The Rising Influence of Rising Affluence

[DewDiligence]

Grain Is the New Oil

http://blogs.forbes.com/danielfisher/2010/09/17/grains-the-new-oil-socgens-grice-says

›by Daniel Fisher
September, 17 2010 9:43 am

A new report by Societe General’s Dylan Grice makes a neat comparison between what happened to oil prices in the 1970s and what will happen to grain in the future. The connecting thread: In both cases the world’s biggest consumer ran out of its own supply.

I’m skeptical grain supplies are as physically constrained as oil, but Grice makes some excellent points. While Chinese officials boast the country has met its grain production quotas for six years straight, consumption is rising at about 5 billion kilos a year and production was close to consumption last year at 530 billion kilos.

The stage is set, Grice says, for a permanent step up in grain prices, just as oil prices jumped following the 1973 Arab oil embargo. An earlier attempt, in 1967, failed because the U.S. had spare production capacity. But when the Arabs closed the spigots again in 1973, U.S. production had peaked and dependency on imports had doubled to 15%.

China’s grain imports have risen from 0 to 15% of consumption and the nation is rapidly converting farmland into higher-value industrial and commercial real estate. A possible harbinger of what’s to come: the “Great Grain Robbery” of 1972, when the Soviets secretly bought grain on the global markets to make up for a shortfall. Prices tripled, although on a real basis they declined steadily after that until around 2003.

Some think the oil-price spike of 2008 was partly caused by China stockpiling diesel and other fuels in advance of the Olympics. Prices have since plunged. If you think grain is headed for a higher plateau, Grice recommends looking at stocks like Bunge, Archer Daniels Midland, Yara International, Agrium, Syngenta and Monsanto.‹