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Supplies Run Short All Over the World

Here are some hard facts about soft commodities…

Many commodities are now in critical supply deficit because of a multitude of external demand-led factors that has driven supplies to multi-decade lows.

The agricultural sector is now home to some of the worst supply shortages. We can thank foreign governments for these shortages. They’re hoarding supplies in the wake of shrinking crop yields. Countries like China, Vietnam and Thailand are curbing grain exports to feed their own population. That’s putting a severe supply crunch on availability and of course, causing prices to skyrocket.

Asian markets rely heavily on grain consumption. Right now, record nominal (before inflation) prices for rice, soybeans and wheat are not compelling these countries to sell their declining stockpiles. In fact, according to the United Nations, 33 countries are currently facing chronic food shortages and riots, namely in rice and other coarse grains.

The grains and other soft commodities like the Breakfast Club, including coffee, sugar and cocoa, have already taken off. But others like orange juice remain distressed and are poised to join the rally as crops in Florida and California eventually succumb to volatile and destructive weather patterns disrupting crop yields.

That phenomenon has already severely crimped grain yields in China, the Ukraine, Argentina and parts of Europe. And it’s spreading.

Chinese Production Has Collapsed

Here’s a staggering statistic sure to dispel any doubts about the grains bull market.

Chinese wheat inventories now sit at their lowest levels in history. China currently has enough wheat to last 140 days, much less than its inventory of 360 days last year.

Wheat and other sister grains are now selling below their 1980 inflation-adjusted prices. So the Chinese will most surely begin stockpiling at bargain-basement prices compared to 24-36 months from now.

Historically, China has moved the wheat market. In the mid-1990s, China aggressively stockpiled wheat when prices plunged to US$3.50 per bushel. Only a few years later, wheat prices soared to US$6.60 per bushel! Spot KC hard wheat currently trades at US$9.90 per bushel.

In 2006, China’s corn exports plunged 60% from the previous year. China is a major competitor in world corn markets. Now China is expanding its ethanol and livestock industries, which is constraining its exports.

This whole supply-side story will get out of control as the grains and, eventually, the soft Breakfast commodities join the bull market in a huge way. Any correction should be viewed as an opportunity to buy cheaper commodities, especially the grains.

CTA at the Forefront

Back in March 2006, I was so excited about soft commodities that I asked Jyske Bank in Denmark to create a guaranteed structured product to invest in a basket of agricultural commodities. Well, 24 months later we’re up 72%.

Ahead of the big bull market advance last year, I also recommended a basket of the grains. In January 2007, that ETF, which just went public, was distressed and plunged below its offering price. That’s when CTA moved in.

Fourteen months later, we’re still riding the grains. We’re sitting on a 62% gain plus another 54% unrealized profit in another grains related index trading in Europe.

Embrace commodity volatility. The current correction is healthy and long overdue while providing a great entry point for new and existing investors seeking a slice of the next bull market in soft commodities.

Plus, the Fed is on your side. Make the most of it.

ERIC ROSEMAN, Investment Director

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About the Author

Eric serves as an editor and Investment Director for The Sovereign Society's Commodity Trend Alert. Eric's talents include blending a dozen or more alternative investment funds to produce consistent returns to traditional asset classes and making commodity based recommendations with huge upside and limited downside.

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The Offshore A-Letter specializes is an elite global investment opportunities, asset protection strategies, tax management solutions, second citizenship and residency programs and offshore structures.

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