AGRI-COMMODITY PRICES: A NEW HIGH!

AGRI-COMMODITY PRICES: A NEW HIGH!

The Agri-Food Price Index hit an all time record high for the week ended 7 March. This index of Agri-Food prices is rather comprehensive in that it includes sixteen(16) important Agri-Commodities. That index is plotted in the chart below which covers the past almost two years.

Recent move upward off the double bottom that had formed is the strongest move for Agri-Food prices since 2012. That important bottom formed out of the long slide from early Summer 2013 as markets anticipated a bumper North American harvest of corn, soybeans, and canola. Why did Agri-Commodity prices bottom, then begin to rise? Answer to that question is really rather simple. Demand for Agri-Food is again the dominant factor, as it will likely be in the years ahead.

Global demand for North American grains is extremely strong. U.S. exports of major grains are up 50% from a year ago. In Canada, unfilled orders for railroad cars to move grains to export facilities recently exceeded 60,000. Due to the shortage of grains last year as a consequence of the weak North American harvest in Fall of 2012, the world had considerable pent up demand. That unfilled need is now being satisfied.

This break out to a new high for the Agri-Food Price Index may have some strong implications due to the length of the trading range in which the index had been trapped. As can be observed in the long-term chart below, the trading range had been in place since 2011. Normally, when a price trades up and out of a long lateral pattern a further move to the upside is likely. That said, no price or index moves in a straight line. As can be observed from the stochastic oscillator in the first chart, the index is over bought at this time. Some form of short-term “rest” should be expected.

This development for the Agri-Food Price Index is broadly based. Such a situation justifies somewhat more confidence than if only a few Agri-Commodities were participating. Since the October low, the average gain of the sixteen(16) commodities in the index has been 12%. Of the Agri-Commodities, 81%, or 13 of 16, have risen since that low. As a final note on this positive situation, 9 of 16 Agri-Commodities, or 56%, have positive price trends giving this rally a broad base of support.

Some skeptics will no doubt point to corn, which is down from the highs of last year. To that we would first remind them that the world eats more than corn. Cash U.S. corn prices are up 13% from that low in October. U.S. corn price is half that of China and less than that in Europe, suggesting that not only in the U.S. is corn bountiful, but attractively priced for export.

These positive price trends in combination with strong volumes along with other developments in Agri-Foods create a positive environment for many companies.

•          Wilmar International(WLMIY), a dominant company in palm oil, should benefit from palm oil prices that have also broken out of a long base, global demand growth, and the shift of Indonesian production from export to biofuels.

•          AGCO(AGCO) and Deere(DE), while perhaps not having the most exciting year in 2014, can look forward to a more rewarding 2015 and years beyond.

•          Bunge(BG) and Archer Daniels(ADM), two major Agri-Collectors, should do well in an environment of positive pricing and strong volumes. Such an economic environment may be the best for them.

•          Agrium(AGU) has proved that its unique retail farm store strategy, Canada, U.S., South America, and Australia, makes it far more than a mere fertilizer company.

•          High prices for animal proteins, beef, pork, and chicken, make the drugs from Zoetis(ZTS), the only large, publicly traded animal health company, both important and considerably more affordable.

•          Both Monsanto(MON) and Syngenta(SYT) are clear beneficiaries of current Agri-Trends. Of the two, Syngenta(SYT) may be selling at a “bargain price” due to a short-term issue with a GM corn seed.

Finally, remember that in the years ahead ,when only old people are still tweeting, the world will still be eating food each and every day.

Ned W. Schmidt,CFA is publisher of The Agri-Food Value View, a monthly exploration of the Agri-Food grand cycle being created by China, India, and Agri-Energy. To contract Ned or to learn more, use this link: www.agrifoodvalueview.com        @agrifoodvv