The Big Picture Update on Q2 2008, Part 2

June 25, 2008 at 7:05 am
Contributed by: Chris

Folks,

Several updates for you here. First, my column this week for Energy and Capital, which is the final part of my update on the big picture for the second quarter of the year. In part 1 of this series, I reviewed the trends in financials, fossil fuels and electricity. This week, I take a look at renewables, food and fertilizer.

After that, some recent media updates. I have lots of media stuff going on related to the book, so stay tuned for more.

Feel free to send me your feedback; I love hearing from my readers.

The Big Picture on Q2 2008, Part 2

Commodities and Renewables Charge While Market Tanks

2008-06-25
By Chris Nelder

In part 1 of this series, we reviewed the trends in financials, fossil fuels and electricity. This week, we take a look at renewables, food and fertilizer.

Renewable Energy

The picture for renewable energy just keeps getting better, as more of the world begins to realize that we are having a real problem maintaining our traditional energy supplies. I have no doubt now that a big revolution in energy has begun. Mark my words: This is the time to go long on renewable energy, for the long term.

Consider this chart of a few of my favorite renewable stocks against the S&P 500:

fslr-wnd-ora-s%26p-Q2-2008.jpg

After being beaten down harshly in the first quarter, along with just about everything else, renewable energy shares bounced up like spring flowers, handily beating the indexes by 20% or better.

Meanwhile, the chatter about controlling carbon emissions has only gotten louder, particularly as bad weather hits everywhere (which we’ll get to in a moment). I expect this trend to continue, and would not be at all surprised to see some sort of binding legislation passed within the next year.

As I have detailed in my book, I favor a carbon tax over cap-and-trade schemes, for a variety of reasons, but I would be happy to see any sort of binding controls established. When that happens, you will definitely want to be holding some solid, reputable renewable energy companies in your portfolio, because it’s going to put new fire under the whole sector, even as it puts the hurts on oil and coal.

Agriculture

Food production has come about even with energy as the world’s top concern since my review of the first quarter. Riots, hoarding, and intermittent shortages became more common, and everyone from the UN to the Saudis put it on the front burner.

My observation was borne out in an unexpectedly harsh way:

Not only are food and energy closely interrelated, but weather is right in the mix too. The increasing use of fossil fuels contributes to global warming, which reduces food production, as was the case with the Australian wheat harvest. At the same time, weather impacts our ability to produce energy…and back around the wheel we go.

Flooding in the Midwest this spring has ruined an estimate 5 million acres of land, and harvests have been delayed because the fields were too wet to work. While parts of the West like California had the driest spring on record, parts of southern Indiana, Illinois and Missouri have endured the wettest spring on record. (Inversely, China’s agriculture ministry instructed wheat and rice farmers in southern China a few weeks ago to harvest as much of their crop as possible before another wave of rains arrived.)

With fields too wet to sow corn, many farmers opted to plant soy this year instead of corn. The corn harvest this year is expected to be 10% lower than last year, and soybean plantings are running about 16% behind last year.

Consequently, corn shot from $5.82 at the end of Q1 to a record $7.92 last week. The spike in corn prices was due to the torrential rains that soaked the Midwest starting in late May, and in a mere two and a half weeks, corn prices went up 28%.

Ethanol production is expected to increase 25% over last year, and consume about 4 billion bushels of corn out of the 86 billion that will be sown this year. In the face of record corn prices, the cattle and poultry industries have been lobbying the EPA to cut the nation’s ethanol production mandate in half.

They’re not the only ones. Policymakers are realizing that corn is a very inefficient way of trying to produce biofuel, and might not be worth it. (That has been my position on corn ethanol since the beginning.) The corn ethanol plays have suffered the fallout:

vse-avr-peix-adm-Q2-2008.jpg

The one bit of good news for grains is the worldwide wheat harvest, which is expected to be about 8% higher this year than last. The expectation brought the price of wheat down from a record $13.50 per bushel on Feb. 27 to $8.70 today, about where it started the year. Still, wheat remains about 50% higher than it was a year ago, and the harvest below average levels.

The big picture for agriculture is clear enough: demand is higher than ever, and supply is faltering. (Reminds you of anything?)

The flooding of the Mississippi had another unexpected consequence: The levee breaks shut down transport on the river, stranding 100 barges. Mississippi barges are the primary mode of transport to get grain from the Midwest to export terminals in the Gulf of Mexico. Grain giant Cargill alone had 200,000 bushels of corn sitting on the dock, unable to get a barge.

If you took my recommendations on fertilizer at the beginning of Q2, you are smiling now:

mos-pot-feed-Q2-2008.jpg

FEED has clearly sold off a speculative bubble, so I wouldn’t touch that one now (and I hope you got out with some nice gains, as I did). But Mosaic and Potash Corp. are still good bets to hold, because I don’t see any reason to think the food supply situation is going to radically improve any time soon. In fact, this looks like a nice little buying opportunity.

As one would expect for a diversified play, the more general agriculture ETFs I suggested have performed more modestly than the fertilizer plays, but who would complain about a 10-30% gain in a quarter, especially when the S&P actually fell a few percent?

gsg-jja-jjg-dba-dbc-Q2-2008..jpg

I remain bullish on the ag ETFs, at least until we get a significant change in the supply and demand balance.

Metals

The metals group I suggested hasn’t done quite as well, but if you picked the better stocks over the ETFs, you made out alright:

bhp-rio-rtp-dbs-jjc-Q2-2008.jpg

My read of the metals group is that it’s probably ripe for a recovery, as the last couple of weeks are showing. Considering that the building boom is still going strong in Asia and the Middle East, and that shortages of basic building materials like iron are still happening regularly, I think this is a good time to jump into metals if you’re not in already.

On the whole, as bad as the news has been in energy, agriculture, finance, and the economy in general for the past quarter, I have to say I saw it all coming. I banked on it, and I’m still banking on it.

With an economy on the ropes, the financial sector going down in flames, food prices skyrocketing, oil prices causing widespread inflation and the Fed helpless to do anything about it, a lot of investors will end this year with a lot less money than they started it.

But not us. In fact, we expect to turn some nice gains, by reading the signs rightly and playing them smartly.

Gains like the ones you’ll make from our energy picks, when you sign up for the $20 Trillion Report.

Until next time,

Chris

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