Friday, December 29, 2006

Why money is pouring into index funds and land...

Consider this prediction from Matthew Lynn at Bloomberg News:
Investors should strap themselves in for a rocky ride in the next 12 months. Equities will collapse, property will be demolished, and you won't be able to give away gold on the streets. The only haven will be fixed income. That's right, '07 will be the year of the bond.

OK, now that we've got the worst joke of the year out of the way, here are six things that might happen in 2007:

- Farming will become a great way to get rich.

High oil prices are causing a surge of interest in alternative energy, with ethanol leading the way. Making fuel from corn or other grains, however, means digging up a lot of fields. It has been more than a century since farmland was the basis for a financial aristocracy, but every asset comes back into its own if you just wait long enough. JPMorgan Chase & Co. rates corn among the best investments for 2007. [More]
[My emphasis]

As we see dollars flow into commodities, one result will be a reluctance by farmers to sell. Especially those of us who are "oversold" on 2006 crops. Perhaps we will revert to historic patterns, but I think our markets are now fringe players in the flow of global dollars [euros, yen, yuan, etc] that are looking for a return.

OK, now for a prediction of my own: 2008 will see the largest gain in farmland prices since 1987.

Also, in Chicago Tribune today, an interesting look at the new ADM CEO, Patricia Woertz. The article is not fluff, and if you couple it with Marcia Taylor's interview in Top Producer, you can see a leader under extreme pressure.
Hired from the senior ranks of California-based Chevron Corp., Woertz is charged with no less than ushering in a new age of renewable energy, reviving the economy of the rural heartland and advancing one of Illinois' biggest companies. And though she de-emphasizes her status as a "woman" CEO, she inevitably carries the flag for her gender, too.

If ADM's financial results swoon, Woertz could be gone in a hurry. Lingering allegiance to the legendary Andreas family, which ran ADM for the past 35 years, could put her in "a vulnerable position," says Ric Marshall, chief analyst at the Corporate Library research group. "The risk is very high her tenure is not going to work out." [More]

There are now sharp differences in the approach to ethanol by very big players. Compare Cargill to ADM. Each is betting heavily on a contrary outlook for the future of corn.

Many think the loss of the "blender credit" for ethanol and lowering or elimination of tariffs on imported ethanol could be fatal to ethanol producers. I'm not so sure. My guess is ADM could weather and even prosper should either or both occur. Smaller competitors would not.

Regardless, the extreme size of the demand increase seems to me to argue producers will enjoy significant market pricing power for a minimum of 2-3 years.

Of course, by that time we'll bid cash rents up to absorb the margin.

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