“I don’t know if I will live to see it,” said Brazil’s president Luiz (Lula) da Silva a couple weeks ago. “But Brazil has to transform itself into a big power in the 21st century. We have everything to make it happen. We are not talking about a little country here.”

No, indeed. Brazil is not “a little country” anymore. Any prudent investor has to consider how to hitch a ride on the Brazil growth story. Brazil is transforming into one of the world’s great powers in this century. It’s important to follow the news from Brazil. At the same time, you have to know where to look, and how to read between the lines.

By official count — what the Brazilian government will confirm — the rocks of Brazil hold nearly 20 billion barrels of proven reserves. That number is on par with the total for U.S. oil reserves, including Alaska and the Gulf of Mexico.

It’s an impressive number, but then there’s also the unofficial Brazilian reserve count. How much oil is “really” down there under Brazilian jurisdiction? It depends with whom you talk. Some Brazilian officials will smile and say the country has 50 billion barrels of resources. If the Brazilians can tap into this treasure, it adds up to more than twice the total reserves of the U.S., including Alaska.

Other knowledgeable — VERY knowledgeable — Brazilians give much larger estimates. I’ve seen estimates that place the resource number at “over 100 billion barrels.” This puts Brazil in with the largest of the large oil nations, such as Iraq, Iran and Saudi Arabia.

These massive oil resources offshore Brazil lie beneath deep water and thick layers of salt. And since it’s all within Brazilian waters, the government of Brazil is increasing its control over offshore development. This way, Brazil will have its own oilmen keeping an eye out for the overall national interest — and making big money for the Brazilian treasury.

The new level of Brazil’s state control over oil development is a strategic decision. Brazil is counting on the hydrocarbon resources to help propel it forward as one of the world’s major powers. And the development in Brazil will control the destiny of a good number of players in the OI portfolio.

Many companies whose fate is tied to the wheel of the Brazilian ship of state are in that portfolio. All of them have operations that span the globe. They’re not a pure play on Brazilian energy development. Just the same, it’s nice to know that they’ll be pulling down a big chunk of business in one booming region over the next couple of decades. As I see it, these firms are long-term core holdings for any diversified energy portfolio.

Gold on the Move

This week, the price of gold touched $1,040 per ounce. Silver also took the elevator to higher floors, to now over $17 per ounce. It’s been good news for all of the gold and silver miners in the OI portfolio.

We’re way up on many of the miners I’ve added this year to the OI portfolio. Some of the beaten-down guys are also showing us their inner Lazarus as precious metals prices soar.

What’s with the Rising Tide?

I just love it when the stocks in the OI portfolio are going up. It beats the heck out of what we experienced last October with the meltdown, that’s for sure. And it makes it easier to be the editor of a financial newsletter that focuses on precious metals, energy and other natural resources.

What’s going on? What’s with the rising tide? I believe we’re seeing some short covering in the precious metals arena. It has always amazed me in the past couple of years that there were people out there shorting gold. Huh? It’s like that scene from the movie The Deer Hunter in which Robert De Niro is playing Russian roulette with a pistol holding bullets in the chambers. You don’t have to be crazy to short gold, but it helps.

I may not have the same eyesight today as back when I flew Navy jets. But how close do you have to look to see that the U.S. dollar is in trouble? Yet people still want to bet on the dollar and against gold? Hey, it’s a free country. And I’ve spent the past few years feeling pretty lonely at times as I described my vision of monetary gloom and doom.

So now the dollar is dropping due to bad news on many fronts. The U.S. economy is NOT “recovering,” contrary to the propaganda from Washington. Unemployment is up, and it’ll stay up for a long time. There’s a structural readjustment going on within the U.S. economy, and it’ll take years (maybe decades) to play out. Meanwhile, U.S. tax policy, energy policy and the overall political process are a train wreck in living color. Can anyone explain to me how this has a happy ending?

The world, of course, is noticing. Now we read about a group of nations (the usual suspects, but add in modern allies Japan and France) trying to figure out how to ditch the dollar and use some other medium of exchange to trade oil. It’s not exactly a new rumor, but now it’s getting traction. And like people smelling smoke in a crowded theater, dollar holders are looking for the exit signs.

Is anyone surprised at this? How much fiscal and monetary abuse can the greenback stand? Hence, the precious metals prices are levitating.

We’ll probably see a pullback in precious metals prices, but that’s just going to be profit taking and the market working its magic. Long term, the metals are still going up.

It’s part of the long-term thesis of Outstanding Investments. Go with precious metals. Go with energy plays. Go with solid resource plays.

Until we meet again,
Byron King

Source: Energy, Brazil, Gold: What More Could You Want?

And so it begins. Just yesterday, we here at the TFN offices got into a late-day discussion about the fate of the nation’s natural gas markets.

With prices remaining low and entirely removed from the recent commodities bonanza, the nation’s expanding natural gas drilling industry is headed for trouble.

Today we got the news that proves our theory.

ConocoPhillips (NYSE:COP), the third largest of the nation’s Big Oil players, announced it is cutting its capital spending budget by nearly 10% and is selling some $10 billion worth of assets.

Why the drastic moves? Thanks in part to stubbornly low natural gas prices, the company needs to make the cuts to shore up a leveraged balance sheet.

If you recall, just last week the company warned Wall Street to expect reduced earnings figures thanks to a 67% reduction in natural gas prices.

There was similar news yesterday from nation’s second-largest producer, Chevron (NYSE:CVX). The California-based company quietly announced all drilling has stopped at its Piceance Basin facilities in Colorado.

I bet you can guess why they plugged the well. Yep, you betcha, low natural gas prices.

Drill, baby, drill

So if the natural gas price conundrum is having this effect on the nation’s largest companies and their multi-billion dollar cash flows, what is it doing to the tiny, marginal players?

Early last month, Trident Resources gave us a glimpse of what is likely to come. Citing liabilities of nearly a billion bucks and assets worth just $10 million, the Canadian gas driller was forced to walk into bankruptcy court and ask for protection from its creditors.

Indeed, the same companies investors were pumping their money into when gas was soaring to record highs are now failing under the weight of massive debt.

Here’s the kicker that is really going to tear the gas industry apart.

That massive debt that was picked up over the past few years doesn’t simply go away now that prices have plummeted. Drillers still have to pay their bills. That means any bit of cash flow available is direly needed.

That is how we got to where we are today, with natural gas inventories across the country at record high levels and growing by the minute.

With bills to pay, drillers simply refuse to close the valves on their producing wells. If they do, they’ll go bankrupt. But until they slow the flow, the price they get for that gas will sink lower and lower.

Eventually, prices will get so low the weak will be shaken out of the market whether they like it or not. They won’t be able to produce enough gas even to make their weekly payroll.

One of many

I could pick on dozens of small drillers that are facing gale-force headwinds, but since Rex Energy Corp. (NASDAQ:REXX) recently expanded its drilling in the Marcellus Shale formation, which is the chief cause of the current market glut, I will put their issues in the spotlight.

With $70 million in liabilities, the $330 million company is one of the better positioned drillers in its category. But much of that debt is focused on bringing the company to the Marcellus Shale region. If the move does not pay off, Rex could be forced to pay on a dud for quite some time.

Common estimates put the break-even price for Marcellus Shale drilling somewhere around $3.70 per 1,000 cubic feet of gas. Right now, drillers are able to get that price from the futures market, but the overfilled spot market is not willing to spend so much.

With nearly $1.50 difference between spot and future prices, something has got to give. With inventories about to overflow, the spot price won’t budge an inch.

The common argument throughout the market is that typical winter demand will reduce supplies and bring the markets back in equilibrium. But remember, the markets rarely go with the crowd.

The speculators have gas prices going higher over the next two months, but the facts and economic laws show prices will be going lower.

If it happens, it won’t be good for drillers. ConocoPhillips knows it. Now so do you.

Source: Natural Gas Industry Braces for Impact

Before we delve into the reasons behind all the publicity, here’s the basic skinny on REEs: One, they are rare, at least sort of. Two, they are indispensable to modern technology. Three, the number of active, dedicated producers is tiny, with more than 90% of the world’s supply coming from China.

If you took high school chemistry, you probably remember the periodic table of the elements. But if you’re like most of us, even if you pulled a 95 on the chem final, you may not recall many of the details today. And there’s a better than even chance you never bothered to memorize the names of the REEs. It’s time to get reacquainted.

They’re generally clustered in a separate grouping at the bottom of the table, are known collectively as the lanthanoids, and these are their names, in order of atomic number (57-70): lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, and ytterbium. Yttrium (39) and lutetium (71) are also sometimes included.

Need to Know, Point 1: Rarity

Fact is, we begin with something of a misnomer. These elements are not, strictly speaking, rare. Earth’s crust is full of them. True, they’re not as common as iron, carbon, or silicon, but are about on a par with nickel, copper, and zinc. Even the scarcest is way more abundant than gold, platinum, or palladium.

What is rare about them is that they’re widely dispersed. Very seldom are they found in economically exploitable deposits. Complicating matters further is that there are so many of them, and they clump together. They have to be separated first from the ore and then from each other.

Thus REE production comes primarily from other mines’ byproducts. The miner strips off the metal he’s really after, then sends the REE clusters to a specialty refiner.

Need to Know, Point 2: Applications

It’s safe to say that life as we know it would be very different without the REEs. The more our technological accomplishments pile atop one another, the more crucial these metals become. Because of their unique properties, there are generally no substitutes for them.

Of all the REEs, the one people may have heard of is neodymium. Alloys containing it have revolutionized permanent magnet technology, allowing miniaturization of all sorts of electronic components in appliances, A/V equipment, computers, communication systems, and military gear. Your hard drive probably has neodymium in it. So does your DVD player.

Liquid crystal displays depend on europium. Fiber-optic cables can’t function without erbium. Virtually all specialty glass products, from mirrors to precision lenses, are polished with cerium oxide. Several REEs are essential constituents of both petroleum fluid cracking catalysts and auto emissions-control catalytic converters. Half a dozen REEs go into the manufacture of the energy-efficient fluorescent bulbs that will soon be mandatory. Lanthanum-nickel-hydride rechargeable batteries are replacing older ones based on lead or cadmium. And no REEs, no electric cars. Nor next-generation wind turbines.

That’s only a partial list. But what makes REEs an increasingly sensitive topic is their role in national defense. Here are a few small items that have become dependent on them: jet fighter engines, missile guidance systems, underwater mine detectors, range finders, space-based satellite power plants, and military communications systems.

Think the Pentagon is very, very interested in maintaining a steady REE supply?

Need to Know, Point 3: Supply

95% of the world’s REE production originates in China. If you’re looking for reasons why we’re so nice to the premier Communist power left standing, this is a biggie.

We weren’t always so dependent. Not long ago, mines such as Mountain Pass in California made us nearly self-sufficient in REEs. But in the early ‘90s, China flooded the market with cheaper product, until it had driven all of its competitors out of business.

Today, Mountain Pass is being revived, but the start-up of an old mine is a lengthy and costly process. There are also some from-scratch REE development projects under way in the U.S., as well as Canada and Australia. But for the moment, China holds the hand with all of the high cards in it.

Forget your hard drive. Forget 11th-grade chemistry experiments. This is a national security issue. The American government cannot afford to lose that supply source, period. Maybe someday, but not now.

And that’s what’s behind the recent furor over these obscure elements. Because China threatened just that, a cutoff. The one thing that really gets Washington’s knickers in a twist.

In August, the story broke in the mainstream press. Sources in China leaked news of a draft copy of a report from the Ministry of Industry and Information Technology. It allegedly calls for a total export ban on five of the rare earths, with the rest restricted to a combined export quota of 35,000 metric tons a year, far below annual global consumption of 125,000 tons, and rising fast.

This doesn’t look like a move they’d follow through on, if only because of the lost trade revenues. And it’s only a recommendation; final approval rests with China’s State Council. But consider it an opening shot across our bow, if you wish. Or perhaps they’re telling us they need their REEs for the domestic economy, and we’d best go find our own supplies. Either way, the scramble is on to find alternatives.

That could backfire. REE prices and demand were already dropping last fall as the recession deepened, and China maintains a decided competitive advantage beyond control of supply: lax environmental standards (many REEs are highly toxic). Thus the new companies could spend the fortunes required to come on line, only to find themselves victims of yet another market glut engineered by the Chinese. Still, these metals are so important, it wouldn’t surprise us if the U.S. government subsidized domestic production, rather than risk a squeeze.

The Market

The market took due notice of the China story, driving the stocks of Western REE producers, and would-be producers, nearly straight up. Since late August, Avalon Rare Metals (TSE:AVL) has gained 120%, Arafura Resources is up 75%, Rare Element Resources has added 72%, and Lynas Corp. (ASX:LYC) is 50% higher (China, ever the master strategist, exploited the credit crisis to grab 25% of Arafura and more than 50% of Lynas). Lurking in the background is Molycorp, the private company redeveloping Mountain Pass. It’s planning an IPO that may well come out of the gate red hot.

With market action this frantic, the sector is on the frothy side at the moment. The heady market caps being awarded to these companies are obviously not based on fundamentals, and a savvy investor takes care not to get caught on the wrong side of a bubble.

Even though the Chinese export ban may never materialize, the ever-growing need for REEs is dead serious. And while the current bubble may pop any day, the long-term prospects for successful miners are outstanding.

Regards,
Doug Hornig

Source: Why All the Fuss Over Rare Earths?

Back in the 1960s and 1970s, a few major companies took out oil exploration concessions there from the government of South Africa. In 1974, Shell (NYSE: RDS.A / RDS.B) discovered a gas field off the southwest coast with the Kudu project. Early estimates were 1 trillion cubic feet of reserves, but current estimates range up to 10 trillion. Kudu was big, but nobody much cared about natural gas back then. Gas was too cheap, and southern Africa was too far away.

There was hardly any development around Kudu for the next 20 years. South Africa was under international sanctions due to its apartheid regime, so oil companies and other outside investment stayed away. Almost nothing happened with energy development until Namibia became independent in 1990.

By the early 1990s, the gas field at Kudu intrigued foreign oil companies. Kudu showed a large hydrocarbon resource. Clearly, there was significant potential. But nobody really understood the offshore geology. Plus, back then, it was tough to drill in water more than about 1,500 feet deep. Namibia didn’t make for an investment magnet.

But with the recent success of offshore Brazil, the energy exploration expectations of the world have been fundamentally altered. The same brilliant researchers and scientists that discovered the potential of Brazil’s Tupi field are now doing extensive research in offshore West Africa, in particular offshore Namibia. One researcher I’ve been following very closely believes the offshore areas of Namibia are ‘geologic analogues’ to Brazil.

Source: The Next Great Oil Frontier

Mittal is the chairman and largest owner of ArcelorMittal (NYSE:MT), the world’s largest steel company. Therefore, his words carry some weight in the steel markets. The fact that these words are so contrary to what everyone else seems to think is significant…

Mittal is singing a rosy tune that has the market atwitter. He thinks steel demand could grow more than 10% in 2010, which would be a strong rebound, indeed.

Whether Mittal turns out to be right or not will hinge on what happens in China. China makes up about half of the world’s steel demand. That’s where the controversy begins, because there is just a lot of uncertainty over China’s economy right now.

I think it’s noteworthy that even those who think Mittal is way too optimistic are still calling for a 5% increase in steel demand next year. The contraction in demand was so severe and happened so quickly in 2009, it is hard to imagine steel demand not rebounding some next year.

Source: Steel Sector: Still Suffering or Rebound Ready?

There is only one state in the country that has yet to finalize its annual budget. The political situation in Pennsylvania is getting desperate. Without a spending plan in place, dozens of organizations are not getting the funding they need to survive. Across the state, angry citizens are sharpening their proverbial pitchforks.

While the desperation in Harrisburg will slow the state’s economy, the fiasco is creating a profit opportunity for a handful of companies, most notably natural gas drillers and gambling operators.

The power of a strong lobby

Buried beneath Pennsylvania’s rolling hills and ancient mountains is a massive stockpile of hard-to-reach natural gas. The Marcellus Shale formation has been a focus of the nation’s gas industry for the last decade.

Pennsylvania’s budget woes are a boon for drillers as revenue-desperate legislators lease even more of the state’s forests in an attempt to drive closed a billion-dollar shortfall. With natural gas prices near multi-year lows, the companies signing those leases are likely getting a large bargain.

Companies like Atlas Energy Resources (NYSE:ATN), Rex Energy (NASDAQ:REXX) and Anadarko (NYSE:APC) should be near the top of your watch list.

Another company worth watching, especially after this morning’s news, is Penn National Gaming (NYSE:PENN). While the company has nothing to do with pulling natural gas out of the ground, Pennsylvania’s budget desperation is going to add to the company’s top line.

When up against the wall, politicians will do just about anything to get themselves out of a nasty situation. Pennsylvania’s lawmakers allowed slot machines into the state just a few years ago in an effort to reduce property taxes.

Even though the program was a verifiable bust, the latest budget proposal expands gambling even further. Now the state will be open to various table games.

Move over Sin City

That is great news for Penn National, one of the state’s largest gaming operators. High-margin games of poker are never bad for profits – at least if you are the house.

Penn National is in the news today as word spreads of its desire to purchase Las Vegas’ Fontainebleu resort and casino. The $3 billion facility is only 70% complete as work was halted last spring after funding was eliminated.

Negotiations are still in progress, but there is a chance Penn National could get itself a bargain with the deal. If it happens, shareholders could get a double-whammy of new, high-margin revenue streams.

Put this one at the top of your watch list and watch the action closely.

No matter what happens with Pennsylvania’s budget, somebody is about to profit. Isn’t that how the government works?

Source: Put These Four Stocks on Your Watch List

If you can’t farm it, you have to mine it. It is a great message, no matter if you are an investor or an out-of-work cowboy.

Riding through the streets of Alaska’s ever-wet capital, you see all sorts of bumper stickers. There are three main categories – fishing, mining and Sarah Palin.

It is the miners getting all of the attention this week.

There are several reasons the world’s mining industry is opening a big ‘ole bottle of bubbly, but none more poignant than the fact that America is shelling out debt faster than a hot-rod blackjack dealer unloading his deck.

As Uncle Sam goes “all in,” the folks paying for Washington’s lavish lifestyle are getting nervous. For proof, I need just one set of numbers.

In July, foreign purchasers bought just $15.3 billion more debt than they sold. In June, that number was $90.7 billion. If the trend continues (and you know it will), we could be in serious trouble.

Here come the interest rates

With an all-out disdain for American debt, countries like China and Russia are finding other ways to convert their greenbacks into something more useful. The commodities market has been the first vehicle of choice.

The share price of just about every major mining company is all the proof we need.

Every day, I compile a list of the session’s big winners and losers. I study them, look for the cause of the volatility and determine how to profit from the action. Lately, my winners list has been filled with the folks pulling minerals from the ground.

One player getting plenty of attention from the bulls is Hecla Mining (NYSE:HL).

So far this month, the silver, gold, lead and zinc miner has watched its Street value increase by more than 60%. Shares are up by over 6% today as gold prices continue their exploration above the critical $1,000 level.

As the markets worry more and more about the notion of runaway inflation and a weakening greenback, gold miners like Hecla will continue to increase in value.

Shares are approaching the $5 mark today, but a $10 quote by spring is not out of the question.

Another double-digit commodity winner comes from Anadarko Petroleum (NYSE:APC). If you are a Hot Stock Confidential subscriber, you are familiar with this oil and gas producer’s winning ways.

Since I recommended buying shares of the company back in May, share price has jumped by over 30%.

The gains continue today as natural gas prices surge above the $3.50 level and as word spreads about the company’s latest deepwater discovery off of Africa’s western coast. The news makes Anadarko a major player in the region and the markets are rewarding the company in kind.

Progress in action

Finally, after spending a week in Juneau, I could not write a piece about the mining industry and not mention Coeur d’Alene Mines (NYSE:CDE), the owner of the ever-disputed Kensington Mine.

Over the past week, I had the opportunity to see the mine, talk with some of its employees and witness the hustle and bustle taking place as the site finally goes into action.

With metal prices on the rise, the mine could not have better timing. When the first minerals are pulled from the ground early next year, the company will get a hefty price for its product.

It is no wonder shares of the company are up by more than 100% in the last ninety days.

No matter your political slant or your views of the mining industry, there is absolutely no room to deny the fundamental value of tangible assets like commodities.

As the world’s wealth and power transfers from one continent to another, the rocks buried beneath the earth’s surface will be the only reliable asset.

If I were you, I would get my hands on some.

Source: Commodities Market: Dig Your Way to Riches

Guaranty Bank in Texas became the 81st U.S. bank to fail this year. It was the 11th largest bank failure in U.S. history. This kind of thing is becoming so regular it is hardly news when it happens.

But what’s interesting to point out about this one is that the FDIC sold Guaranty to Banco Bilbao Vizcaya Argentaria of Spain. This is the first time regulators have sold a failed bank to a foreign lender. Such a turn of events would have been unthinkable only a decade ago.

So the world turns. When it comes to the question of who has the money, it’s often a non-U.S. buyer these days.

Speaking of foreign buyers, there is probably no group of buyers more watched and coveted than Chinese consumers. Recently, the Financial Times had a piece that highlights things the Chinese like to buy.

This is important because the Chinese are becoming increasingly affluent in large numbers. Total consumer spending was $1.7 trillion in 2007, compared to $12 trillion in the U.S. But that number is growing rapidly. The FT focused on the new rich. China now boasts more millionaires than the U.K. The rapid growth of this group has companies all over the world spending more money and time figuring out ways to get in their pockets.

So what do the affluent Chinese like? Outside of ordinary things like flashy cars and booze and quirky things like ivory and dried seahorses, one thing was mentioned in the FT piece that caught my eye: The Chinese love gold.

“China loves gold in all its forms,” the FT reports, “as a reserve currency, jewelry, an investment.” I’ve mentioned in the past about how the Chinese central bank doubled its holdings of gold this year, but it’s more widespread than that.

The rising middle class in China also buys a lot of gold. Since 2007, Chinese consumers have been the second largest purchasers of gold jewelry in the world, behind only India. The FT points out those gold sales were up 28% year over year in May. Total gold demand for the year was up 21%, to 400 million tonnes. There are not too many sales of any kind going up that much in this financial crisis, but there it is.

The financial crisis and weak stock market have helped gold as people look for a place to park some money. I think gold will remain a good place to be for some time yet. And gold stocks have the stars lined up for them. Many are reporting falling cash costs, yet the price of gold is staying up here in the $900s — and is likely headed much higher. That means gold stocks are reporting good increases in cash flow, among the few sectors to do so.

The Growth Is Overseas

As to the larger picture, I think trends in overseas markets should continue to be a focus, and I will keep on an eye on them. The U.S consumer is pretty well tapped out, finally. The growth is overseas.

Over the weekend, Barron’s featured a worthwhile interview with Chris Wood, the Hong Kong-based strategist for CLSA’s Asia-Pacific group. He’s been on top of some of the bigger-picture developments in Asia for years — sniffing out trouble in Thailand before the Asian crisis in 1997, for instance, and, more recently, giving early warning calls on the global troubles that would emerge after the U.S. mortgage market imploded.

What’s Wood’s take today? “The financial crisis in the Western world will lead to a long period of anemic growth,” he says. “From a global investor’s standpoint, Asia and the emerging markets stand out as a place to invest.”

When you look at some of the data rolling in, it is hard not to see it. For instance, earlier this year, oil consumption in the developing countries passed the top 30 (OECD) countries for the first time. There are now more cars sold on a monthly basis in the top 16 emerging markets than there are in the U.S., Japan and the EU combined.

More opportunities will emerge, as many of these markets are only in the early innings of the most commodity-intensive part of their development. As a result, we’ll see a lot more power plants, water treatment plants and the like built over time. Then there are the agricultural needs, not only to support population growth, but to support the boost in biofuels.

Biofuel Boom

Steven Johnston at AgCapita, a firm dedicated to investing in agriculture, put together a worthwhile newsletter. In the latest update, the group shows how biofuel production is on the rise:

This trend will surely continue, as most of the oil-producing countries have in place biofuel targets whereby they mandate that a certain amount of fuel must be biofuel. AgCapita’s own research indicated that the biofuel targets in the U.S., the EU, Canada, Japan, Brazil, India and China alone could require the use of over 400 million acres of arable land, or over 10% of the world’s total. This is in direct competition with food production and should have a significant effect on crop prices.

What a lot of people overlook is just how fertilizer-, water- and energy-intensive these biofuels are. So agriculture remains another attractive market to invest in right now in what otherwise looks like a time of tepid growth. That means opportunities in fertilizer stocks, grain handlers, farm equipment and farmland.

Have a good week, and I’ll write you again soon.

Regards,
Chris Mayer

Source: What Chinese Money Buys: Gold Goes Green

The St. Louis-based Monsanto said in June that its fiscal third-quarter earnings fell to $694 million, or $1.25 a share, from $811 million, or $1.45 a share, in the same period a year ago. Sales slipped to $3.16 billion from $3.54 billion last year. The company also said its annual earnings would likely be at the low end of its $4.40 to $4.50 a share forecast range.

That’s not very impressive for a company that last year posted record net sales of $11.4 billion for fiscal 2008, a 36% jump from fiscal 2007. But there’s also good news for Monsanto investors. Chairman and Chief Executive Officer Hugh Grant said last week that his company is poised to achieve its long-term goals by producing more efficient products and streamlining production.

“We have committed to using our technology to double yields in our three core crops – corn, soybeans and cotton – by 2030, while reducing our use of key resources by one-third per unit produced,” Grant said. “Innovation has us well on our way to achieving this, with our most robust pipeline ever. We’re on the verge of an unprecedented technology explosion that will deliver the types of products growers want most – those that offer greater yield and value.”

By 2012, Monsanto expects its gross profit from its core seeds and traits business to be between $7.3 billion and $7.5 billion – about 2.5 times its 2007 level. Grant said this increase will be facilitated by the development of seven new “high impact technologies” that by 2020 will boost revenue by $3 billion.

“These projects came to be through a disciplined investment in seed and biotech that is unmatched in the industry,” Grant said. “We consistently invest 14% to 15% of our total net sales for seeds and genomics in research and development for breeding and biotechnology.”

It’s true that Monsanto’s commitment to research and development have made it the dominant player in the market for genetically modified seeds. But Monsanto has become a victim of its own success.  It is currently locked in an ugly legal spat with its chief rival in the biotechnology E.I. du Pont de Nemours & Co. (NYSE: DD), which has led to accusations that Monsanto is a monopoly – an accusation that has drawn the attention of the federal government.

DuPont Gets Dirty

Conflict between the agribusiness arch-nemeses erupted earlier this year when Monsanto sued DuPont, and its subsidiary Pioneer Hi-Bred International Inc., for unlawful use of its proprietary “Roundup Ready” herbicide tolerant technologies in soybeans and corn.

DuPont doesn’t deny “stacking” soybeans with the Roundup Ready trait with its own Optimum GAT trait, but instead argues it is not violating Monsanto’s patent by doing so.

“We fundamentally disagree with Monsanto’s position that they can use their current trait monopoly to prevent the introduction of competitive seed products for U.S. growers,” DuPont spokesman Dan Turner told Reuters. “This is yet another example of Monsanto trying to flex its anti-competitive muscle in the market, by stifling healthy competition among seed producers that are looking to grow yields for those that matter most — the farmers,” he added.

The conflict escalated Monday, when Monsanto CEO Grant sent a letter to DuPont Chairman Charles O. Holliday Jr. accusing the company of a “serious breach of business ethics.”

“Your lobbying and communications that paint your company as a victim of limiting technology licenses is dishonest, disingenuous and downright deceitful,” Grant told Holliday in the letter.

Furthermore, Grant decried the use of “masked third parties” to “attack” Monsanto as
“misleading to the public and a serious breach of business ethics far beyond honest competitor behavior.”

It’s likely that by “masked third parties” Grant meant the Organization for Competitive (OCM) Markets, a nonprofit group that claims Monsanto controls 90% of the market for genetically modified seed. The Lincoln, NE-based organization claims to take on big agricultural companies in defense of small farmers and consumers, but it was recently revealed DuPont gives the group financial support.

“We’ve supported OCM for a number of years as we have dozens of organizations that are aligned with our belief around what’s in the best interest of our farmer customers,” DuPont spokesman Dan Turner told St. Louis Today. “However, we don’t disclose the amount that we give to OCM or any other organization.”

Turner couldn’t name any of the other organizations that DuPont supports, the paper said.

Is Monsanto Being Thrown Under the Anti-Trust Bus?

In July 2008, the OCM started the Crop Seed Concentration Project an initiative target specifically at Monsanto, which the group says controls 90% of the market for genetically modified seed, a figure Monsanto disputes.

“Monsanto’s effort to enforce licensing agreements and protect its patent rights has dramatically altered American agriculture,” the OCM says on its Web site. “Monsanto has filed more than 100 patent infringement lawsuits against U.S. farmers.”

The OCD’s crop concentration campaign coincides with U.S. President Barack Obama’s vow to enforce antitrust laws that were neglected by the Bush administration, and its national convention attracted the representatives from the Federal Trade Commission, the Department of Justice, and the Commodity Futures Trading Commission.

“For many farmers and consumer advocates, we understand that there are concerns regarding the levels of concentration in the seed industry–particularly for corn and soybeans,” Philip Weiser, the new Deputy Assistant Attorney General, said at the OCM gathering, which took place in Monsanto’s hometown of St. Louis, Mo.

Weiser said federal regulators are “committed to examining” the level of competition in several agribusiness sectors

The Department of Justice and the Department of Agriculture will have a series of “workshops” to “openly discuss legal and economic issues associated with competition in the agriculture industry,” said Christine Varney, the assistant attorney general in charge of antitrust issues at the Justice Department.

“Monsanto welcomes the opportunity to be an active participant in the discussion and looks forward to these workshops,” the company said on its Web site. “There have been unsubstantiated allegations of a lack of competition in the seed market for several years now. We’re confident an objective review will reveal competition is alive and flourishing in the seed market.”

The workshops are scheduled to begin in January.

Source: Monsanto Focused on Long-Term Growth, but DuPont Dustup Draws Attention from Regulators

To set the table, water rates in China have been so far below the global average it’s ridiculous. Especially when you consider the severe water problems in China. The graphic below is from The Wall Street Journal (“China Cities Raise Water Price in Bid to Conserve” by Andrew Batson):

The Chinese are water-poor. They are sucking their aquifers dry. It is particularly bad in the north of China. The groundwater under the North China Plains is draining away quickly. By some estimates, China will exhaust this water supply in the next ten years.

You probably know that the city of Venice is sinking a fraction of an inch per year. But that’s nothing compared to what is going on in Beijing. Parts of Beijing are sinking 8 inches a year! According to Andrew Lees (The Right Game), it is the world’s largest cone of depression (an underground hole created by a depleted water table) at over 15,000 square miles. The second largest cone of depression is around Shanghai.

So finally, many cities are raising the price of water. The WSJ points out several places where water prices could rise 25-48%. Shanghai, for instance, raised water rates 25% in June and plans another 22% increase next year.

The second event that caught my eye was the collaboration between China and India to monitor the health of Himalayan glaciers. This area is very important to both countries. They fought a war over it in 1962. So, the fact that they are getting together on the Himalayan glaciers is meaningful.

Here is why it is so important: Seven of the world’s largest rivers, including the Ganges and the Yangtze, are fed by the glaciers of the Himalayas. They supply water to about 40 per cent of the world’s population.

Well, those glaciers are shrinking. The Indian Space Research Organization, using satellite images, has studied the changes in 466 glaciers. It found they had lost more than 20% of their size between 1962 and 2001.

This melting increases the water flow at first, but eventually slows dramatically as the glaciers either melt completely or reform. These observations have given rise to a kind of “Peak Himalaya” where people wonder if we have not seen the maximum water flow from the mountains.

We know the current run rate on demand is already well above what is sustainable given annual rainfall and river flows. That’s why you have those depressions. That explains the depleted aquifers and the rivers that don’t reach the sea. Now throw into that ugly brew a decline in water supply from the Himalayas. The situation is worse than it seems, if that is possible, because much of the existing fresh water in both countries is so polluted it is unfit for human consumption.

As if all of that weren’t bad enough, the demand for water is still rising rapidly in China and India. The water use per capita in China and India are still well below global averages. As these countries industrialize, they’ll consume exponentially more water. It takes water to make just about everything. For example, to make a 1 tonne passenger car takes more than 100,000 gallons of water. Just to make a cotton shirt takes over 1,000 gallons of water. And most of our water goes into making our food.

So, population growth by itself guarantees increased water demand. (Globally, water consumption increases at more than twice the rate of population growth.) These two countries already have big populations and both will get bigger. When you look at demographic trends, China and India alone will add close 600 million people over the next 30 years. That’s two present-day United States.

Fresh water, like oil, is getting a lot harder to find for 40% of the world’s population. It will get worse before it gets better. The days when we think of water as a cheap resource are coming to a close. That’s especially true for China and India.

Bottom line: We need to create more fresh water. You do that by finding new sources either through new supplies (drilling deeper, desalination, etc.) or by using existing supplies more efficiently (irrigation and other efficiency gains).

All of that takes time and energy. Desalination is energy intensive. Drilling deeper for water or going to more distant source requires energy to pump and move the water. Replacing older, less efficient plants and equipment takes time and energy again. (Detect a theme here?)

Countries, companies and people will find ways to make this transition. The companies that can solve these problems will do well.

Regards,

Chris Mayer

Source: The End of Cheap Water?