Agora Financial’s Rude Awakening

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Laguna Beach, California

• Whiplash in the markets and the coming boom in agriculture plays,
• One fertilizer stock that ought to boost your portfolio,
• The very first $1 One-Month Trial for Exec. Series Readers Only and plenty more…

Eric Fry, reporting from Laguna Beach, California…

Gold is in the news these days because the dollar is in the news. Specifically, gold is front-page news because the dollar is in the Obituaries. The dollar-holders of the world are afraid to hold dollars. And so the dollar-holders of the world seek to hold fewer dollars than they have in the past.

But unloading dollars is easier said than done. If you sell them, what do you buy that will hold its value better than greenbacks? Gold seems like an obvious choice, given it lengthy history of monetary fidelity. But many dollar-phobes fear gold almost as much as they fear dollars. Sure, gold has held its value over time, but gold also loses value from time to time. So if, for example, you bought an ounce of gold at $950 (to protect your capital) and the price of that ounce fell to $700, your capital would feel more wounded than protected.

Thus, the Great Dollar-Replacement Quest proceeds around the globe. Question #1: How many dollars should I sell? Question #2: What asset(s) should I buy that will retain its/their purchasing power better than dollars?

The list of plausible dollar-replacement candidates is both diverse and lengthy…

Some investors advocate buying a basket of major foreign currencies, like the euro. Other investors advocate buying a basket of emerging or exotic foreign currencies like the Brazilian real (before you laugh, please recall that the real has gained more then 20% against the dollar year-to-date). Still other investors advocate buying stocks or real estate or commodities of one type or another.

Regular readers of this column would be well aware that your editors favor commodities as their preferred dollar hedge. If the dollar continues to struggle, a diversified basket of commodities would likely appreciate (in dollar terms) and retain its “purchasing power.”

Within the commodity universe, agricultural commodities possess one very unique attribute: essentiality. People must eat; therefore, people must buy agricultural commodities. And since the entire world is in competition for the same foodstuffs, the pricing of these foodstuffs will reflect the purchasing power parity of global currencies. In other words, if the dollar’s purchasing power fell, you could expect the price of a bushel of wheat to rise in dollar terms.

But even if a dollar crisis fails to appear, agricultural commodities are looking like a very good investment at the moment, according to Chris Mayer, editor of Mayer’s Special Situations. Read on for the details…

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The Best Investment Opportunity of 2009
By Chris Mayer, editor of Mayer’s Special Situations

“Investing in agriculture today will be like investing in the oil sector in 2001-2002,” writes Mark McLornan in the May issue of Marc Faber’s Gloom Boom & Doom Report. McLornan runs a fund that invests in farmland. Some of his on-the-ground observations confirm many of the things I’ve been telling my readers for the past several years.

As for likening agriculture today to oil in 2001-2002, an investor’s pulse quickens. We all know the great run oil stocks had as the price of oil sprinted from under $30 to a peak of $143 per barrel. Investors made hundreds-of-percent gains – even thousands-of-percent gains. What most investors forget is that oil prices halved from 2000 to the bottom in 2001, just before the great run-up. The same sort of setup seems to be happening today in the agriculture sector. Most ag commodities fell more than 50% after hitting their June 2008 highs.

This is the pause that refreshes.

The biggest reason to get excited about agriculture is the fact that supplies are at multi-decade lows. In fact, as McLornan points out, “agriculture is one of the very few sectors globally that currently face supply shortages.”

The “stocks-to-use ratio” provides a helpful context. This ratio measures how much supply is on hand versus how much we use. High ratios imply a fully supplied market. Low ratios hint at possible shortages. You have to go back to the 1970s to find ratios in wheat and corn as low as they are today.

The kicker to all this is that last year, the world’s farmers produced a record wheat crop and the stocks-to-use ratio barely budged. There is no way we are going to top that harvest this year with all the drought hitting different parts of the world.

The International Grains Council (IGC) predicts a fall in total wheat output in 2009-10. The IGC predicts global wheat output of 650 million tons, down by 5% from the previous year. The largest declines are seen in the European Union, the U.S., China, Russia, and Ukraine. “Although conditions in the Northern Hemisphere are generally favorable,” the IGC says, “production is likely to fall sharply.”

McLornan says that global yields for wheat hit a plateau in the 1980s and “gene modification technology has been unable to improve what natural selection has achieved over the past centuries.” So we already have tight supplies. And they look to get tighter.

The financial crisis also threatens to reduce supplies. Farmers who cannot gain access to credit cannot put seeds in the ground. Thus, the twin forces of drought and financial crisis seem likely to exert a growing influence over the grain markets – depressing supplies and therefore, boosting prices.

We’ve seen this movie before…

In 1933, in the pit of the Great Depression, writer Sherwood Anderson took to America’s back roads to see how the country was making out. He wandered into coal towns and mill towns, farms and factories.

His account, published in 1935 as Puzzled America, gives us a peek at Depression-era days. As the title lets on, most Americans seemed not to know quite what to make of the Great Depression. “Puzzled” seems just the right word.

It was puzzling because a man was prosperous and then suddenly was not any longer. A common story in farm country during the Great Depression began something like this: There was a prosperous farmer with lots of land who grew wheat. He then went into debt to buy more land and plant more wheat. The price of wheat suddenly fell like a shot quail. And the farm went under. Just like that, our man was broke.

If the financial crisis didn’t take the farm, Mother Nature did. “It was a farm until he plowed it,” Anderson quotes one man as saying of his uncle’s place. Then the drought came. The dry soil swirled around like snow in a blizzard. The farm simply “blew away.”

The hot winds tore the bark right off the trees and burned crops to ash. Fences lay buried under dust drifts. Dust storms blackened the sky. Topsoil of thousands of acres blew away. Anderson describes a little church in North Dakota:

The boards of the church cracking and curling under the dry heat, the paint on the boards frying in the hot winds… and the dust of the fields sifting in through the cracks. Dust in the mouths of the people as they prayed for rain.

Commodity prices took a big tumble after the crash of 1929. That’s what bankrupted the once-prosperous farmers. Then you had fewer farmers farming. Then you also had drought. Supply fell and prices soon rallied hard off their bottoms. By 1937, most food commodities – corn, wheat, sugar – were as high, or higher, than their ‘29 highs.

Today, we also have the dual threat of drought and financial crisis. Farmers across the southern plains report poor crop conditions, thanks to dry weather. We also have drought in many places in the world that usually grow a lot of food.

One example: China’s Ministry of Agriculture said that a third of its crop faces drought issues. The country’s stocks-to-use ratio will fall below 30% for the first time since 1971. As AgCapita, an investment fund specializing in farmland, notes in a recent letter, China will be a net importer of 12 million metric tons of wheat. By way of comparison, Canada’s entire annual wheat exports average around 15 million metric tons.

We also have cutbacks in supply, as farmers have a harder time getting financing to buy seed, fertilizer and machinery. As The Wall Street Journal reported recently:

Across the nation, farmers are making plans to cut their production of corn, wheat, rice, peanuts, beef, pork, poultry and milk… Also, some farmers plan to grow just one crop on land that normally produces two each year, and to let some land lie fallow throughout the year.

Production of meat in every category will fall for the first time since 1973. Meanwhile, consumption of grains keeps rising. Globally, wheat demand should rise 6% this year. No surprise that retail food prices rose nearly 6% last year. I think they could rise as much this year.

Ultimately, we’ll have to grow more food…somehow. So a forward-looking investor will want to invest in the ideas that help that process along. Fertilizers are one such idea. Like a prizefighter with a tough chin, fertilizer demand doesn’t stay down for long. The reasons are simple. Lower fertilizer use means lower crop yields. Lower crop yields tend to raise prices for food. These higher prices then provide an incentive to plant more, so fertilizer demand comes back.

I’m a fan of PotashCorp (POT:nyse), which benefits from these trends. It also owns more potash, a key fertilizer, than anybody else. As Barron’s recently noted: “Longer-term investors can take comfort in the knowledge that many crop-planting, potash-guzzling countries – like China, India, Brazil – all have growing economies.” And they have growing populations as well.

There are other ways to invest too. You can buy other ag-related businesses. You can also invest in the actual food commodities. I expect good moves on this stuff in the back half of the year after the fall harvest disappoints.

What about demand?

I think we’re getting close to the moment when the world’s meager supplies of grains become front-page news. We have another few months before the reality of a lousy fall harvest sets in. Agriculture investments should do very well from that point – for everything from fertilizer stocks to agricultural equipment makers to the grains themselves.

As always, I recommend buying assets like these before the crowd sees it on the 6:00 news.

Joel’s Note: It’s no secret that we’ve been trying to convince you to grab a spot on the Mayer’s Special Situations mailing list. Quite simply, Chris provides some of the best investment research in the business, bar none. Still, it’s tough making that first step, that first commitment to sign up.

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— Energy & Scarcity Investor: Final Week Countdown —

Good Times Make Money…But RECE$IONS Make FORTUNES

Right now I’m seeking a few brave souls with the “stones” to become…

“Miserable Rich!”

Do what I’m about to show you — before Friday, May 29 — and you could make so much money, you’ll demand I apologize for “spoiling” you with so much success.

Impossible? Don’t take my word for it. Read on here…

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[Rude Endnote: Are we getting giddy yet? Stocks have risen and tumbled almost 400 points over the past couple of days. Yesterday the Dow fell over 2% to end the day on a neat 8, 300 points. The S&P was down a similar amount.

European markets were feeling the pinch early in trading today. Last we checked measures from London to Germany were in the red over 1%.

Closer to this region, Japan’s Nikkei 225 inched 0.13% higher while the Aussie All Ordinaries sunk just over 1%.

Markets in Hong Kong, China and Taiwan are closed for an extra long weekend. Your editor will be among the thousands of screaming idiots attending the annual Dragon Boat festival in Hong Kong over the weekend.

We’ll fire off tomorrow’s edition from somewhere in the middle of the celebrations.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com