Wednesday, August 8, 2007

Agricultural Inflation

From the Financial Times today:


Commodities surge set to raise food prices


By Javier Blas and Chris Flood in London and Adam Jones in Paris

Published: August 8 2007 18:39 | Last updated: August 8 2007 18:39

Consumers are facing higher food prices as the cost of agricultural commodities surges on what the industry describes as a ‘perfect storm’ of tight supplies and robust demand.

The price increases come as manufacturers begin to pass on to consumers higher wholesale agricultural commodities costs following several months of warnings.

Chicago wheat rose on Wednesday to an 11-year high of $6.71 a bushel while European milling wheat rose in Paris to €218.75 a tonne, the highest since the wheat futures contract was launched 1998. European milk prices have reached about €5,500 a tonne, an 86 per cent increase since January. In the past five years, milk prices have risen almost four-fold.

Corn, barley, soyabean, coffee and cocoa prices are well above their averages of the past five years. Meat and poultry prices are also increasing, traders said.

Gregg Engles, chief executive of Dean, the largest US dairy company, said: “It feels like a perfect storm and it is not over.” Food companies were facing “the most stubbornly inflationary dairy markets in history”.

Danone, the world’s biggest manufacturer of fresh dairy products, began to raise prices last month to cope with the higher cost of milk and other raw materials. Nestle, Unilever and Cadbury Schweppes are among others to have lifted prices. Antoine Giscard d’Estaing, the French group’s chief financial officer, said then that consumers would probably see prices rise in the shops. Panic buying by some food-importing countries is now also underpinning prices, particularly on the cereals market, traders said.

Middle East and North African countries, such as Morocco and Egypt, which are dependent on wheat imports, have rushed to boost their stockpiles.

Gavin Maquire of Iowa Grain in Chicago said markets were seeing “near-panic” buying by import-dependent nations.

The sharp increases in the cost of food, particularly milk and cheese, has reignited debate in Europe about the 2003 reform of the common agriculture policy, which cut support to farmers. Some French politicians, among others, say this contributed to reduced supplies and the recent price rises.

However, analysts said the bulk of the price increases was the result of rising demand from newly industrialised countries such as China, which are consuming more high-protein foodstuffs such as meat and dairy products, and tight supplies after crops were hit by adverse weather in Australia, the Black Sea basin and Europe.

The biofuel industry’s growing cereal consumption is also pushing up prices.

1 comment:

Agcapita said...

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 by our firm, Agcapita Farmland Investment Partnership (Calgary, Canada based agriculture private equity firm) 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

Agcapita’s investment team has over 40 years private equity and fund management experience and over $1 billion in total career transactions. The team currently manages a group of private equity funds with almost CAD$ 100 million of assets under management and previously managed a group of emerging market funds with almost C$500 million in assets for one of the largest banks in Europe.

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: Agcapita believes 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.