Tuesday, October 28, 2008

Will the Credit Crisis lead to a Food Crisis?

In a recent post ("Jim Rogers on CNBC Europe Early This Morning") we mentioned that Rogers continues to be bullish on agricultural commodities. Another investor who remains bullish on agriculture is Aaron Edelheit. Today on his blog, Aaron Edelheit writes that low global inventories, continuing demand growth from China, and the credit crisis together are setting the table for food shortages next year ("Looming Food Catastrophe in 2009"). Regarding Chinese demand, Edelheit quotes an article by Jim Lane, editor of Biofuels Digest1 ("It's not food, it's not fuel, it's China: Expanded study of impact of China on global corn market") that argues that demand for corn has been driven primarily by the growing consumption of meat in China (since corn is used to feed livestock):

“Even with all the growth, Chinese meat consumption is still 45 percent less than the average consumption in the US,” Lane warned. “An additional 277 million tonnes of grain would be needed to support China at parity with the US. That would take 68 million acres to grow. There isn’t that kind of arable land available anywhere is the world, whether we grow grains for renewable energy or not.”

Regarding the impact of the credit crisis, Edelheit writes,

The credit crisis is hammering South American farmers, to the extent that they cannot get fertilizer2. No fertilizer, no planting of crops.

Further, suppliers are asking farmers in the U.S. for more upfront money to make sure they aren’t holding delinquent debts, causing farming to be a bit more uncertain this year.

Edelheit bases this on an article by Carlos Caminada, Shruti Singh and Jeff Wilson on Bloomberg yesterday ("Farm-Credit Squeeze May Cut Crops, Spur Food Crisis").3 This raises two questions related to one of Edelheit's holdings, Hemisphere GPS (TSX: HEM.TO): if farmers can't get credit to buy fertilizer, can they get credit to buy Hemisphere's precision agriculture equipment? Do they need credit to buy Hemisphere's equipment? Edelheit doesn't say, as he doesn't discuss his stock positions on his blog.

1I find this sort of primary research -- the kind often done by industry-specific analysts, but occasionally done by money managers such as Edelheit -- impressive. Partly as a result of doing this sort of research, occasional commenter Daniel Wahl (his blog) invested early in some winners in the agricultural space, as I noted in a post last June ("Stress Fractures in Titanium"). Daniel has taken his blog in something of a new direction recently, as he prepares to launch a new blog, and he no longer writes about his trades, but he did note in a recent comment thread on his blog that he is still holds Hemisphere GPS, and calls on the fertilizer company Potash Corp. of Saskatchewan (NYSE: POT).

2This may have been a factor in the recent correction in the prices of fertilizer company stocks.

3Jim Rogers similarly linked the credit crisis and commodities in his CNBC Europe interview last week, noting the difficulty anyone would have in borrowing money to dig a mine today.


DaveinHackensack said...

I asked Edelheit on his blog if he thought the credit crisis would limit farmers' purchases of precision agriculture equipment. His response:

"Internationally, yes, it might limit the short term uptake in precision ag. But on the whole this is becoming a must, best practice purchase, and it actually helps lower costs, so I don’t think it will be much affected.

If anything growth rates will slow a bit."

HEM releases earnings next week, so we should get a sense of this then.

Daniel said...

First thanks for the mention and the link.

"...if farmers can't get credit to buy fertilizer, can they get credit to buy Hemisphere's precision agriculture equipment?"

Hemisphere offers credit to farmers themselves if they need it. An analyst recently asked the Company if anyone has been using this line and was told that since inception nobody has used it.

That could mean a number of things but it's likely that either they have been able to find credit on better terms elsewhere or they're comfortable paying cash and keeping their debt levels at the low percentage it's at.

Fertilizer and seeds is an issue for farmers outside of the US and is for those inside too--but not as much.

I think the bigger issue here, for farmers, is the price they can hedge crops forward at.

But both combined obviously have farmers a little nervous, and will effect their choices. We'll see how it plays out. I tend to agree with Edelheit's reply to you on the blog. Growth rates may be slower, but sales probably won't be affected all that much.


"Do they need credit to buy Hemisphere's equipment? Edelheit doesn't say, as he doesn't discuss his stock positions on his blog."

GPS products are easily digestible for most farmers out of cash flow, and helps them to mitigate price-input risk--of higher fuel, fertilizer, and seed prices--as well as operation risk (allowing them to plant more, faster, given a shorter time to do it given inclement weather).

In general, from the scuttlebutt I've done, the more price-conscious the farmer, the more likely they are to choose HEM's products.

The analyst who said this credit squeeze could very well be bullish news for HEM said it due to this factor entirely.

Daniel said...

I think Edelheit's right to not talk about stock positions on his blog by the way.

A while back I came to the conclusion that people will focus on what you focus on.

For instance, leaving aside legal issues, if Edeleit said something was a good buy at a certain price, there'd be a ton of people asking for more information at each point along the way higher or lower.

"Is it still a good buy?" "Are you selling now that it's dropped?" "Why did you tell me it was a good buy and now it's 50% lower?" and so on...

Suddenly he'd be spending a lot of time either dealing with anxious bullish investors, or hecklers from the sidelines--with no value going to him in return. See the above questions.

(No doubt he gets some of that already given that he moderates comments.)

At VIC he can talk about prices and such--and it's worth it--because of the ideas that others get back and the quality of the members (who focus on the fundamentals).

This was part of my thinking when I quit posting what I was doing on my own.

And, though it doesn't seem like it cause I've been posting a lot more, I've made as many if not more posts about the businesses I own or follow this month than most others.

More importantly, the replies were more focused on the fundamental issues--which is my primary concern anyway. The prices will take care of themselves in time...the important thing is being right (and, if wrong, in learning why so my method can get better).

DaveinHackensack said...

De nada, as they say in one of the world's biggest agricultural powers. Thanks for the comments.

Regarding Edelheit's blog, I don't begrudge him at all for not writing about his positions. He is a professional money manager and has fiduciary obligations to his clients as well as a host of legal and compliance issues to consider. I doubt he's worried about 'hecklers'. Frankly, I'm a little surprised that you are, for a couple of reasons. First, to some extent, it's par for the course in message boards, blogging, etc. Ideas are challenged (sometimes for legitimate reasons, and sometimes not); second, the current market environment seems to have reduced the 'heckling' significantly. At least that's been my experience.

For example, when Alloy Steel first plummeted to $1.50 per share, after it released its earnings in August, the dentist and AlexG wandered over from GuruFocus to post comments here; now that it's trading under a dollar, I haven't heard any similar comments. I suspect it's because most of us have seen similar declines in a lot of our positions. I was actually thinking of writing a post about this decline in 'heckling', and was going to title it, "Absence of Schadenfreude".

BTW, as far as I'm aware, Edelheit doesn't monitor comments on his blog. Whenever I've posted comments there, they have appeared immediately.

Appreciate your comments on HEM, btw. Hopefully, we'll hear some encouraging news next week.

Incidentally, I thought I might see a comment from you on the post about Hussman and Hooke's Law, given your fondness for philosophy.

Daniel said...

Your experience is likely to be a little bit different from mine...

I agree that having one's ideas challenged is a good thing--if the focus is on the facts at hand, or a proper method of making investing decisions based on them.

I also think, though (as I said) that people will largely focus on what you do.

This month I've made seven posts dealing with companies I own. (A little more than usual.) The focus was on insider buying, issues--like credit--affecting sales, data from distribution checks, and so on.

The focus in each was pretty clear and I got back some good feedback on what I wanted--the ideas themselves.

And that's the whole point. I put time into something and got the value I wanted out of it (from readers in particular and leaving aside others I get just from the writing process).

I haven't lost anything in not posting trades, especially since I'm not a trader. To the extent that my posts are more focused, partly because of not posting about prices and partly because I realized the value to readers and myself of making them more concentrated, I've actually gained a lot.

But each person is different--with regards to their values, their readers (some of whom may turn out to be more stressful than others), and so on.


If I was going to start a new blog focused on investing--with the goal of getting quality feedback on my method or issues related to the industry--I would not even mention the stocks at all.

I would talk about the industry--for example, is credit available to farmers, how do corn prices determine demand for fertilizers, etc--and I would focus on the method--for example,

I'd also focus on one particular issue affecting a company at a time. Again, I think the more focused one's posts, and the shorter, the more they will be read, and the more relevant and quality responses one is likely to get.

Such a format would also attract the type of readers I would want--those focused on the method and the facts (rather than those worried about short-term performance, looking back or forwards). At least that would be the hope.

Regardless, the blog I'll be starting is not going to be like this. But I will be using some of the lessons from my first year in working on this one...