Chris Mayer

“I think we have a food crisis right now.”
– Hussein Allidina, head of commodities research, Morgan Stanley

The leaves have turned all shades of red and gold. The air is crisp and cool. The fall beers are tapped. The brats are on the grill. It’s autumn. That means it’s time to talk about the harvest, in particular for corn.

Corn was the big news in markets on Friday. What some called a “harvest shocker” sent corn up 6% on the day. The USDA cut its harvest projections by nearly 4%, which took the market by surprise. And that’s just one of the reasons why the corn price has soared to $5.30 a bushel from $3.30 a bushel last July.

The shares of most ag-based companies are responding in kind. Fertilizer stocks are soaring, for example, as are the shares of irrigation equipment companies like Lindsay (NYSE:LNN). By contrast, the market has been hammering the stocks of meat producers. Tyson Foods has been falling on the theory that higher prices for corn means higher feed prices to fatten up those chickens, cows, sheep and pigs.

By historical standards, the US corn harvest is still a mighty pile – 12.7 billion bushels. It’s the third largest ever. But demand is also near record levels. And that’s why supplies are still tight.

The USDA said that US corn held in reserve will fall 47%. This means the US will have the tightest reserves since the mid-’90s. However, the US also has a lot less idle farmland than it did then, which means it’s not going to be as easy to replenish lost reserves through US production.

Of course, there are spillover effects, too. This doesn’t affect just corn. Soybeans jumped nearly 7%, and wheat was up 9%. What affects one crop affects others. They all compete for arable land and the farmer’s investment dollar. If more farmers plant corn, that could mean fewer farmers plant soybeans.

Also, in the shadows lingers the possibility of another 2008 food crisis. Some think it’s already here. Some of the largest grain exporters, like Russia and the Ukraine, have imposed export restrictions. Meanwhile, many of the chronically large grain importers in the Middle East and North Africa are starting to hoard supplies. This drama resembles the one we saw in 2008.

So I think we’ll see a mega-corn planting for next year. That will be good for fertilizer and ag equipment stocks, as farmers load up on what they need. But from this point, the best-performing stocks might be the ones getting mauled today.

The old saw in the commodity pits reminds us that the cure for high prices is high prices. The market will bring us a lot of grain next year. My guess is that corn will be cheaper in the spring than it is today.

Meat prices will continue to rise, too, and are already climbing this year. Beef prices are already the highest in a quarter-century. In this scenario, the best plays would be the beaten-down Tyson Foods of the world that turn the world’s grain into meat.

In the meantime, it’s worth noting that agricultural commodities are not the only ones rising. Metals also helped the benchmark index for raw materials hit its highest level in two years on Friday. Tin hit an all-time high of $26,780 a tonne. Copper hit a two-year peak of $8,349.50 per tonne.

Beyond the industrial metals, precious metals are also soaring. Gold hit a new all-time high of $1,364.60 an ounce. All the big gold producers are closing their hedge books. Meaning, they think the price of gold will go higher. So rather than sell gold forward at today’s prices, they will take their chances. AngloGold Ashanti was the latest to do this.

On top of this, central banks around the world keep buying gold. Overseas, governments are actually encouraging their citizens to own gold. Most recently, the Vietnamese central bank said it was thinking about lifting a ban on gold imports, which has been in place since May 2008. The market took this as bullish, because Vietnam is one of Asia’s largest consumers of gold.

Silver is putting in 30-year highs.

When all these commodities start hitting their highs together, something greater is at work than just supply and demand issues.

As the FT notes: “Investors are pouring money into commodities as fear intensifies that competitive currency devaluations and quantitative easing – in effect, pumping money into the economy – by the world’s central banks will lead to the debasement of paper currencies and to runaway inflation.”

This is exactly it. Investors are not as dumb as they sometimes seem. They see the world’s governments fighting over currency issues. They see that the likely outcome is that these governments weaken their currencies. As one does it, the other weakens in response. Then the other weakens it more. And so on and so forth.

And before you know it, you need a $20 bill to buy a cup of coffee.

Commodities trade on world markets – at least the major ones do. Prices adjust to the fall in currencies. So as the dollar weakens, the price of gold or oil ought to rise in dollar terms, everything else being equal.

Companies that produce these commodities could do even better, because their costs – such as for labor – don’t rise as fast. When you get your annual raise – if you are a salaried worker – inflation may well have already chomped 10-15% of your purchasing power.

Also, commodity producers who have already spent the large dollars to get a project up and running will find they have a big advantage over new projects. Inflation will make new projects much more expensive by comparison. This also stimulates the merger and acquisition activity we’ve seen.

Management teams will sit in their backrooms and do the math on a white board. They will see that it is often cheaper these days to buy what they want in the stock market, rather than build it themselves. This is what BHP decided when it bid for PotashCorp; it’s what Robbins & Myers did when they decided to bid for T3. So my advice is to stay with tangible assets that won’t lose value as currencies depreciate.

For the last few years, I’ve been recommending the shares of tangible asset companies like PotashCorp and T3 to the subscribers of Mayer’s Special Situations.  Most of these recommendations have performed very well. But I think there’s still a lot more investment success to be had by buying into the companies that feed and power the world.

Regards,

Chris Mayer
for The Daily Reckoning

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Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents. 

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