Alan's Finance Blog

The Malaysian Rice Company That’s Poised for Steady Growth

By Jeff D. Opdyke, Editor, The Sovereign Individual

Dear Sovereign Investor,

Even before the Mongol hordes of Genghis Khan breached the Great Wall of China in the 13th century, rice was a commodity of paramount importance to Asia.

Nothing has changed all these centuries later. Well, actually, one thing has changed … the political importance governments now tie to rice.

Just as many countries today stockpile oil as an insurance strategy to protect themselves during times of war and crisis, numerous developing-market countries, particularly across Asia, have their own government-mandated emergency rice reserves.

Rice is, after all, not only the staple diet for the region, it’s a commodity that’s prone to political manipulation. The moment a global upset impacts rice supplies – whether it’s a poor harvest, a natural disaster or even man-made calamities such as war – panic drives rice prices up. And governments in many developing-nation, rice-producing countries respond by clamping off exports to keep local prices contained.

Of course, that only serves to worsen the crisis elsewhere since the decreased supply pushes prices even higher. That’s exactly what happened during the Great Commodity Boom of 2007-08, a period that saw rice prices nearly triple in short order, leading to food riots form Southeast Asia to North Africa.

That suddenly made rice a matter of national security … and an opportunity for investors who realize the populations are growing in the world’s biggest rice-consuming nations.

Empty Bellies are the Instigators of Revolution

The world is not short on rice. There’s plenty to go around. The big challenge is that many countries measure themselves according to their ability to self-sufficiently feed their people. And that’s where the supply/demand picture with rice breaks down.

Less than 10% of the world’s rice crop actually trades freely in the international commodity market. The rest remains locked up in their countries where it was grown, stored in vast warehouses in the event of a national, regional or global emergency that disrupts rice supplies. If all that rice traded globally, you could probably feed the world.

But governments refuse to allow that. They know that empty bellies are the instigators of revolution. And the way to combat that is to ensure that enough supply of rice is quickly available inside the country.

Last October, in fact, 13 Asian countries – including China, Japan, South Korea and Thailand, the world’s largest rice producer – signed a pact that enhances cooperation on food security through an existing regional rice-stockpiling system known as the Asean Plus Three Emergency Rice Reserve. Through the pact, the nations are stashing away nearly 800,000 tons of rice in the event rice supplies are destabilized for whatever reason.

While it’s easy for countries to stockpile rice, it’s not so easy for the rest of us. And there’s no easy way to trade rice. While it is a commodity you’ll find listed in the commodity-futures market, the reality is that rice contracts basically trade by appointment, meaning there’s simply very few contracts that trade.

To build exposure to the rice market means that you have to own stock in a company active in the rice industry.

The Only Company Allowed to Import Rice

The rice company with the most-unique business model is a Malaysian rice giant known as Padiberas Nasional Berhad, or Bernas (Kuala Lumpur: BERNAS).

Bernas is Malaysia’s rice leader, currently controlling about 24% of the local rice paddy and 45% of Malaysian rice demand. It’s involved in everything from seeding and farming, to buying and processing the rice that Malaysian farmers produce, to warehousing and marketing rice in Malaysia.

But perhaps the most-interesting aspect of Bernas is that it owns a government-mandated monopoly.

Bernas is the only company in the country allowed to import rice into Malaysia – and Malaysia is a country that only produces about 30% of its rice demand. That gives Bernas huge advantages, particularly because of one fact – Malaysians think imported rice is of better quality. And for Bernas, imported rice carries bigger profit margins.

In keeping with the rice-as-national-security theme, Bernas, in return for the import monopoly, must maintain Malaysia’s strategic rice reserve and must buy rice from local farmers at certain price levels. But that’s a small tradeoff to be given such a lucrative advantage.

Involved in Every Aspect of the Rice Industry

More important to us as investors, Bernas’ advantaged position provides for great stability.

Revenues have grown consistently at an average annual rate of nearly 11% for each of the last five years. Net income has grown consistently at 5% a year.

It’s certainly not a fast-growth stock, but it is a stable-growth stock that plays to one of the most secure trends in the world – demand for rice. That demand grows at an annual pace slightly faster than population growth, the result of an emerging middle class that has more money to spend on more food. Malaysia’s population is growing by about 2% a year, and rice demand is growing by between 3.5% and 4% annually – adding to Bernas’ stability.

Best of all, Bernas is a dividend juggernaut. Though the company’s dividend changes with profitability, it’s most recent yield is in the 10% range.

At a time when U.S. interest rates are stuck near 0% – and will remain at that depressed level for several more years, Bernas represents the kind of high-quality, high-yield stock that’s perfect for investors who want exposure to unique food commodities – like rice – that are otherwise a challenge to play here at home.

Until next time, stay sovereign…

Jeff D. Opdyke

The Great Grain Bonanza

Dear Sovereign Investor,

I attended a banquet in Beijing in 1989, not long after the Tiananmen Square massacre. It was a strange time to be in China. A senior government official at my table denied the massacre had even taken place.

As the subject switched quickly to economics, he also told me of his government’s multi-decade plan for slow growth.

Well, that wasn’t very accurate either.

Growth – yes; slow – not even close.

Chinese economic growth has surpassed the wildest dreams – and fears – of the west. But as China’s global power has expanded, so too has their dinner-table sophistication and the investment opportunity…

Even back then, I knew China was the demand side of the equation in the commodities markets. Today, the Chinese are driving automobiles instead of riding bicycles. They are using computers. They are drinking fine wines.

The Chinese have also changed their diet from basic rice to more complex grains and animal proteins. This dietary transformation lies at the very heart of a very profitable opportunity.

As Chinese Wealth Grows, the
Price of Grain Rockets

In 2001, China joined the World Trade Organization. Since then, the slow and steady march of the Chinese economy has turbo-charged the price of grain. The following chart shows how price in the key grain markets of soybeans, corn and wheat has skyrocketed since 2001:

China’s Energy Demand is
Part of the Equation

Global demand for crude oil has increased by 1% over the past quarter alone. Yet at the same time, the U.S. Energy Information Administration (EIA) reported earlier this month that China’s oil consumption during the same period increased by 4.6% to 10.24 million barrels per day.

The contrast between the demand for oil in fast-growing China and demand in the rest of world is obvious. But why is this important for grains? Well, it turns out that as prices for crude oil increase, demand for biofuels such as ethanol and fuels made from other grains also increases.

And therein lays the logic of another profitable vertex – as China’s thirst for fuel increases, so too does the price of both grain and oil.

Further Reasons for the Long-Term
Surge in Grain Prices

There are further reasons for the long-term surge in the price of grain…

An Appetite that will Drive Prices Higher: In 2008 droughts, floods and other climate events caused grain prices to soar as crop yields decreased. But based on projected consumption of grains in China, even in a perfect crop year where soybean, corn and wheat yields are at a peak, rising demand from China will support even higher price levels.

The World’s Top Grain Importer in Less Than a Decade: China is fast becoming the world’s largest importer of agricultural products, and within the next five to 10 years it will be there.

Thanks to the fact that China’s per capita farm land is less than 40% of the world’s average, the mass importation of soybeans is inevitable.

Demand Keeps Rising: Earlier this year, China used up her strategic stockpiles of soybeans as the price of edible oil skyrocketed. The country supported local manufacturers of edible oils by supplying soybeans from stocks bought at lower prices. China then showed up as a buyer of soybeans when the market moved lower during the third quarter.

The Chinese still have an appetite to replace their strategic stockpile.
China has also become a net importer of corn this year after 14 years of self-sufficiency. The domestic demand for animal protein has increased China’s demand for corn.

Loving U.S. dollar is Also Pushing Prices Up: The long-term bear market in the U.S. dollar has also contributed to higher commodity prices across the board. Grain prices have moved higher because of the falling greenback.

China is competing for finite stocks of food-stuffs: China last year imported 54.8 million metric tons of soybeans – some 80% of its domestic consumption. As the Chinese include more meat in their diets, the country has become a key player in the global corn trade. Current projections are that China will import five million tons of corn this year. It is already the top importer of soybeans and cotton and a major importer of sugar.

The Bottom Line

China has undergone dramatic changes since 1989. Today it is an advanced nation with advanced desires and appetites, and there is only so much land on the globe suitable for growing staples.

We have only seen the beginning of a rally in the grain markets. The increasing sophistication of the Chinese appetite has created an environment for grains to continue to move higher. And you should expect much higher prices in the years to come.

Shares in food processing companies such as Archer Daniels Midland (ADM) and Bunge (BG) are poised to rise. These are a good way to play the bull market in grains. And, for the more adventurous, the grain futures markets offer investors the opportunity to buy futures and options.

Make sure that you include long-term exposure to grains in your investment portfolio!

Happy trade hunting…

Andy Hecht
Editor, Trade Hunter & Commodity Trend Alert

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Greetings,

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Regards,

Alan

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

Will Grains Gain OR Wane? Find Out For FREE

Futures Junctures Free Week has begun
September 16, 2010

By Elliott Wave International

Over the past few months, leading grain prices have climbed up the commodity wall like a “mile-a-minute” kudzu vine. From late June to early August, the big three grain markets (wheat, corn, and soybeans) soared 40%-plus in a coordinated rally to multi-year highs before leveling off.

The question on the minds of market participants is simple: Is the grains’ uptrend set to end?

Well, according to the mainstream experts, the answer is a definite NO — and an equally definite YES. See, according to recent headlines, grain prices are as likely headed for strong gains as they are for a world of pain. On this, following news items capture the very conflicting grain complex picture:

• “Wheat futures decline, fall most in two weeks after Egypt looks elsewhere for supplies… We have a bearish tone.” (Wall Street Journal)
• “Wheat Soars Despite Reassurance On German Crop.” (AP)
• “Corn Above $5-per bushel mark; prices expected to pull back.” (Cattle Network)
• “Corn (Soybeans) Still King… the bull market is intact for now.” (Farm Forum)
• “Grain Markets Are Hot: But Is It Too Late? One money manager believes the dance will soon be coming to an end.” (Minyanville)

I rest my case.

(Near-Term Opportunities On The House: On Wednesday September 16, EWI launched its famous Futures Junctures Free Week,providing all Club EWI members with instant, no-cost access to comprehensive near-, and long-term commodity analysis. Sign up today and take advantage of this amazing offer.)

Fortunately, there’s a quick and easy alternative to the mixed messages of the mainstream: the September 14 Daily Futures Junctures. In that publication, EWI’s chief commodity analyst Jeffrey Kennedy presents in depth analysis, labeled price charts, and live video commentary on all three grain markets — a total of 12 charts in all.

The best part is, you can get instant access to Daily Futures Junctures, along with its long-term sister Monthly Futures Junctures at the unbelievable discount of 100% off. This complimentary admission to one of EWI’s most exclusive subscriber resources is the benefit of Futures Junctures Service Free Week. The event runs from 5 pm (EST) on Wednesday September 15 to September 23. Sign up today and start taking advantage of this amazing opportunity.

Drives your Forex risk to ZERO (webinar)

No matter how you trade Forex, you probably don’t want to
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been snapped up by over 500 traders in just the past few
days.

He’s holding this webinar to kick things off for his new
Forex Income Engine 2.0 students, and he extended this
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what’s going on.

Specifically, he’ll be yanking some of the best content
straight out of his Forex Income Engine 2.0 course and
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new students, including:

* The 2 critical mistakes most Forex traders make, & how to
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* How to create an “infinite” reward/risk ratio when you
trade Forex, regardless of what pair or timeframe you
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* Why most traders actually LOSE money when they try to
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PLUS…

* Bill’s going to give away ANOTHER copy of his course to
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All you need to do to get a copy is SHOW UP, but you MUST be
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that will be revealed on the webinar that you will NOT want
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Register HERE:

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As of this writing, Bill says he only has about 415 copies
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That means they’ll probably sell out any day now.

To claim your virtual seat for this webinar, go ahead and
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-once the room fills up, you will be LOCKED OUT.

Again, it’s all happening TOMORROW, Thursday, December 10th,
at 4pm Eastern (New York time).

See you then.

Good Trading,
Alan

Energy Prices May Slide Further After Consolidation

Slump in energy prices stabilizes in European session. WTI crude oil recovers to 74 after plunging to as low as 73.53 earlier in the day. Heating oil and RBOB gasoline also edge higher after falling for 4 days. However, as demand outlook remains dismal and official view on US’ economic development is far from optimistic, energy prices may weaken further in the near-term.

From recent comments by OPEC members, we are almost certain that the organization controlling the world’s 40% oil production will maintain output quota unchanged at the meeting on December 22. While the member countries said that they are satisfied with current oil price and do not believe adjustment in oil production is required, we notice that the overall compliance has deteriorated further. A survey showed that total production by OPEC – 11 (excluding Iraq) exceeded quota by an aggregate 1.66M bpd in November. In October, total production was 1.5M bpd above quota. While this is predictable as most countries try to benefit from the rally in oil price, investors should beware that the increase in production may pervert the fundamentals of energy market slowly. In fact, non-OPEC production growth has been improving. It’s expected that rise in non-OPEC supply will be enough to meet the rising oil demand next year. Therefore, the need for OPEC production growth will drop.

On the other hand, gold’s rebound after sliding to 1136.1 Monday suggests strong demand for the yellow metal. Gold has been treated as a good hedge against inflation and depreciation in USD. Central banks’ (including India, Sri Lanka and Mauritius) purchase from the IMF in November and reduced gold sales from European central banks confirmed this notion. However, the Bank of Korea does not agree with it. Lee Eung Baek, head of the Reserve Management Department, said that ‘there’s an illusion in gold…We follow the big trend. Gold isn’t the trend. Out of more than 200 nations, how many countries have bought bullion?’, indicating the central bank does not find gold investment attractive.

Undoubtedly, weakness in commodity prices has been driven by strong rebound in USD. The greenback’s strength has been driven by speculations of an earlier rate hike by the Fed and then by increase in risk aversion as the Fed Chairman Ben Bernanke stated that the US’ economy will face significant headwinds. USD rises against all major currencies except for Japanese yen which is also treated as ‘safe-haven’.

Advance in Japanese yen today is also spurred by the new set of stimulus policy announced by the government. The new 7.2 trillion yen spending package includes 3.5 trillion yen for the region, 600B yen for employment and 800B yen for the environment.

At today’s BOC meeting, policymakers will most probably announce to keep its policy rate at 0.25%. Recovery has been seen in Canada since the last meeting. Unemployment rate surprisingly dropped to 8.5% with 79.1K increase in payrolls in November. However, GDP growth in 3Q09 missed market expectation. It’s unlikely that the central bank will deliver a more hawkish view before recovery proves to be self-sustainable. Therefore, we expected the BOC will reiterate that ‘conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target’.

Commodity Prices Generally Lower Ahead of Non-farm Payrolls

World markets generally head lower ahead of release of US non-farm payrolls. WTI crude oil slides for a 3rd consecutive day as investors worry that poor employment data may signal delay in economic recovery. Currently trading at 75.7, the benchmark contract in crude oil has moved towards the lower end of recent trading range of 72-82.

Consensus forecast non-farm payrolls in the US fell -114K in November following a huge drop of -190K in the previous month. Unemployment rate probably stayed at 10.2%. Most of market participants believed that October’s decline in payrolls was somehow too much and pullback this month is justified. Moreover, apart from positive jobless claims data released in recent weeks, seasonal adjustment might have also driven payrolls higher.

That said, an improvement is not certain. In fact, readings of some employment surveys were mixed. ISM manufacturing declined from its recent peak of 55.7 in October to 53.6 in November but employment component stayed above 50 for the second consecutive week. However, the major concern came from the services sector. Released Thursday, ISM non-manufacturing index slipped back into contraction territory and the employment component, at 41.6, remained poor.

Gold price also retreats after surging for 5 days and making a fresh high of 1227.5. Near-term overbought condition and broad-based decline in the commodity sector trigger the selloff. The benchmark contract currently trades at 1207 after sliding to 1201.4.

Stock markets also move lower. In Asia, the MSCI Asia Pacific Index lost -0.3%. In Australia, the S&P/ASX 200 Index dropped -1.5% which the NZX 50 Index in New Zealand slid -0.2%. In Japan, the Nikkei 225 Stock Average gained +0.5% as Prime Minister Yukio Hatoyama is expected to announce some new stimulus measures today.

In European morning, UK’s FTSE 100 Index slides -0.65 to 5279. Shares in Germany and France also plunge with both of DAX and CAC 40 Indices falling -0.5%.

This Commodity is Poised to Outshine Gold

Gold has been grabbing all the headlines lately as the price for the precious metal has hit record highs.

In the weeks and months to come, however, you’re going to be hearing about a far more pedestrian commodity: Rice.

The price of rice has started to climb based on reports that both India and the Philippines are looking to import record quantities. India lost 18% of its rice crop to drought this year. For the first time in more than 20 years, it may have to become a net importer of rice.

While drought plagued India, the Philippines had the opposite problem: Too much rain. The country lost an estimated 1.3 million metric tons of rice — at least 8% of the domestic supply for this rice-importing nation — in a series of strong typhoons that hit the region during the past three months.

Along with most commodities, rice hit record prices last year, with the futures markets hitting a peak of $25.07 per 100 pounds in April. And, also like most commodities, the price of rice tumbled as the global recession unfolded. But even though the price of almost every other commodity has been rebounding, boosted by a weaker U.S. dollar, the price of rice has been flat-lining at $13.50.

Until recently.

In the past few weeks, India and the Philippines started to buy rice in the world market. Rice futures have started to climb as a result, up roughly +15% in the past three weeks.

Some analysts have argued that the price of rice could double from here. Others argue that this year’s healthier crops produced stockpiles in Thailand and Vietnam that could help mitigate at least part of any price increase. But one of the biggest unknowns going into a period of potentially higher rice prices…

… is panic.

Last year’s record rice prices started a wave of civil unrest. Rice prices also started panic-driven hoarding. Bulk retailers like Wal-Mart’s (NYSE: WMT) Sam’s Club and Costco (Nasdaq: COST) began rationing rice in an attempt to keep it on their shelves. If the market starts to catch even a whiff of panic in the air, the price of rice could skyrocket.

Unless you dabble in the futures market, there’s no real pure rice play for American investors. When rice hit record prices last year, investors wondered why there was no rice-based exchange-traded fund (ETF). More than a year later, they are still wondering why one of the world’s largest crops still lacks an investment vehicle of its own.

Some investors are using general agriculture ETFs like PowerShares DB Agriculture (NYSE: DBA) and iPath DJ-AIG Agriculture Sub-Index (NYSE: JJA) as proxies for rice. But neither of these funds has an interest in rice. Elements/Rogers International Commodity Agriculture (NYSE: RJA) is one of the only funds that does have rice as a holding, but only a meager 1.43% of the portfolio. Still, it’s more rice than you’ll find in any other exchange-traded product.

But I find myself thinking back to when crude oil prices were coming off their lows.

Instead of consumers hoarding oil, we had cases of institutional hoarding. Speculators and investment houses started buying up oil on the cheap and storing it, hoping to sell it for a higher price in the future. If this starts to happen with rice, a company with grain storage capacity, like Archer Daniels Midland (NYSE: ADM) may be the beneficiary.

ADM has rebounded +44.2% in the last year, although it’s still -33% off its April 2008 high. And with a forward P/E of roughly 11.5 and a PEG ratio less than 1.2, ADM may be a better value bet on rising rice prices than any of the alternatives.

Amy Calistri
Editor
StreetAuthority’s Stock of the Month

Investors Take Profits After Relentless Rallies in Commodities

Crude oil price continues hovering at year-high level in European morning as the market awaits the inventory report. Apart from this report, there’s not much industry-specific data that investors can rely on this week. On the macro front, focus of today is inflation data from the Eurozone and the US. Moreover, regional manufacturing in the US should also trigger market sentiment which will decide oil price’s direction in the near-term.

Released earlier, Eurozone’s CPI moderated more rapidly than anticipated in September. The reading came in flat on monthly basis after rising +0.3% in August. The market had expected a gain of +0.1%. On annual basis, the headline reading contracted -0.3% while the core CPI was stickier and increased +1.2%. In the US, analysts forecast CPI would have risen +0.2% mom in September after surging +0.4% a month ago. On annual basis, contraction should have slowed to -1.4% following a decline of -1.5% in August. CPI is a barometer that investors have been monitoring as its outlook determines the Fed’s monetary policy.

The Empire manufacturing index probably fell to 17.75 in October after soaring to23-month high at 18.88 in the previous month. At the same time, the Philly Fed index might have dropped to 12 after rising 10 points to 14.1 in September. The regional manufacturing surveys will give important indication on how the ISM index moves from September’s level of 52.6.

Gold plunges to 1052 in European morning as investors take profits after the yellow metal rallying +9% in the past 2 weeks. Other precious metals also decline in sympathy. Silver falls -2.2% to 17.5 while platinum pares gains in the past 2 days and currently trades -1.2% lower at 1351.

Silver, which outperformed gold in recent rise, may undergo deeper correction as its fundamental outlook is not at all brilliant. Yesterday, both Rio Tinto and Fresnillo reported rise in silver supply in 3Q09. Rio Tinto said that its silver output rose +39% yoy in the third quarter to 2.12M oz while Fresnillo reported that its production in the white metal increased +7% yoy and +1% qoq to 9.6M oz. Although there are potential strike in Peru (the world’s largest producer in silver), it will be unlikely to eliminate supply surplus this year unless industrial demand picks up rigorously.

Stock market strengthens amid speculations on favorable earnings results. In Asia, the MSCI Asia Pacific Index climbed +0.6% as Japan’s Nikkei 225 Stock Average rose +1.8% to 10238.7 after Elpida memory posted the first operating profit in 8 quarters. Moreover, Credit Suisse recommended buying Panasonic Corp. Other indices such as Australia’s S&P/ASX 200 Index and South Korea’s Kospi Index also gained +0.6%. In Europe, benchmark indices fluctuate between gains and losses. In the US session, Goldman Sachs and Citigroup will report 3Q09 earnings.

Sentiment Returns and Commodities Surge

Crude oil price rallied to a 7-week high at 73.84 Monday as driven by strong equity market and weak USD. While market sentiment once again pushed oil closer to the key resistance of 75, stagnant fundamentals in energy market refrained price from an upside break. The benchmark contract eventually settled at 73.27, gaining +0.7% from last Friday’s close.

For fuel products, heating oil jumped +2.2% to a 7-week high as US Climate Prediction Centre forecasts temperatures in the Northeast and Midwest will drop below normal between October 15 and October 25. Investors anticipated a colder weather should spur higher consumption in heating oil. As lead by strength in the energy complex, RBOB gasoline also climbed +1.8%.

Gold price pared Friday’s loss and rebounded +0.8% to 1057.5 yesterday with the decline in USD remaining the major driving force. Silver surged to almost a 3-month high at 17.955 before closing the day +0.7% higher at 17.82 while platinum added +0.6% to close at 1347.3.

Stocks in US strengthened with Dow Jones Industrial Average gaining +0.2% to 9885.8 and S&P 500 Average adding +0.4% to 1076.2, the highest in a year. Investors were excited as Black & Decker Corp upgraded its 3Q09 earning forecast and Ford Motors said its auto sales in Europe rose +12% in September.

USD weakened against major currencies except for Japanese yen and British pound. The dollar index fell to 76.12. Against higher-yield currencies such as the euro, Australian dollar and New Zealand dollar, USD dropped to 1.48, 0.908 and 0.736 respectively after a brief recovery last Friday. British pound weakened against the dollar and the euro as the Center for Economic and Business Research said the nation’s interest rate should stay at a record low of 0.5% at least until 2011. At the same time, the British Chambers of Commerce said that the BOE should extend its bond purchase program by 25B pound to 200B pound next month so as to support economic recovery. Currently trading at 5-month low against the dollar and 6-month low against the euro, the pound will stay under pressure for some time.

Today in Asia, commodity prices change little as the market awaits more data both from the macro and industry side. Stocks rally with the MSCI Asia Pacific Index soaring +0.5%. In Japan, Nikkei 225 Stock Average gains +1% to 10114 as Japan’s exports should benefit from weakness in yen. Retail sales in New Zealand surprisingly increased +1.1% mom in August, compared with consensus of a +0.6%gain, from a drop of -0.5% in the prior month. Excluding auto, the reading surged +1.2% during the month. The better-than-expected data should increase speculations that the RBNZ will increase its policy rate earlier than previous estimated. Currently, the market is pricing in a move in January 2010.

Source: OilnGold