Tag Archives: corn

Feed the World

7 Feb

The US Grain Council says it ahs received information that points to Chinese demand for around 9m tonnes of corn imports in 2011. They claim that China is expecting to be around 10-15m tonnes short on corn inventory this year (using a 30% inventory/use as a target ratio).

Now the council is an industry body, and as such its findings might be somewhat optimistic. Nonetheless, directionally, and in terms of magnitude, demand anywhere near these levels would be nothing short of dramatic. Let’s put it in a little context….

  • Firstly, 2010 was a record year for Chinese corn imports at 1.3m tonnes since its 1995-6 season of crop failures. That puts the Grain Council’s estimate for 2011 7 times the recent record.
  • Secondly, in 2010 the global export market was around 92m tonnes. 9m is almost a 10% increase!
  • Thirdly, this 9m tonne figure is 9 times the USDA’s forecast of only 1m tonnes.
  • Finally, prior to 1995 China accounted for 0% of global soybean import demand. By 2010 it accounted for 63%. Perhaps corn is about to reach an inflection point.

There are ways to profit out of this. As we’ve discussed here before, demand for soft commodities has a positive impact along the entire value chain, especially when it comes to fertilizers. We all know that with growing food demand against a backdrop of limited arable land, there’s a need to improve yields to keep the world fed. That’s great for fertilizers.

At present farmer economics are the best they’ve ever been, and 2011 looks set to be a record year. Unlike the commodity bubble in 2008 though, fertilizer producers have been more sensible when it comes to pricing their goods this time around. Potash, for example, is in around US$450/t, while at this stage of the 2008 cycle is was about US$750/t. I believe that massive price increases in the last cycle pushed farmers to reduce their fertilizer inputs dramatically (as well as the global credit crunch!). Despite what analysts were being fed by the fertilizer industry about the integral nature of their products to global food security, we all learned that farmers can take “fertilizer holidays” with negligible reductions in their yields.

This time around though, I consider the more tempered price increases as a positive for the bottom lines of fertilizer producers. After all, the top line is comprised of both volume and price, and producers are more sensibly protecting their profits, by understanding the elasticity of their products.

I recently went to visit the CEO of a major global fertilizer company who said that this time they were not being greedy!

The upshot is, that in 1Q11 I believe fertilizer stocks (and general agchem) still have some way to go, but perhaps more importantly, their downsides are more protected.


Cotton prices are a bubble – all bubbles burst

12 Nov

I couldn’t help but notice some economists point out that clothing was one of the reasons for the upside surprise in China’s October CPI figure (4.4% vs. 4% consensus, and 3.6% in September). I would expect continued policy responses in this inflationary environment, including the chance of price curbs in addition to the market’s expectations of increased bank RRR rate.

I want to take a step back in this article and talk about cotton. The price of cotton is above $1/lb for only the second time since the US civil war! In fact look at the Bloomberg chart below – the price of cotton futures have almost doubled since July! Why?

Well there are some long term secular trends at work here.

  • I can’t deny that cotton demand in both China and India has doubled since 1995 – the result of increased urbanization and GDP/capita.
  • Over the past few years the prices of other soft commodities, such as corn and soy have also increased. This is the result of (1) improved diets in emerging markets (corn feeds animals, and animal consumption rises as nations grow wealthier); (2) a growing world population; (3) reduced arable acreage; and (4) bio-diesel production. As the prices of corn and soy have increased, farmers are naturally compelled to replace cotton production with the likes of corn production, which reduces cotton supply.

However I can’t ignore that the price of cotton smells like a bubble. Just look above at the chart again. Then look below at the chart of the historical price of potash.

When the prices of corn and soy increase, it makes economic sense for farmers to apply more potash to increase their yields. As a consequence the price of potash similarly increases. Over the period highlighted, the price of crops and potash increased dramatically. Now I know hindsight is a wonderful thing, but the price of potash eventually came crashing down – history shows us that was a bubble. During the years before the recent economic crisis market participants were well aware of the long-term soft commodity cycle (which I explained above).   Yet some kind of over exuberance grasped the imagination of market participants. The cotton chart looks like the left hand side of this potash chart before the price tumbled.

In my opinion short-term drivers of the cotton market have been overplayed. It has led to an over exuberance in cotton futures, and created a bubble. I’m not the first person to posit that when things are good the market thinks they are better than they are, and when things are bad the market thinks they are worse than they are.

What are these short-term drivers?

  • Weakened USD, which I believe is more likely to strengthen in the medium-term. Why?
    • I am against the consensus and believe that QE2 was over done. I think there’s a chance that all USD600bn might not be used. Why? Corporate tax receipts are healthy and indicative of strong profits in the next quarter. Unemployment is a lagging indicator, and always stagnates at this stage of a recovery – what’s more recent data has been encouraging and revised up. Employment agencies are seeing growth in profits, especially in temporary work (which as a quasi-lead indicator). IMS data highlights the inventory cycle is close to an inflection point (which will be great for employment). When the market sees this the USD is sure to strengthen. Also consumer confidence indexes are forecasting a solid consumer Christmas.
  • Potential for prolonged Indian cotton export bans
  • Bad weather in China and Pakistan
    • This is clearly cannot be factored in as a long-term issue!
  • The weather and Indian story have lead to short-term purchases by mills not wanting to be left short.

So you see there’s a decreased supply in the short-term, a short-term increase in demand, and a short term FX issue.  This must have led to massive speculation pushing up the price of those cotton futures. It simply can’t be the case that these short term elements could double the price of an asset on a fundamental basis, especially considering the fact that the long-term drivers have been known for years.

Now, I can’t tell you how long the price will remain elevated, or whether it will go up another 10%, 25% or 50%. But what I will say is that this is a bubble, and bubbles always burst.

So on the one hand beware. And on the other hand, look for stocks that have been hit and see if they present a good entry point – for example clothes retailers or manufacturers.

Zai Jian

PS – I hope soon to return to writing about building a core China portfolio. All articles on the subject can be found here –https://ravendragon.wordpress.com/category/building-a-core-china-portfolio/)