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