Tag Archives: Agriculture

article 3 months old

Chinese Inflation Surges

By Greg Peel

There would have been the odd green tea spill at the G20 meeting in Seoul as leaders gathered around the Bloomberg terminal to learn the latest round of Chinese economic data. The Chinese finance minister was last seen slinking quietly out a back door.

China's annualised consumer price index grew by 4.4% in October, marking a significant jump above the 3.6% rate of growth in September. Economists had expected a 4.0% figure. Wholesale inflation looked similarly ominous, with the producer price index coming in at 5.0%, up on 4.3% last month and ahead of 4.5% expectations.

The reason the Chinese finance minister might have wanted to be somewhere else all of a sudden is that the inflation results suggests another rate hike will likely be forthcoming from the People's Bank of China anytime soon, which yet again puts pressure – further pressure – on Beijing to revalue the renminbi. Beijing is tipped to do just that, probably before the year is out, and probably only by about 5-7% as an increment.

The renminbi is anywhere between 20% to 40% undervalued depending on what comparisons you use.

But if Beijing does revalue the renminbi shortly it will not be because a bunch of gweilos demanded as much at a token cocktail gathering.

The rest of China's data movements were more benign.

Urban investment dipped to 24.4% growth from 24.5%, bang on expectation; retail sales fell to 18.6% from 18.8% when a flat result was expected; and industrial production surprised with a fall to 13.1% from 13.3% when an increase to 13.5% was expected.

These numbers are more akin to a China being carefully slowed by Beijing. The inflation numbers, nevertheless, reflect rising commodity prices which to some extent reflect a weaker US dollar, but also fundamental demand/supply issues in the food and textile space. The food bill of the average Chinese household is still a far greater proportion of the weekly budget compared to that of Westerners, so soft commodity inflation, which has been running riot, has a greater impact on China than it does in the US or Australia.

China knows it's pointless to wave a finger at the US and its sinister money printing policies because it is Beijing who chooses to peg to the US dollar and thus import such inflation. Were the renminbi to be revalued then food prices for the Chinese population would fall, but so too would Chinese exports become more expensive, and Beijing does not yet think China's domestic economy is proportionately effective enough to cope with the burden of lost export sales and lower receipts.

article 3 months old

Material Matters: Index Re-Weightings, Plus Miners With Cash

By Chris Shaw

January will see the annual re-weighting of various commodity index funds. Macquarie estimates there is US$220-$230 billion tracking commodity index products as at the start of this month, suggesting changes in index weightings can generate significant buying or selling of various commodities.

The two most important indices are the S&P GSCI and the Dow-Jones UBS Index, which together with other products that track the performance of these indices, account for about US$180 billion of the money in commodity index products.

On Macquarie's numbers, the split in terms of where money is invested is roughly US$109 billion in energy commodities, US$29 billion in industrial metals, US$18 billion in precious metals and US$59 billion in agricultural commodities.

The DJ-UBS index is the more important for the base metals given a higher weighting, while Macquarie notes the re-weightings that occur with respect to the DJ-UBS index tend to be far more significant given this index is weighted by dollar value.

In the view of Macquarie, it will be natural gas and zinc that will see significant buying when indices re-weight this time around. For zinc the broker expects buying of around 100,000 tonnes, which equates to close to 10% of monthly consumption and about 2.5% of monthly zinc cash 3-month open interest. Buying in natural gas is estimated by the broker to be around US$3 billion, which is close to 10 days of US consumption at 65BCF per day and US$4/MMBTU pricing.

In contrast, selling of nickel is likely to be around 15,000 tonnes, which is about 12% of monthly consumption and around 3.5% of monthly nickel cash 3-month open interest. Selling should also be significant in cotton, corn, coffee and silver, this reflecting the strong price performance of these commodities over the course of this year.

Macquarie notes index re-weighting tends to impact markets before any actual re-weighting takes place, so late December and early January is when any potential impact is likely to be most significant. Index re-weighting involves the selling of futures rather than physical products, meaning the price impact of any changes will be less than if it was genuine physical buying or selling in the market.

Citi has turned its focus to the financial position of the global mining market, the broker estimating by the end of 2011 there will be a net debt position of only around US$4 billion, this expected to improve to a net cash position of around US$72 billion by the end of 2012.

Driving the improved cash position is a combination of strong commodity prices and solid company balance sheets. Going on history, Citi suggests capex is likely to be ramped up as cash positions strengthen, but big ticket capital management initiatives are unlikely.

Along with capex, acquisitions have also been playing a big role in the sector, Citi noting since 2005 dividend payments of US$129 billion have almost been matched by acquisitions worth US$126 billion. This compares to total cash returns (dividends plus buybacks less equity raisings) of only US$63 billion since 2005.

With respect to BHP Billiton ((BHP)) and Rio Tinto ((RIO)), Citi notes over the past decade capex has accounted for 53% of BHP's cash spend and 37% for Rio Tinto's. This compares to an average for the global sector over the past five years of around 60%.

The combination of capex, acquisitions and returns has accounted for about 70% of EBITDA (earnings before interest, tax, depreciation and amortisation) over the past decade for both BHP and Rio Tinto on Citi's estimates. Over the next five years this is expected to fall to around 35%.

Citi's analysis suggests if both companies were to keep the same rate of spend over the next five years this would imply US$70 billion for BHP and US$50 billion for Rio Tinto. Citi expects a significant proportion of this spend is likely to be channeled to increases in ordinary dividends rather than buybacks.

This reflects Citi's view that while a buyback would deliver a one-off benefit to shareholders and be accretive in earnings per share terms, a pick up in underlying dividends would be a more attractive longer-term outcome. If both companies were to lift their yields to 5% it would soak up an extra US$4 billion and US$6 billion in spend respectively on the broker's numbers.

Both BHP and Rio Tinto are heavily involved in iron ore and it is this end of the commodities market that has received closer attention from UBS. As the broker notes, market consensus at present is for iron ore prices to halve over the next five years as a wall of new supply comes to the market.

For UBS the key to future prices will be when, if ever, and at what price, this new material actually comes to the market, as new projects typically experience delays and higher costs. As well, UBS argues demand for iron ore could easily exceed consensus expectations in coming years as these numbers look to be relatively conservative.

As an example, UBS points out its current forecasts are for a market deficit in 2011, a small surplus in 2012 and then much looser markets. But UBS also notes in the days after it made this market assessment BHP Billiton announced a delay and slower ramp up at its Rapid Growth Project 5. This is significant as this project was to contribute 40% of total production growth over the next three years.

On the demand side, UBS estimates if Chinese steel production growth was assumed to be 6% through 2015 rather than the 4% currently forecast, the global iron ore market would remain in substantial deficit through 2013 and would still be tight in 2014 and 2015.

This leads UBS to suggest the risk is the global iron ore market remains tighter than currently expected for another four years, which could result in the market upgrading its long-term price assumptions by 20% in two years' time. Australian iron ore plays would be sensitive to such an outcome, UBS offering Rio Tinto as an example.

On the broker's current numbers, Rio Tinto is trading at a 25% discount to fair value at present, but this fair value could increase by 20% if consensus price expectations for iron ore were increased. This would imply the Rio Tinto share price would need to rise by around 60% to reach fair value on a two-year view.

Relating this to the Australian iron ore stocks in its coverage, UBS has calculated how much its forecast base net present values would increase if iron ore prices remain stronger for longer. The increases range from 11% for BHP Billiton to 14% for Mount Gibson ((MGX)), 19% for Rio Tinto, 33% for Fortescue Metals ((FMG)) and 35% for Gindalbie Metals ((GBG)).

UBS has Buy ratings on all five companies, while the FNArena database shows sentiment indicator readings for the stocks of 1.0 for Rio Tinto and Gindalbie, 0.8 for Mount Gibson, 0.6 for BHP and 0.3 for Fortescue.

article 3 months old

Material Matters: Copper A Winner Plus Bulks And Steel Orders Of Preference

By Chris Shaw

Commodity prices enjoyed a strong October, with metals in general and tin and silver in particular recording strong gains and outperforming the bulk commodity sector for the month. As Macquarie notes, the gains in metal prices were not simply the result of a weaker US dollar, as most metals rose strongly in other currency terms as well.

Nickel underperformed its base metal peers in October and Macquarie suggests this was not a surprise given that metal's softer fundamentals. Gold has rallied to near US$1,400 per ounce but during October the metal underperformed both silver and the platinum group metals, as exposure to a recovery in industrial demand was more sought after than a safe haven investment in the broker's view.

Among the bulk metals, Macquarie notes iron ore prices were resilient through October, this thanks to a supply shortfall from India that boosted spot prices. Coal prices were also solid, the broker seeing this as a reflection of supply concerns stemming from wet weather in Australia.

BA Merrill Lynch has looked more closely at the potential impact of the wet conditions in Australia on commodity prices, seeing potential for mining to be impacted by more than the farm sector. This is because further wet weather could disrupt supply and so exports. On the plus side, BA-ML notes reduced supply can help hold up prices even in the face of a modest softening in demand.

For the Australian farming sector, BA-ML notes the wet conditions have brought the drought to an end, which has helped boost crop and food production. This is coming at a time when weather related supply disruptions abroad are pushing up prices globally.

Looking at commodities as an asset class, Deutsche Bank notes commodity index returns this year have been somewhat disappointing relative to other asset classes such as emerging markets and equities. This comes despite Commodities Futures Trading Commission ((CFTC)) data showing commodity indices have enjoyed renewed inflows since the middle of the year.

In the view of Deutsche Bank, this pick up in inflows reflects increasing market confidence in the outlook for growth in emerging markets, as well as efforts by the Federal Reserve to push up economic growth in the US.

Deutsche suggests the Fed's decision to introduce further quantitative easing measures is a bullish one for risky assets, especially as the stockbroker sees the US dollar weakening further as the end of the year approaches.

This implies potential for further gains in precious metal prices, with Deutsche Bank expecting silver will outperform gold. Agricultural commodity prices should also continue to move higher into next year in Deutsche's view thanks to rising shortages in a number of markets, while the introduction of physically backed Exchange Traded Funds (ETFs) for industrial metals brings new price spike risks to these markets.

In oil, while Deutsche sees current equity market and foreign exchange rate trends as bullish for prices, any rally would be more sustainable and less likely to experience corrections if forward oil prices could move into backwardation.

In terms of price forecasts, Deutsche Bank expects an average oil price in 2010 of US$78.30 per barrel, up 3.1% from its previous estimate thanks to a forecast December quarter price of US$85.00 per barrel. In 2011 it forecasts an average of US$80.00 per barrel, rising to US$85.00 per barrel in 2012.

Following some modest changes to its base metal price forecasts, Deutsche Bank is now forecasting average prices for 2010, 2011 and 2012 of US$2,154, US$2,646 and US$2,866 per tonne for aluminium, US$7,357, US$8,267 and US$8,818 per tonne for copper and US$2,119, US$2,425 and US$2,646 per tonne for lead.

On the same basis Deutsche is forecasting prices for nickel of US$21, 657, US$25,353, and US$26,455 per tonne, for tin of US$19,262, US$18,464 and US$19,842 per tonne and for zinc of US$2,124, US$2,535 and US$2,866 per tonne for 2010 to 2012.

For gold, Deutsche Bank is forecasting prices of US$1,211 per ounce this year, US$1,450 per ounce in 2011 and US$1,600 per ounce in 2012, while for silver its forecasts stand at US$19.10, US$24.25 and US$28.00 per ounce respectively.

Still on industrial metals, Standard Bank notes copper prices have rallied strongly thanks to the latest quantitative easing measures announced by the US Fed, the moves bringing some fresh buying interest and some short covering activity to the market.

This was enough to push prices above US$8,700 per tonne last week. With tight fundamentals still in place in the global copper market and with the prospect of further US dollar weakness, Standard Bank suggests this rally could continue, with record highs a chance to be surpassed this quarter. This would be three months earlier than the bank had been forecasting.

While it is investor flows driving the market at present, which suggests any sell-off could be quite aggressive in nature given a lack of physical activity, Standard Bank suggests these investor flows can continue to support prices shorter-term.

Given an expectation physical activity will return to the market in the coming months, Standard Bank remains bullish and expects copper will push ahead through US$9,000 per tonne and beyond in coming months.

In the bulk commodities, Credit Suisse recently revised its iron ore and foreign exchange forecasts. Post this review, the broker has reiterated its order of preference among the Australian iron ore and steel plays.

On its current house view of iron ore prices, which is based on a long-term price of US$58 per tonne, Credit Suisse's order of preference in the sector is Mount Gibson ((MGX)), Gindalbie Metals ((GBG)), Atlas Iron ((AGO)) and finally Fortescue Metals ((FMG)). If the broker's long-term price assumption proves too low and US$100 per tonne is more realistic, this order would change to Gindalbie, Fortescue, Atlas and then Mount Gibson.

Among the Australian steel plays, the Credit Suisse order of preference stands at BlueScope Steel ((BSL)), OneSteel ((OST)) and then Sims Metal Management ((SGM)). The broker cautions as earnings volatility in the sector is high at present, this order is not a high conviction call.

In terms of how this stacks up with consensus views according to the FNArena database, Sentiment Indicator readings for the steel plays stand at 0.9 for BlueScope, 0.6 for OneSteel and 0.1 for Sims. Among the iron ore plays Sentiment Indicator readings range from a reading of 1.0 for Gindalbie to 0.8 for Mount Gibson, 0.3 for Fortescue and 0.2 for Atlas Iron.

article 3 months old

The Rising Cost Of Survival

By Richard (Rick) Mills, Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

Socio-economic turmoil - lawlessness, poverty, lack of adequate medical facilities and attention, low to no employment, low wages, disease, no clean drinking water or water for irrigation and shortages of food or unaffordable food can all cause socio-economic pressure to build in many countries that were once stable environments for investment.

In 2007 and 2008 roughly 40 food riots occurred – two of the more publicized examples were when people took to the streets after rising corn prices made tortillas very expensive in Mexico and skyrocketing food prices in Haiti led to the overthrow of that country’s Prime Minister.

The U.N. Food and Agriculture Organization (FAO) reported a five per cent increase in the international price of food over July and August 2010.

"I think everyone is wondering if we are going to have a repeat of 2008 when there were food riots around the world." Johanna Nesseth Tuttle, director, Global Food Security Project

The world’s developing economies mostly rely on food imports to sustain themselves. On average their citizens spend a much larger percentage of their wages on food than do their counterparts in developed nations. Some published estimates are as high as 50 to 60 percent of income going towards food.

Our agriculture system is concentrated on producing a very few staple crops - there is a very serious lack of crop diversity. Corn, wheat, rice and soy are the main staples and production is oftentimes half a world away from where the majority of the crop would be consumed. Taken together, this means if we get hit by a particularly bad harvest in one area, if a severe El Nino strikes, or more localized severe weather phenomena strikes, food supplies can get totally out of control in many countries.

Considering that the global food supply chain is weak (easily disrupted by lack of transportation, weather, insurgency, stealing) and non-existent in many areas then you have a recipe for potential disaster in many regions of the world. When, not if, this food supply shortfall happens, for whatever reason, then almost any city, and almost any countryside could be aflame with strikes, riots and civil disobedience.

Climate change

The worry about, and direct threat of, ongoing climate change impact on agriculture isn’t about the slow almost imperceptible changes caused by a gradual shift in our weather patterns. The greatest worry is that climate change might intensify already extreme events.

This seems to be happening today, witness the incredible drought and massive wildfires in Russia, the flooding in Pakistan, unbelievable hailstorms in Texas and unprecedented cold snaps in China.

And with extreme events being exacerbated by climate change an already stressed agricultural industry (by loss of arable land, shortage of fresh water for irrigation, increasing human population, staple food crops used for bio-fuel production, increasing energy costs and developing countries changing diets) is increasingly having a more difficult time feeding and clothing the world.

Many climatologists believe that the ongoing climate change the earth is undergoing will increase the frequency and severity of extreme weather events.

Inflation

As I said, the most severe consequences of non-existent or more expensive staple foods are felt in developing countries whose citizens spend an exorbitant percentage of their incomes feeding themselves and their family compared to families in the western world. The recent riots in Mozambique were caused by a 30 percent hike in the price of bread after a double digit increase for water and energy - this happened in a country where many spend nearly 75 percent of the household budget on food. People in the poorer countries simply cannot afford increases in the price of food - in Mozambique the per-capita income is $800 per year.

The USDA believes food inflation will quicken it’s pace during the final months of 2010 and into 2011. "Although inflation has been relatively weak for most of 2009 and 2010, higher food commodity and energy prices are now exerting pressure on wholesale and retail food prices." USDA food economist Ephraim Leibtag

“We continue to be shocked and amazed at the size of the cotton moves. These are, without question, going to translate into higher prices for consumers but more at the low end.” Sharon Johnson, cotton analyst, First Capital Group

There was a massive hailstorm in Texas (the centre of U.S. cotton production) and a severe cold snap in China (the world’s top cotton producer). Both these extreme weather events happened on top of already record low cotton inventories. With cotton inventories drawn down to record lows farmers might be tempted to shift their production focus from soybeans and grains to cotton.

Fresh water for irrigation and drinking is getting harder to source and more expensive. Food, the energy used to produce our food, and cotton – most of the world lives in cotton – are all moving higher.

The Rising Cost of Survival

It seems to this author that the increase in the price of food is the straw that breaks the camel’s back. The real cause of angst is the rising cost of living being felt in developing areas of the world. Many of these people, already living in poverty, and those on poverties edges, are far less capable of absorbing the increased costs of what is really just basic survival for themselves and their families. Yet this is the first group of people who are impacted by the coming unstoppable waves of inflation and real shortages - whether localized or temporary because of supply chain breakages or poor harvests.

Hundreds of millions of marginalized people, people perhaps counted by the billions, across all nations, will feel the extreme pinch of increased prices, across all asset classes, on their household budgets. But especially so in what those people need the most – water, food and clothing – the bare essentials necessary for survival.

Country Risk

One of the most serious and, in many cases now unpredictable, risks facing investors is "country risk" - where the political and economic stability of the host country is questionable and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.

When a countries citizens get upset, when the drama hits the streets, when the riots start and those in power fear they are losing control and are in danger of being overthrown - regime change in many of these developing countries can quickly become a reality - they will act to please their populace. One of the first actions often taken is the nationalization of foreigners assets – often accompanied by placing the blame for the countries woes on anybody but the government, misdirecting the mobs attention.

All governments fear social unrest - social unrest breeds an upswing in regional militancy and insurgency - the 2007-08 food shortages and consequent rioting recently helped to trigger the collapse of governments in Haiti and Madagascar. Today, in Egypt, half the population depends on government subsidized bread. If Egypt’s present government cannot continue to subsidize bread for the masses upcoming parliamentary elections will be effected. In Serbia a public warning about a coming 30 per cent hike in the price of cooking oil has led to threats of demonstrations by trade unions.

The bottom line? Foreigners, no matter how entrenched in the country, have always made easy targets. Greedy, capitalist hating Marxist governments have never before needed an excuse to nationalize others assets, and they did so time after time. Now investors have something else to ponder and monitor – one that concerns all food importing countries governed by any political ideology.

Conclusion

The United Nations Food and Agriculture Organization acknowledges that higher prices are causing hardships. But they quickly add the situation that exists today is far less dire than the one in 2007-08. Hmmmm maybe, but this author does not believe that is going to be the case for long.

The relief we’ve seen, in the last two years - from this food, or rather from this higher cost of survival driven social unrest - is very temporary, a calm before the storm. A shortage of fresh clean water for irrigation and drinking, fragile and easily disrupted food supply chains and extremely expensive (or non-existent) food, clothing and energy basics for emerging and developing nations is going to be the coming norm. And it’s going to cause chaos.

"Long-term growth in global demand for agricultural products - in combination with the continued presence of U.S. ethanol demand in the corn sector and EU biodiesel demand for vegetable oils - holds prices for corn, oilseeds, and many other crops well above their historical levels." USDA

Quantitative easing and a global currency race to worthless. Inefficient supply chains, intensified weather phenomena and a race to secure dwindling supplies of commodities by developed economies (and their richer inhabitants) all mean the very basics of human survival will become increasingly scarce for the poorer people in the developing world.

Are there storm clouds on your radar screen…no?

Well, there’s a storm brewing on the horizon. Maybe you should be keeping a weather eye on developments in the countries you’ve invested in.

Richard (Rick) Mills

PS - Let’s never forget, in our rush for profit, that there is a real human cost involved. There are untold millions of adults and children who go to bed every night hungry, thirsty and cold.

rick@aheadoftheherd.com
www.aheadoftheherd.com

If you're interested in learning more about the junior resource market please come and visit us at www.aheadoftheherd.com.

Membership is free, no credit card or personal information is asked for.

***

Richard is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell.com, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor and Financial Sense.

***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Richard Mills does not owns shares of any company mentioned in this article

No company mentioned in this article is an advertiser on his website aheadoftheherd.com

article 3 months old

What Chance A BHP Buyback?

By Greg Peel

Oh Canada.

While sovereign takeover rejections should come as no surprise to Australians who've had to deal with a few now, it did come as some surprise to analysts that the Canadian government has quite emphatically rejected BHP Billiton's ((BHP)) bid for the Potash Corporation of Saskatchewan. BHP has a month to go back and think about it, but no details of the specific rejection criteria were released. The deal was simply deemed to be “not in Canada's benefit”.

The local market, however, was much relieved. The 2.5% share price jump yesterday shows just how unpopular the Potash deal is to BHP fans who are worried the Big Australian will overstretch and over-risk an otherwise healthy balance sheet by investing in what is ostensibly for BHP a whole new market. (BHP currently owns potash assets next door in Saskatchewan at Jansen, but they are greenfield).

The Potash board had already summarily rejected BHP's bid as too low, and followed the rejection up with a very strong quarterly earnings result. The risk was always going to be BHP would really have to pay up to gain control of Potash, and maybe even raise some new capital to do so.

But there is a double-whammy effect as well. If BHP abandons Potash, on the assumption no amount of concessions will appease a Canadian government which is worried about local jobs and local royalties (BHP can offset its Jansen development costs against Potash earnings and thus avoid paying royalties to the state of Saskatchewan), then the market is assuming a 10% share buyback which would be about equivalently accretive for earnings per share.

BHP provided a buyback hint earlier when it renewed its buyback authority at the UK AGM.

However, while analysts have done the numbers on a buyback and agree that it would be a strong positive for BHP shareholders, they are not necessarily convinced that's exactly what Marius Kloppers will decide to do instead. Kloppers has clearly signaled an intention to buy rather than buy back.

Firstly, analysts assume the Potash deal is far from dead, albeit we don't know whether the exact criteria of the Canadian government rejection make any sort of deal a waste of time putting forward. It's only an initial rejection nevertheless, so one assumes Canada has given BHP some specific sticking points to address and a deal may yet be given the green light.

But assuming BHP ultimately gives up on either a too hard basis, or on the basis it's not prepared to pay the sort of price Potash shareholders ultimately require, then Marius will be like a kid with his pocket money in a lolly shop where the cobbers have run out. With temptation all around, what else might suffice?

Analysts believe there is a very good chance that BHP will either not instigate a buyback or buy back less than 10% on the basis the excess cash on the balance sheet can be better used – at least in the board's eyes. If fertiliser is too hard, and aluminium and nickel are none too attractive, that leaves only copper and oil. There's not much point in pursuing coal and iron ore, analysts note, given BHP will always run into rejections on the basis of reduced competition.

New copper projects are very thin on the ground these days, so that really just leaves oil. That's why a couple of brokers are tipping a Gulf of Mexico acquisition might replace an abandoned Potash bid rather than a straight buyback. The only risk here is that BHP baulks at getting too overweight in oil assets. Potash, after all, was all about diversification.

So the jury's still out. We have to wait a month to see what BHP comes back with and wait to see what the Canadian government then does. If we assume approval, we have to then see what price BHP is prepared to jump to as its final offer for Potash and at what price Potash shareholders are tempted.

Assuming final rejection, we then have to wait and see whether BHP has a Plan B acquisition already on the cards, or will regroup to consider a Plan B, or will sit on its cash and wait until another appealing target pops up, or whether it simply gives the excess cash back to shareholders by buying back stock as the market is clearly hoping.

All the while, we have to consider whether or not BHP was fairly valued ahead of any Potash consideration, particularly given some uncertainty over immediate Chinese iron ore demand, general coal demand (which was quite weak last month according to the trade balance numbers), and of course the headwind of an Aussie dollar now above parity with a bullet.

Of the eight FNArena database brokers, five are maintaining Buy ratings while two look at already hefty multiples and have settled on Hold. One (BA-Merrill Lynch) is restricted which means it is advising on the Potash deal.

The consensus target for BHP is $49.37 which is 9.5% above the current trading price.

article 3 months old

Special Div From CSR?

By Chris Shaw

CSR ((CSR)) delivered an underlying interim profit of $89 million, the result down 8% in year-on-year terms and lower than market expectations. As an example, Macquarie had been forecasting an interim profit of $106 million.

The result was a messy one according to Macquarie, with the Sucrogen sugar assets disappointing, soft insulation and glass earnings but signs of stronger momentum in the core building products division. Earnings from aluminium were flat and property earnings improved off a low base.

Deutsche Bank also identified a margin improvement from the building products division as worthy of note, as it points to the gains stemming from a focus on costs and an improvement in operational efficiencies.

Not everyone in the market is convinced the building products division outlook is improving. While Macquarie pointed to some gains from better conditions in residential construction and ongoing benefits from cost reduction and efficiency improvements, UBS points out the division has not grown in line with the Australian economy for some time.

According to UBS this underperformance is the result of a combination of flat housing starts, a lack of product innovation and some structural overcapacity in the industry. The positive in the broker's view is CSR has a strong balance sheet, which presents management with opportunities to make this business more relevant to investors looking for growth investments.

While sugar division earnings fell short of estimates, Macquarie suggests this is not a great issue as there is a proposed sale of the division to Wilmar International in place. As well, Deutsche Bank notes the poor sugar result can be attributed to unseasonably wet weather, which makes it more of a timing issue than an operational disappointment.

The key for CSR, assuming the Sucrogen sale goes ahead, will be what management decides to do with the proceeds received from the sale. Deutsche notes group debt currently stands at $957.4 million, so assuming $1.75 billion in net proceeds CSR could effectively be debt free.

This is unlikely in Deutsche's view, as it anticipates management will prefer to retain a modest level of gearing while delivering some capital management initiatives to shareholders. Deutsche expects a fully franked dividend of 20c per share and a 10% share buyback at $1.80 per share.

Macquarie is unsure of what form any capital return is likely to take but expects a total return equal to $850 million or 56c per share, while UBS estimates a total return of 55c per share, down from 72c previously.

Post the interim result there have been some minor changes to earnings estimates across the market. Citi also lowered its earnings forecasts post the result and at the same time the broker has downgraded to a Sell rating from Hold previously. The downgrade reflects recent share price strength and a cut in price target to $1.65 from $1.80.

This was the only change in rating post the interim result, the FNArena database showing CSR is rated as Buy twice, Hold three times and Sell once. The consensus price target on CSR according to the FNArena database stands at $1.96, down from 1.99 previously.

Shares in CSR today are down slightly and as at 1.30pm the stock was 3c lower at $1.78. This compares to a range over the past year of $1.585 to $2.13 and implies upside of around 10% to the consensus price target in the FNArena database.

article 3 months old

Material Matters: Ag Commodities Rising, As Is Global Steel Production

By Chris Shaw

Agricultural commodity prices have rallied in recent months to the extent prices have hit a series of multi-year, and for cotton, all-time highs. Supply side downgrades were the initial driver of the rally, but in the view of Barclays Capital the gains are now being sustained by a more long-term fundamental misalignment.

Barclays notes the agricultural commodities are now showing evidence of declining stocks, strong demand, government intervention and bio-fuel policies, all of which are boosting the demand side of the equation.

Crucial to the demand side is the role of China, Barclays noting that nation's demand for agricultural imports this year has been nothing short of voracious. Corn imports as at the end of September of 512,800 tonnes are up more than 7,000% in year on year terms, reflecting tight domestic conditions and a shift towards more import dependence.

This leads Barclays to suggest China is unlikely to be able to hold onto its self-sufficiency status in the corn market. The increase in Chinese demand has come at a time of tighter course grain supplies and lower US yields, so tightening that market significantly.

Elsewhere, government intervention has also played a part, with one example being India banning cotton exports for a month and placing new restrictions on that market. Russia has similarly banned grain exports until the 2011 harvest, while Ukraine has a grain export cap until the end of this year.

Had inventory levels been higher, these moves would have had less impact but Barclays notes US corn stocks are at their lowest level since 1996-97 and global stocks at their lowest since 1993-94. This leads Barclays to forecast corn prices should test US$6 per bushel near-term, a move that would likely take soybean prices higher as well. For soybeans, Barclays expects a test of US$13 per bushel.

Still on China, RBS Australia notes September trade data showed refined metal imports remained strong, while imports of base metal ores and concentrates, coal and crude oil were at record or near record levels.

In aluminium, China was a modest net primary importer of around 1,600 tonnes and exports of alloys and products fell from August levels. While there was likely some accumulation of stockpiles over the past two years, RBS doesn't see aggressive liquidation in China as a major threat to the aluminium market in coming years.

While net refined copper imports into China fell in September, they remain well above the levels of recent years. The other positive for RBS is near record copper prices haven't generated a surge in copper supply. Current stockpiles are likely to gradually re-enter the market to meet shortfalls post this year.

Nickel imports rose in September, but the issue in the view of RBS is the potential for Chinese nickel pig iron supply to surge as production appears to be picking up. This trend appears likely to continue in coming years, especially as Chinese nickel pig iron production costs have halved over the past two years.

China remains a net refined zinc importer though imports were weaker in September as domestic production rose. The key for RBS is demand for concentrates remains firm despite potential smelter capacity cuts.

Similarly, iron ore demand is expected to remain robust into 2011, so supporting prices near current levels. It is the same story in coal, as the broker notes September data show China remains a large net importer . With demand likely to stay firm, prices should remain well supported.

Over in steel, industry consultant MEPS is forecasting record high global steel production for 2010 despite some weakness in the second half of the year. MEPS expects total world output of 1.4 billion tonnes, which would be a 14.4% increase from 2009. A further increase of 4% is expected in 2011 thanks to rising economic activity levels.

Supporting the full year forecast was record output in the September quarter of almost six million tonnes, an outcome almost three million tonnes higher than that recorded in the same period in 2008.

In terms of increases, Asia is expected to be a major contributor, China driving steel output in the region to a forecast 892 million tonnes this year, up from 798.5 million tonnes in 2009. MEPS also expects strong growth in EU output, forecasting production of 202.3 million tonnes this year compared to 168.2 million tonnes in 2009.

North American production will also grow solidly, MEPS forecasting output this year of 111.5 million tonnes, up from 82.4 million tonnes in 2009. In percentage terms, steel production in Oceania will also rise sharply to a forecast 8.3 million tonnes, up from 6.0 million tonnes last year.

Gains from other regions will be more modest, predicts MEPS. Its forecasts are calling for CIS output to increase to 104.9 million tonnes this year from 97.5 million tonnes last year, while in South America production is expected to increase to 43.6 million tonnes from 38.1 million tonnes previously.

In Africa, MEPS expects output for 2010 of 16.9 million tonnes against 2009's 15.2 million tonnes, while in the Middle East steel production is forecast to increase to 20.5 million tonnes this year from 17.7 million tonnes in 2009.

article 3 months old

Material Matters: LME Week, Mineral Sands, Fertiliser, Ratings Revisions

By Chris Shaw

Last week was LME Metals Week and the discussions brought up some interesting points according to Goldman Sachs. In general terms, the broker notes miners generally are happy with current prices and most producers have a positive outlook for 2011.

According to Goldman Sachs, this reflects the generally comfortable view of producers with respect to China continuing to be the main driver of base metal demand growth. The copper story looks the brightest according to the broker, while there is a consensus opinion aluminium will remain over-supplied in the medium-term. Market opinions on nickel and zinc are mixed at present.

Standard Bank also notes LME Week participants are bullish on copper, even with prices currently above the US$8000 per tonne level. While the bank agrees on the positive outlook for the metal it sees scope for significant price volatility in coming weeks ahead of the next Fed meeting in the US in early November.

In Standard Bank's view copper prices have run out of steam somewhat following the strong gains recorded in September and early October. As well, the bank notes a recent moderating in open interest levels suggests some market participants have decided to take some profits.

Driving copper prices in the bank's view has been the value of the US dollar, so with further quantitative easing measures expected there is scope for anticipated Chinese re-stocking of the metal to be delayed if the greenback falls further.

This is likely to create some additional volatility in copper markets, especially as Standard Bank also sees scope for power curbs in China continuing to impact on smelters and fabricators and so short-term demand for the metal.

Another major talking point during LME week according to Goldman Sachs was the rumoured introduction of physically-backed exchange traded funds (ETFs) for copper, aluminium and possibly other base metals.

Goldman Sachs notes consumers and producers generally are uncomfortable with the concept, especially given the impact such products could have on prices, premiums and market fundamentals. This is partly because higher prices stemming from increased physical demand could result in increased substitution between metals.

There were also questions as to the economics of such ETFs. Goldman Sachs notes industry consultants Brook Hunt calculates given the cost of storage, investors in an aluminium ETF would need around 15% price upside to break even while those in copper ETFs would require 5-8% price increases. To date, the timing of the release of any base metal ETFs remains unknown.

Deutsche Bank is somewhat more positive on the potential impact of base metal ETFs, taking the view the launch of such products could herald new investment demand for this part of the commodity complex.

Having said that, Deutsche cautions the potential launch of such ETFs, along with support stemming from the potential for further quantitative easing measures and US dollar weakness, is largely priced into base metal markets at current levels. This implies a short-term correction is possible, likely coming before the end of the year in the broker's view.

Elsewhere in commodities, Goldman Sachs recently met with the management of minerals sands play TZ Minerals International and learned the current market for high grade titanium feedstocks and zircon is presently very tight. This trend is likely to continue, TZ Minerals expecting increasing deficits in these markets beyond 2014 even allowing for known new projects.

The other point made by TZ Minerals is that historically most titanium feedstock producers have had “cap and collar” pricing mechanisms but a number of these contracts are ending either this year or in the next couple of years.

This is likely to see a shift to shorter contract durations, with pricing possibly moving from annual to a minimum of semi-annual contracts. Quarterly contracts are also possible. Recent price increases have been accepted by customers given a lack of choice according to TZ Minerals, the company seeing scope for further price increases from 2012-2015.

Following the meeting with TZ Minerals, Goldman Sachs continues to rate both Iluka ((ILU)) and Mineral Deposits ((MDL)) as Buys with respective price targets of $9.00 and $1.35. The FNArena database shows Sentiment Indicator readings of 0.4 for Iluka and 1.0 for Mineral Deposits. Consensus price targets according to the database stand at $6.03 for Iluka and $1.22 for Mineral Deposits.

In the energy sector UBS has revised its foreign exchange estimates to reflect the fact the Australian dollar has been far stronger against the US dollar than the broker had expected. At the end of the September quarter the AUD/USD rate was $0.97 and UBS has now applied this rate to its forecasts through to the end of the third quarter of 2013. Previously its model had factored in an exchange rate of $0.8410 against the US dollar.

Applying this new currency forecast and marking-to-market for the actual quarter-end oil price sees UBS adjust earnings estimates through the sector, with most of its estimates falling up to 10% this year and around 20% in 2011. Some moves have been larger or smaller but these have come from companies with a relatively low earnings base.

At the larger capitalisation end of the sector there is no change to UBS's preference for Woodside ((WPL)) and Oil Search ((OSH)). Both companies are rated as Buys, while price targets have changed modestly to $55.14 for Woodside and to $8.55 for Oil Search.

Elsewhere in the sector UBS continues to rate Santos ((STO)), Karoon Gas ((KAR)), Australian Worldwide Exploration ((AWE)) and Roc Oil ((ROC)) as Buys. Both Caltex ((CTX)) and Beach Petroleum ((BPT)) have been downgraded to Neutral ratings from Buy previously, in both cases thanks to recent share price strength.

UBS has also downgraded AED Oil ((AED)) to Sell from Neutral, which again is largely a valuation move given recent strong share price performance. As well, there remains some uncertainty surrounding an ongoing contractual dispute regarding the Puffin prospect and this supports the broker's downgrade to a more negative view.

Turning to the fertiliser market, Goldman Sachs notes while US diammonium phosate (DAP) inventories at the end of the month were up 13% compared to the end of August they remain about 24% below five-year average levels. It is a similar story in urea, where inventories are around 23% below the five-year average.

This lack of inventory is supporting prices and Goldman Sachs has responded by lifting its forecasts for DAP prices to US$500 per tonne in FY11 and US$425 per tonne in FY12. Incitec Pivot ((IPL)) is the primary fertiliser exposure on the Australian market and the FNArena database shows the stock is rated as Buy and Hold three times each and Sell once.

The other change made by Goldman Sachs in the commodities sector has been to upgrade Rio Tinto ((RIO)) to a Buy rating, the broker resuming coverage on the announcement the proposed iron ore joint venture with BHP Billiton ((BHP)) has been scrapped.

As the proposed joint venture was not included in its forecasts, Goldman Sachs makes no changes to its earnings estimates for Rio Tinto on the news the deal is off. This means a return to focus on Rio Tinto's earnings outlook. With iron ore expected to account for about 79% of earnings in 2010 and a favourable short-term outlook for the product, Goldman Sachs has a positive view in this regard.

From an expected price in the current half year of US$131 per tonne FOB Goldman Sachs expects iron ore prices will rise to US$137 per tonne in the first half of 2011. Spot prices are even better at US$140.70 per tonne at present, which offers some upside to the broker's earnings forecasts.

These stand at earnings per share of US668.5c this year, US795.1c in 2011 and US$778.6c in 2012. For Goldman Sachs this justifies a share price target for Rio Tinto of $104.94. This compares to a consensus price target according to the FNArena database of $97.67. Targets range from $90.00 for Deutsche Bank to UBS at $107.00, while Rio Tinto is rated as Buy by all eight brokers covering the company.

article 3 months old

Material Matters: Soft Commodities Higher, Stronger Oz Dollar Impacting On Oil Sector

By Chris Shaw

There has been movement in soft commodity markets after the US Department of Agriculture (USDA) made significant cuts to its estimates for US corn yields in 2010-11. Yields are now forecast to be 155.8 bushels per acre, down from a September forecast of 162.5 bushels.

In the view of Barclays Capital, any cut in forecast yields below 159 bushels per acre would give upside impetus to the market and this is what has happened. Chicago Board of Trade prices for corn, wheat and soybeans all closed "limit up" following the USDA release.

Even after the yield cut is factored in, US corn production is estimated to be at its third highest level on record but as Barclays notes strong consumption and export demand means US corn stocks of 22.9 million tonnes are at their lowest level in 14 years.

Given the US is a major supplier to the global corn market, this low level of stocks is generating concerns of a shortage. This is especially the case given China's imports have surged in recent months. As well, there is a proposal in the US to increase the ethanol blend rate which would further limit the amount of corn available for export.

The price spillover to other grains reflects more than just the news on the US corn market outlook, Barclays noting the wheat market is is already tighter than was expected earlier in the year thanks to production issues in Russia, Canada and Pakistan that is bringing down estimates of stockpiles.

Such supply issues bode well for the grains generally in the view of Barclays, with corn likely to outperform the sector. New highs in coming weeks are expected, Barclays forecasting an average corn price of US$5.24 per bushel in the final quarter of this year and US$5.40 per bushel in the first quarter of 2011.

There are other implications from the USDA report, Credit Suisse noting fertiliser prices jumped 7% on the news of revised inventory forecasts. The broker sees this as a positive for Incitec Pivot ((IPL)), as rising soft commodity prices support the planting intentions of farmers.

At present Credit Suisse is around 9% above consensus forecasts for Incitec Pivot in FY10 and 22% in FY11, though it expects this gap will narrow in coming weeks as market upgrades appear inevitable given rising prices.

While it remains above the market with respect to earnings forecasts, Credit Suisse retains its Neutral rating on Incitec Pivot on valuation grounds as the stock is trading within range of its valuation-based price target of $4.10.

The FNArena database shows Incitec Pivot is rated as Buy and Hold three times each and Sell once, with an average price target of $3.69.

Turning to energy markets, Commonwealth Bank notes total US rig counts rose last week to 1,671 from 1,659, with oil plays being favoured over gas plays at present. As well, the bank notes growth in rigs at present is concentrated in horizontal rather than vertical drilling reflecting changes in technology thanks to the US shale gas boom.

In terms of prices, Commonwealth Bank notes the recent tick-up in the oil price has been more than offset by a weaker US dollar, meaning oil product prices in Australian dollars have actually fallen. To reflect this JP Morgan has revised earnings estimates for the energy stocks it covers, the changes following updates to both the broker's oil price and foreign exchange estimates.

JP Morgan now expects a fourth quarter oil price of US$81 per barrel, down from US$85 previously, while in 2011 the broker's average price forecast has been revised to US$82.50 from US$90 previously. For the Aussie dollar against the US currency the broker now expects an average of US91c in 2010, up from US88c previously, and to US98c in 2011 and US95c in 2012 compared to prior estimates of US90c in both years.

Factoring in the changes sees JP Morgan cut its 2011 net profit forecasts for stocks in the sector by 16-25%. The changes also mean adjustments to price targets, the broker's target for Santos ((STO)) falling to $16.10 from $17.20 and for Roc Oil ((ROC)) to $0.40 from $0.44. Woodside Petroleum's ((WPL)) target actually rises to $48.00 from $46.50.

There are no changes to JP Morgan's ratings, meaning Santos and Oil Search ((OSH)) remain as Overweight recommendations. Neutral ratings continue to be applied to Woodside, Australian Worldwide Exploration ((AWE)) and Beach Energy ((BPT)), while JP Morgan continues to rate Roc Oil as Underweight.

By way of comparison, Sentiment Indicator readings for each stock according to the FNArena database stand at 1.0 for Oil Search, 0.9 for AWE, 0.8 for Santos, 0.5 for Woodside, 0.4 for Roc Oil and 0.3 for Beach Energy.

article 3 months old

Old Mother Hubbard

By Richard (Rick) Mills
Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

In 1798 32 year-old British economist Malthus anonymously published “An Essay on the Principle of Population” and in it he argued that human population’s increase geometrically (1, 2, 4, 16 etc.) while their food supply can only increase arithmetically (1, 2, 3, 4 etc.). Since food is obviously necessary for us to survive, unchecked population growth in any one area or involving the whole planet would lead to individual pockets of humanity starving or even mass worldwide starvation.

"The power of population is indefinitely greater than the power in the earth to produce subsistence for man". Thomas Robert Malthus

Malthusian pessimism has long been criticized by doubters believing technological advancements in:

- Agriculture
- Energy
- Water use
- Manufacturing
- Disease control
- Fertilizers
- Information management
- Transportation

would keep crop production ahead of the population growth curve.

Enter the Black Swans

The Black Swan Theory or "Theory of Black Swan Events" was developed by Nassim Nicholas Taleb to explain:

1) the disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology,
2) the non-computability of the probability of the consequential rare events using scientific methods (owing to their very nature of small probabilities) and
3) the psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs. Black Swan Theory refers to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences. Wikipedia

A "perfect storm" of circumstances is setting the stage for possible massive food price increases, food riots, supply chain disruptions, country versus country water disputes and increasing numbers of hungry people.

Consider:

- Record setting droughts and worldwide abnormal weather
- Exploding populations and eastern diets shifting to a western style one
- Worldwide crop failures
- Diminishing world food stocks
- Income deflation
- Flooding
- Freak cold snaps
- Aquifers are being depleted faster than natural refreshment rates
- Farmers ability to buy seeds and fertilizers was hampered during the financial crisis by a lack of credit – this limited production and then low prices towards the end of 2008 discouraged the planting of new crops in 2009
- Relocation of produce for energy production - corn for ethanol
- Desertification - new deserts are growing at a rate of 51,800 square kilometers per year. As an example Nigeria (Africa’s most populous country) is losing almost 900,000 acres of cropland per year to desertification because of increased livestock foraging and human needs

Harvests around the world are going to be smaller, the world’s food inventories are going to be lower while at the same time global demand for basic food staples - and simultaneously a richer diet containing more meat - is at an all time high and growing.

The U.N. calls the global food crisis a "silent tsunami.”

So just how bad are things around the world?

Saudi Arabia was once the world's eighth largest wheat grower but are phasing out grain production by the year 2016. The Saudis feared an embargo on grain after the 1972 oil embargo so they decided to grow their own. They farmed the desert and today have almost pumped their aquifer dry.

“We are entering a new food era, one marked by higher food prices, rapidly growing numbers of hungry people, and an intensifying competition for land and water resources that has now crossed national boundaries as food-importing countries try to buy or lease vast tracts of land in other countries.” Lester Brown, Earth Policy Institute

Almost biblical like droughts in Kazakhstan, Ukraine and Russia which also had to deal with brutal, massive wildfires - firefighters in Russia were battling 520 separate wheat field fires spanning over 700 miles in area. Pakistan lost most of its stored grain in its recent flood disaster.

India has suffered its worst drought in 37 years - total rainfall is 23 percent below average. India’s monsoon rains are extremely important to the countries farmers because almost 70 percent of India's farms are not irrigated and depend on rainfall during the monsoon season.

Food prices are rising around 15% a year in India, Nepal, Latin America and China.

Corn is at its highest price in two years because of a wetter than expected US harvest and freezing weather in China and Canada. US corn prices broke through the US$5-a-bushel level for the first time since September 2008.

Agriculture assistance today is 3.5 percent of overall U.S. development aid - down from 18 percent in 1979.

Emergency food aid is needed now to prevent famine in Niger, Mali, Chad, Burkina Faso, Mauritania, and northern Nigeria. The drought in East Africa is in its fifth year, 23 million Africans in that region are on the verge of starvation.

The U.N. Food and Agriculture Organization (FAO) recently cut its 2010 global wheat forecast by 4 percent.

The FAO projects average wheat and coarse grain prices to increase 15-40% over the next ten years. Vegetable oil prices are expected to increase more than 40%, with dairy prices increasing 16-45%.

By 2050 the FAO says a 70% increase in food production will be required to keep pace with projected population growth. Already, according to the FAO, more than one billion people go to bed hungry every night.

Australia is being called the new "dust bowl" the country’s drought is so bad.

Russia, the world's fourth largest wheat producer, has imposed an export ban on grain that will stay in place till after the 2011 harvest.

The ban is forcing importers in the Middle East and North Africa to turn to Europe and the US for supplies.

Germany could become reliant on wheat imports for the first time in 10 years. The winter wheat harvest will be 9% lower this year than last forcing Germany to import grain from France and the US.

White sugar is climbing in price because of speculation that India, Pakistan and other importers will purchase more as a supply deficit looms.

The FAO Food Price Index (FFPI) averaged 176 points in August 2010, up 5 percent, from July. The FFPI stands at its highest level since September 2008.

Meat prices have risen because a drop in production coincided with rising demand from China. In August the FAO's meat price index climbed 16% yoy.

Lamb prices are at a 37-year high, pork and poultry are also priced higher.

Last week, the FAO called an emergency meeting for 24th September to discuss the current food crisis – just two short years after the last food crisis. The emergency meeting is being seen by many as a warning that there may yet be another food crisis looming.

As in 2008, rocketing prices are the result of rising demand and supply shortages caused by freak weather and poor harvests (Export bans in some 38 countries during the price crisis in 2007-2008 caused a dramatic drop in cereal stocks).

“If no decisive action is taken, the prices of key food commodities are likely to be 50 to 100 per cent higher by 2020 than they were at the turn of the millennium. This would dramatically increase the level of hunger and malnutrition, around the world.” Harald von Witzke, president, Humboldt Forum for Food and Agriculture

Conclusion

If a person was so inclined they could bury their head in the sand and write off all of the above as nothing more than temporary conditions impacting world food supply.

That might not be a prudent move.

Western consumers are, for all intent and purposes, totally dependent on retail food stores for their subsistence. Yet these stores have only 2 - 3 days of inventory on hand at any one time. If any kind of a short term crisis hits, let alone a massive disruption in the food supply chain, stockpiling and hoarding will quickly empty store shelves.

Too much Doom and Gloom? Perhaps, but given all of the above two things are abundantly clear to this author - firstly the era of cheap food is over and secondly a serious disruption in the food supply chain - one lasting longer than a couple of days - to a grocery store near you might become more than a temporary minor inconvenience.

Are agricultural commodities and your local grocers supply chain on your radar screen?

If not, maybe they should be.

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you're interested in learning more about the junior resource market please come and visit us at www.aheadoftheherd.com.

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***
Richard is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell.com, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Resource Investor, Calgary Herald and Financial Sense.

***
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