acre, Saskatchewan farmland is some of the least expensive in the world. The prices in Alberta are almost 3 times higher than Saskatchewan at an average of $1,000.

3. Canada has world class farming infrastructure: Unlike investing in farmland in emerging markets such as Argentina, Brazil or Russia, Canadian farmland is supported by first world storage, processing, and shipping infrastructure. This infrastructure is extremely costly to reproduce.

4. Canada has low political risk: Unlike emerging markets, Canada lacks significant political risk. Canadian farmland owners benefit from a transparent and enforceable title system with no material risk of de jure or, worse yet, de facto expropriation. See recent agriculture export tariffs in Argentina.

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