While many are uneasy about the future, an increasing number of down home country bumpkins are banking excesss coinage. I’m talking about your garden variety friendly farmer.
According to the USDA, net farm income set a new record in 2007 and will likely surpass that in 2008. Inflation-adjusted farm income hasn’t looked this good since the early 1970’s, before many of you internets were born.
What gives?
First of all, consider that there is an important transfer taking place that is shifting income away from discretionary purchases and towards necessities, like food. As world food supplies are stressed and prices rise, there is unrest in various places around the world as economically dispersed and distanced as Mexico, Italy and India. For example, in January, world wheat stockpiles fell to their lowest levels in over 20 years, with supply levels sufficient for only about 2 months.
And several countries are starting to take action to stem the crisis. For instance, the EU has lowered or removed numerous cereal import duties for the first time since it came into existence. Similarly, pressure is mounting on governments in the U.S. and elsewhere to loosen the rules that impose constraints on land use. If the Western Hemisphere experiences a poor growing season, that would undoubtedly push grain supplies lower to critical levels. The demand for food coming out of the emerging markets, coupled with poor growing seasons in key producing regions like Russia and Australia have contributed to the growing supply-demand imbalance. Pain is on the horizon for emerging country markets.
The boom in Ag can also be partly explained by happenstance. For example, the energy bill recently passed by Congress that mandates the production of 15 billion gallons of corn-based ethanol annually by the year 2015 is creating new demand and upward pressure on corn prices. That is also affecting the supply-demand relationship in other grains as well.
Thomas Malthus’ dire predictions rested on an assumption that population growth is geometric, whereas food production only increases arithmetically. This further injects fear that recent price trends in food will end in a very scary economic and social conclusion. Shortfalls are the inevitable consequence this global view. It appears to be playing out today.
But, are things really that bleak?
What may offset the end result may be found in better irrigation (LNN: 70.26 +0.63%) and land management, introduction of better pest control systems, improved fertilization (POT: 156.00 +2.30%), (MOS: 114.04 +4.10%), (AGU: 70.42 +3.62%) and higher yielding grains (MON: 119.05 +1.00%). More technological innovations in Ag will continue, and may even accelerate, given the price levels of farm commodities. High returns seem to attract capital. Not odd, no?
The bottom line is that it is not too late to “milk the farmer”. There is still room to bank more coin is this space. The Ag sector stocks will still be volatile, no doubt. But, these are great stocks to trade as well as invest in for the longer term. However, in my opinion, you’ll make bigger money buying and holding on to these stocks, and adding to your position on normal pullbacks. The Ag sector is in the midst of a long term uptrend that could last for years. Many of the companies in this sector have highly visible and predictable revenues and earnings—a big factor when buying stocks during a period of negative index earnings growth. Of course, many of you will not heed my “buy and add to, long term” advice and will try to trade these stocks daily for nickels and dimes. That’s fine. Short term swing traders can make good money. Believe it. Ag stocks are in a big long term uptrend with more room to run.
The supply-demand imbalances in the Ag sector, particularly the grains, is very serious and will be the top story and focus for international policy makers in 2008. Keep in mind that the global trend from rural living to city living in the emerging countries is pushing up demand for better food and more of it. Add to all this the cost of transportation and the unknown factor of the weather, and we could see continued price inflation in food. The near term beneficiaries of all this will continue to be the Ag biotech and fertilizer companies that are able to provide solutions that help the farmer increase crop yields, and thus, help them live large.
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