23 Dezember 2005

Farming commodities are next big Chinese boom

Corn is cheap. Trading at 20-year lows, it has missed out entirely on Asia’s roaring commodity boom. Wheat is not doing much better. Soya is asleep.

It is as if farm goods were stuck in the commodity depression of the 1990s while oil, gas, copper, platinum, molybdenum and lead surge in a fever of demand driven by the rise of Asia and the easy-credit policies of the world’s central banks.

If this divergence looks untenable, it probably is. A billion Indians and 1.3billion Chinese eat too. Their chemical industries need palm oil, their soap firms use soya.

Far-sighted investors are eyeing the whole gamut of farm products from corn and wheat to sunflower and live cattle, anticipating a catch-up boom running from 2006 until the end of the decade.

Deutsche Bank believes that food demand and a switch to crop “bio-fuels” as an alternative to oil could turn farmers into ”the new sheikhs”.

Michael Lewis, head of commodities research, said urban spread in China was paving over the most fertile farmland along the south eastern seaboard.

China’s food demand, however, is rising fast as affluent consumers switch to higher protein diets, just like their island cousins a generation ago. The Taiwanese eat nine times as much meat and fish.

Mr Lewis said China was close to a “tipping point”, becoming an importer of corn for the first time since records were kept. It is much the same picture for wheat. Corn and soya are used as feedstuff to fatten cattle, pigs and poultry, as well as for China’s ubiquitous fish farms. It takes 30 pounds of feed to produce one pound of meat.

“Corn inventories are collapsing in China, but they have not yet begun to rely on imports. History would suggest that such a shift is likely to trigger a strong turnaround in prices,” he said.

Corn prices have fallen by 20pc over the past three years, the worst performer of the major commodities. Deutsche Bank expected the crop to track the trajectory of zinc, which has doubled this year after a lacklustre 2004 as China crossed from exporter to a net importer. China dismantled most food barriers after joining the World Trade Organisation in 2001. Food imports have soared from $10billion in 2002 to over $25billion last year.

The UN’s Food and Agriculture Organisation expects the world population to continue rising from its current level of 6.4billion by 1.2pc a year until 2015, adding around 77m extra mouths a year. Most will be eating better than ever before.

Consumers are clambering up the food ladder in India, Pakistan, Vietnam and Indonesia. Almost 50pc of humanity is in the midst of a diet revolution, but land is finite.

“Farmland is running out across the world,” said Dieter Rentschler, manager of Aquila Capital in Hamburg.

“It is one of the biggest questions of our time whether food output can keep pace with world population growth, or whether we’re going to see shortages in certain markets,” he said.

Wendel Gietz, from the Argentine brokers Agro Austral, said foreign investors were snapping up chunks of Patagonia and the pampas at a vertiginous pace, led by Nikkon, AIG, and Walbrook, and Italy’s Benetton brothers.

He said 10pc of Argentine’s total territory had been bought by outside groups, including 17m hectares of the best arable land.

A land rush is just starting in Romania, where quality acreage in the Danube delta costs a fraction of comparable land in the core EU states.

Will Armitage, senior dealer at IG Index spread traders, said he is picking up early signs of interest in food commodity futures.

“One of our savviest clients is switching into agricultural products. He feels that metals have been there, done that, got their T-shirt, but now it’s time for food, especially cattle,” he said.

Sugar has already rallied, doubling to more than 12 cents a pound over the past two years.

No longer a pure food “play”, it has become an oil substitute as Brazil – the world’s top producer – diverts half its crop from the global market to meet local demand for ethanol fuel.

After a few false starts Brazilians have fallen in love with flex-fuel motors, allowing them to switch from petrol to ethanol as relative prices change.

Jim Rogers, the former partner of George Soros and now a commodities tycoon, says the Chinese have a sweet tooth like everybody else, forecasting that per capita consumption of sugar will rocket just as it did in Japan as affluence reached the hinterland.

Aquila Capital is recommending sugar, palm oil, corn and sunflower, all of which can be used as “bio-energy” substitutes for oil and gas.

Sunflower diesel was used to power a super-clean motorboat at this month’s Kyoto Conference in Montreal, though it reportedly smelt of chips.

Crop-based fuels have been in fashion before, of course, in the 1920s. They faded fast as cheap oil gave the world 80 years of easy energy. The craze could fizzle out again if a severe global recession slashes demand for crude.

One way for small investors to take part is through the stocks of agro-conglomerates such as Bunge, the US-Argentine leader in farm fertilisers and vegetable oils listed on the New York Exchange.

Aquila is keen on the German sugar giant Südzucker and Switzerland’s Syngenta, the agro-chemical and seeds firm developing a sugar and corn bio-fuels project, listed in New York.

Investors can opt for a range of commodity funds, which have already attracted $70billion in funds – up from $20billion in 2002.

These include the GSCI Goldman Sachs commodity index, which is spread across metals, energy and farm goods. AIG and Jim Rogers have similar indexes.

Deutsche Bank has a rolling commodity index that automatically strips out goods that have already risen strongly, rotating into laggards – for those who do not want too much oil exposure.

Deutsche Bank predicted that the whole resource sector would continue to hum along, driven by Asian growth and the roaring global money supply, but farm goods had the most room to rally. It said the economic climate of rising inflation was “relatively hostile” to both equities and bonds. While commodities may bounce up and down, the overall super-cycle is likely to remain intact for years to come.

For struggling British farmers, the predictions must sound too good to believe. Most are wondering how they will survive cuts in EU subsidies. Deloitte Touche told them in a grim report last month that it was no longer “rational” to till the land, predicting a slump in average income from £66 per acre to £48 an acre over the next three years.

The black mood may be a sign that the bottom has finally arrived for an unloved sector that seemed to have been left behind by history. Those who can stick it out on the land for a little longer yet may ultimately be rewarded beyond their dreams.

For the rest of us, it may be worth a flutter on mixed-cropping land at £3,000 an acre. If it’s a flop, we still have the pleasure of marching up and down our acres in green wellies.

Source: Telegraph Dec. 23, 2005

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