Contrarian Stock Market Investing News - Featuring Bargain Stocks » Food

Old-fashioned commodities; old-fashioned strength

Chris Mayer — Wed, 11 Nov 2009 12:26:51 +0000

Chris Mayer (Penny Sleuth):
“If you can tell me something else where the fundamentals are so attractive…I’d be happy to put my money there,” said Jim Rogers, the famed investor and self-made billionaire in a recent interview. “But I don’t know of any other place.”

What’s he talking about? Today, we take a look and invest right alongside his idea. And it should start to pay off with the arrival of the first swallows of spring in 2010. It’s also timely now — in this weak-kneed economy — because it has traditionally held up well even in when the economy is on the ropes. Even the Great Depression couldn’t put this thing down.

We start with simple truths. The world’s population has more than doubled since 1950 — from about 2.5 billion to 6.7 billion. By 2050, there will be more than 9 billion people on the planet. Almost all of this growth will come from undeveloped markets such as China and India. And they will all be doing one thing, for sure — eating.

Now, hang on. I know that is a banal insight by itself, but this story has layers like a tiramisu. The second layer is the mix of food eaten, which is important. These undeveloped economies are getting richer. Predictably, as people everywhere have done and continue to do when they have a little more money in their pockets, they change their diets. They spend more on food. The average Chinese spends 40 cents of every additional dollar earned on food. In India, it’s about 70 cents of every additional dollar. What do they buy?

Read the rest of the story at PennySleuth.com.

A Grainy Picture

Kevin Kerr — Thu, 19 Jun 2008 21:42:20 +0000

Most of us Americans are so accustomed to a world of plenty; we have a hard time imagining a world of scarcity — much less making investments based upon this idea. But the energy markets provide a very powerful example of what happens when resources become less plentiful.

Five years ago, almost no one believed that oil prices would soar past $30 per barrel. $50 seemed utterly unthinkable. As oil prices continued climbing, so did disbelief. The skeptics never abandoned their misguided notion that oil was “overpriced.” So when crude retreated from $75 to $50 early last year, the prospect of $100 oil seemed like a ridiculous prediction

Due of Peak Oil, the prices of agricultural commodities are going much higher…

Most of the agricultural markets have had a big move already, but these markets could easily suffer a big correction from current levels. The long-term investor will want to buy these markets on weakness, not sell them.

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A hundred years ago, the average American spent about 45% of annual income on food. Today, that figure is down to about 15%. So we’ve been taking cheap food for granted and have spent our “extra” cash on plasma TVs and leased BMWs.

We don’t worry about food costs or whether it will be readily available tomorrow. But the agricultural markets may have some major surprises in store for complacent Americans…and unprepared investors:

While shortages of key industrial and energy commodities are frightening, no sector will threaten global stability more than agriculture…

In 2007, we saw stark glimpses of just how bad this situation will get. The “Tortilla Crisis” in Mexico, the “Pasta Protest” in Italy, the riots and crushing of one supermarket shopper in China over cooking oil… We have seen dairy, meat, and bread prices skyrocket.

It’s ironic that as global population is reaching an all-time high, we are turning a huge percentage of our crops into ethanol or biofuel…

This questionable, if not idiotic, alternative produces little, if any, short-term benefit and considerable long-term harm — both to the quality of farmland and to the integrity and stability of the global agriculture markets. In other words, using food as fuel can make a big mess out of the global food supply…and the prices that we all pay for that supply.

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From sea to shining sea, the U.S. has croplands as far as the eye can see. For years, its bounty has been a supermarket for the world. Now it’s a fuel station, too.

China, which has hundreds of millions more hungry mouths than we have, has far less arable farmland. And worse, China has far fewer controls in place to regulate farming methods.

Trends like these strongly suggest that the agricultural markets will imitate the price action of the energy markets. As investors, we must look at this situation as an opportunity…

We should be looking to buy stocks of some of the key agricultural companies that help support the industry: those dealing with equipment makers, fertilizer, irrigation, and transport.

In my own portfolios, I have exposure to soybeans, wheat, and corn. I also think the soft commodities are much undervalued: coffee, cocoa, sugar, and cotton. These markets are also poised to move much higher…

The planet is not running out of food, but it might be running out of cheap food. So stock up your pantry and start shopping for the kinds of investments that will prosper during the coming agriculture boom.

Regards,
Kevin Kerr

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Source: A Grainy Picture

Earthquake Will Boost Chinese Inflation Rate

Contrarian Profits — Wed, 21 May 2008 15:12:52 +0000

The recent devastating earthquake in China will push record food prices in the country even higher. However, experts say the earthquake will not slow economic growth.

“There will be less supply of pork, less supply of rice,” said Sun Mingchun, a Hong Kong-based economist at Lehman Brothers Holdings, speaking to Bloomberg. “It’s not causing supply to decline drastically but it is definitely less. The impact on inflation is more than its impact on growth.”

The Fed at the Crossroads

John Mauldin — Sat, 17 May 2008 15:04:09 +0000

Is the economy poised for a recovery, as the stock market seems to expect? Or are we in for another few more quarters of recession and/or slow growth?

Retail Sales Take a Dive

Many commentators, looking for a bullish lifeline, have pointed to the fact that retail sales grew in April by 1.8% over this time last year. But that is truly grasping at straws. Just last November they were growing at 6% year over year and have been dropping relentlessly for the last six months. And as good friend and data maven Greg Weldon points out, retail sales last November were 1.3% over inflation and now are a negative 2.1% below inflation. Retail sales are clearly headed down. (www.weldononline.com, a must-read for those who need in-depth analysis of all things and data economic)

But there was growth. Gasoline sales were up 16.3%. And food sales were up 6.1%. 77% of the increase in retail sales this year has been from increases in food and gas sales. If you take out food and gas, retail sales are down by about 2% in the last three months.

The consumer is getting squeezed. Reuters did a rather anecdotal, but revealing survey of Wal-Mart buyers at the beginning of the month. They found a significant increase in store traffic from the end of the month to the first of the month. Surveys showed that shoppers were stretched on their budgets due to rising gas and food costs and simply had to wait until their monthly checks came to go to the store for food. Many indicated they had changed their buying habits, now shopping at lower-cost stores like Wal-Mart.

At the Mauldin household I must admit to a kind of food shock upon my return. I eat a lot of smoked turkey from a local grocery deli. Arriving back from South Africa last night, I sent my oldest son to the store to put in a supply for the next few days. My “regular” turkey that was about $5.99 a pound a few months ago is now selling for $8.99. That is considerably higher than the 5.9% food-at-home inflation rate that the folks who give us the CPI tell us is the case. Next time I will find a less expensive brand, as the Reuters survey suggest shoppers all across the country are doing.

(I do recognize the inconsistency of saving a few dollars at home while I eat out at nice restaurants where the price increases are even greater. It is all about what is in your head. There are books and massive studies devoted to such behavior.)

“Leslie Dach, executive vice president of corporate affairs and government relations at Wal-Mart, said the cycle of shoppers running out of money in between paychecks and then flocking to its stores on payday is ‘more pronounced, more visible.’

While many U.S. retailers are facing waning sales as shoppers cut back on purchases of clothes, jewelry or home furnishings, Wal-Mart’s vast grocery business and its emphasis on low prices is spurring a resurgence at its U.S. stores and in its stock price.” (Reuters)

But prices are actually up at Wal-Mart. And not just from food. Looking at the latest Commerce Department data, we find that US import prices are up 15% year over year. Even taking out gasoline, prices are up 6.2%. And it is somewhat surprising that it is only 6.2%. Why?

Because the dollar has fallen by more than 6%. The Chinese ambassador to the US, Mr. Zhou Wenzhong, recently pointed out that the Chinese renminbi has appreciated almost 19% since July of 2005. I have been writing for years that the Chinese would allow their currency to appreciate slowly and steadily for their own purposes and on their own schedule. They need to do so in order to contain their own rising inflation. Look for it to rise another 10% by the middle of next year.

Consider that because of the rise of the renminbi, the prices for oil and food imports in China have risen 20% less than for US consumers. And the prices they charge us for their goods are only about 4% higher. But that meager growth is up from only 1% last fall. Those (notably economics-challenged Senators Schumer and Graham) who have been pressing for China to allow its currency to rise are going to find that such a rise ultimately means higher prices for US consumers. Be careful what you wish for, Senators. You just might get it.

Lower consumer spending is not just due to gas and food. There is also a psychological component. Frederic Mishkin, one of Ben Bernanke’s colleagues at the Fed, has done research that suggests the “typical American family will cut its spending by up to 7 cents for every dollar in housing wealth it loses. Given a 20% fall in prices, this adds up to a nationwide reduction in consumer spending of about $350 billion a year, or 2.5% of the U.S.’s gross domestic product. That’s a big number – more than enough to tip the economy into recession.” (Conde Nast)

And that’s if the fall in prices is only 20%. I continue to put forth the proposition that we are going to see a slow Muddle Through Recovery, as the boost we got from Mortgage Equity Withdrawals during the last recession will not be available this time.

Accounting for Inflation

If beauty is in the eye of the beholder, inflation is in the eye of the statistician. Because the number you end up with is dependent on the models and assumptions you choose. As the chart below shows, there have been two major revisions to how inflation is figured, one in 1983 and another in 1998. (Thanks to Barry Ritholtz at The Big Picture for this source.)

Note that using the same methodology as was used in 1983, inflation would be around 11.6% today. Before 1983, the BLS used actual home prices to account for inflation. After that time, they used something called Owners Equivalent Rent or OER. This is the theoretical price a home would rent for. There are sound reasons to use OER and equally good reasons to use actual home prices (as is done in Europe). But both methods have flaws. You just have to pick a methodology and stick with it.

And there are reasons to think that OER may not rise as it would normally do in this part of the cycle, because so many homes which cannot sell are being rented out, and rent prices might not rise as much as in past cycles.