Crops up

Selling soybeans at their highest prices in three decades and corn while it flirts with the 1996 peak is a money-losing trade, according to Goldman Sachs Group Inc and Deutsche Bank AG.

Corn at $4.55 a bushel is "cheap", Frankfurt-based Deutsche Bank says. Goldman Sachs in New York expects soybeans to rise 29 percent in 2008, the best investment in commodities. Investors who followed the banks' advice and bought raw materials last year profited as the Standard & Poor's GSCI Index advanced 33 percent, beating the 3.5 percent gain in the S&P 500 Index and the 9.1 percent return from US Treasuries, according to data compiled by Merrill Lynch & Co.

Rising wealth from Shanghai to Sao Paulo is leading to better diets and straining corn and soybean supplies just as record energy prices boost sales of biofuels. Even after rising 17 percent in 2007, corn costs about $2 a bushel after adjusting for inflation, compared with a $7.80 high in 1974.

"We are in the early stages of a rally that could last 20 years" in agriculture, says Christopher Wyke, product manager at London-based Schroders Plc, which manages $3.5 billion in commodities and is buying more corn and soybean contracts while reducing energy holdings. "Prices are historically cheap."

Not since the Soviet harvest failures of the 1970s have food prices risen so quickly. European Central Bank President Jean-Claude Trichet said December 19 that the region faced a "more protracted" period of elevated inflation than expected because of food and oil prices.

World soybean inventories will plunge 23 percent in the 2007-08 marketing season to 47.3 million tons from a record 61.1 million the previous year, the US Agriculture Department estimates.

Goldman Sachs, the world's biggest securities firm, predicts soybeans will reach $14.50 a bushel. Investors who buy $10 million of November contracts on the Chicago Board of Trade would earn $2.9 million should the forecast prove accurate. A hedge fund that borrowed money to increase the bet using margin could turn that $10 million into about $59 million.

Corn versus wheat

A farmer drives a combine along the final row of soybeans near Center Village, Ohio. Soybeans could be the best investment in commodities in 2008. Bloomberg News

The bank forecast December 2008 corn prices will increase 12 percent to $5.30 a bushel from $4.735 now. Goldman recommended buying corn and selling wheat in a "spread" trade to exploit changes in the relative value of the crops.

Rallies in agricultural markets historically last about two years, boosting prices by 135 percent, according to Michael Lewis, the London-based global head of commodities research at Deutsche Bank. Prices may climb as much as 250 percent during three to four years in this cycle, he says. The rally in agriculture markets started in the fourth quarter of 2006.

Farmers are planting more acres to take advantage of the price rise, which could damp gains. The US national corn yield has more than doubled to 153 bushels an acre in 2007 from 71.9 in 1974, while the soybean average has jumped 74 percent to 41.3 bushels from 23.7 in 1974, government statistics show.

Droughts from Ukraine to Australia have cut crop yields, sending prices for wheat to a record in December and soybeans to a 34-year high. Corn rose to $4.62 a bushel in Chicago trading on January 2, the highest since 1996. Farmers are planting more wheat at the expense of corn, soybeans and cotton.

Wheat farmers worldwide may increase plantings by 4 percent, the London-based International Grains Council said in November. In the US, the world's largest wheat exporter, growers will sow 64 million acres in the year ending May 31, up 6 percent, the Agriculture Department said in October.

"We'll continue to see a battle for land between the grains," says Matthew Sena, an analyst at New York-based Castlestone Management LLC, which oversees $800 million. "The run-up in wheat prices will prevent a dramatic supply response for soybeans and corn."

Castlestone invests about $100 million in commodities, and Sena says the fund has been adding to its corn and soybean holdings while cutting investments in wheat.

Demand for biofuels, made from corn, oilseeds and sugar, is growing as countries seek to cut their dependence on fossil fuels after oil rose to a record $99.29 a barrel in November. Demand is straining the availability of farmland as well as water supplies.

"The severity of these factors means that there's a better chance of this being the longest and biggest agricultural rally ever," says Colin Waugh, portfolio manager at New York-based Galtere International Fund, which manages $1.3 billion in commodities and related investments.

The biggest winners from the US energy bill signed by President George W. Bush on December 20 may be companies including Archer Daniels Midland Co of Decatur, Illinois, and Sacramento-based Pacific Ethanol Inc. The legislation requires biofuels production to increase to 36 billion gallons in 2022 from 7.5 billion in 2012.

US ethanol prices at $2.2157 a gallon on average are 11 percent cheaper than New York wholesale gasoline futures at $2.4908 a gallon.

Crop prices "will show a tendency to go up, and the reason is the growing world population, changing food patterns and limited availability of land," says Martin Richenhagen, CEO of Agco Corp, the second-largest US maker of tractors and combines after Deere & Co. "This is good news for the farmer."

Inflation risk

Higher food prices may cause faster inflation. US consumer prices increased 0.8 percent in November, the most in more than two years. Inflation in the 13-nation euro region accelerated to 3.1 percent in November, the fastest since 2001, according to Eurostat. Japan's core consumer prices rose at the fastest pace in more than nine years in November.

Developing nations will feel the greatest pain. The cost of corn tortillas in Mexico, where shortages in 2006 boosted inflation, may rise 13 percent this year, according to Gruma SAB, the world's largest maker of corn flour. Food prices in China, the fastest-growing economy, increased 18.2 percent in November.

The rise in crop prices is creating the "risk of social unrest", says Roland Jansen, whose $129 million Mother Earth Resources fund in Liechtenstein gained 28 percent in 2006, more than double the returns of commodity indexes.

Agencies

(China Daily 01/05/2008 page11)