Emerging Markets Will Drive Up Grain

04/09/2013 9:45 am EST


Ashmead Pringle of the GreenHaven Group says demand from the ever-increasing global populace will bring sunshine to the food commodity markets.

Nancy Zambell: My guest today is Ashmead Pringle, the Co-Founder and President of the GreenHaven Group, which is a commodity-based business. Ashmead, thank you so much for joining me today.

Ashmead Pringle: It's my pleasure to be with you, Nancy.

Nancy Zambell: I understand that you run an ETF, an exchange traded fund, called the GreenHaven Continuous Commodity Index Fund (GCC). Can you tell me a little about the index that you're tracking?

Ashmead Pringle: The index that we chose is the Thomson Reuters Continuous Commodity Index, or the CCI for short.

It used to be known as the CRB index until 2005, and the CRB index goes all the way back to 1957. It's the longest running published commodity futures benchmark. It was renamed CCI in 2005, but its composition didn't change then.

It's an equal-weight index, and it now has 17 commodities that include metals, energy, agriculture, and the so-called soft commodities, which are cotton, coffee, cocoa, and sugar. It has a relatively low energy weighting-about 18%-and that's a major differentiator from some other indices, which have up to 60% or 65% energy.

Nancy Zambell: That's because energy has done so well.

Ashmead Pringle: Yes, it has done well at times. But to be fair, agriculture's done quite well also.

Actually, if you look back over the last four or five years, the energy-heavy indexes in this space have actually done pretty poorly because of what's called the roll yield in those markets, where the essential cost of moving the position from an expiring month to a new month has been a tremendous drag on returns. The CCI index has performed really well versus the energy-heavy ones.
Nancy Zambell: I bet a lot of people aren't aware of that. Looking back at some of my research for the past year, it looks like commodities such as grains and corn performed better for the year than almost anything other than palladium. Can you comment about what's going on in the grain market today?

Ashmead Pringle: Grains did very well in 2012. The tremendous drought in the US sent corn and wheat and soybean prices very, very high. And that also priced US exports out of export markets to some degree. So, we actually lost some market share.

Those prices are beginning to subside from those peaks, due to the forecast for large planted acres, and so far pretty decent weather. It looks like we'll be able to have ample stocks domestically by the time we reach the fall.

So stocks have been easing back from their drought highs, but we think they'll maintain the level that they moved up to in 2005 and 2006, when there was a secular shift up in grain prices.

Nancy Zambell: Now what about energy? Are there any particular segments in energy that you really like right now?

Ashmead Pringle: Yes, we think natural gas is performing pretty well. It had been very cheap last year because of the extremely mild winter that we had, which left us with record-high stocks in storage at the beginning of this heating season.

But we've had a fairly good winter and cold February and March, so those overhanging stocks have really been totally depleted, or will be in the next week or two. And we're going to end the heating season with natural gas in storage that's a little bit less than the five-year average. So that's firmed prices a bit.

There will be a shift away from natural gas, probably, at these prices-back to coal-by the power utilities, because coal is a good bit cheaper than natural gas right now. But we think that gap will probably close by coal rising rather than natural gas falling too much.

Nancy Zambell: Is there anything going on in the cotton market? I noticed that year-to-date, it looks like cotton has done very, very well, and didn't do too badly last year. Is there just an increase in cotton demand now?

Ashmead Pringle: Well, I'm not tracking cotton very closely these days. China is the world's biggest producer and also the biggest user. And the US-though it's not the largest cotton producer-is kind of a swing market, and so our exports can fill the gap when there's a problem elsewhere.

Nancy Zambell: Let's turn to the real estate side of the equation. Are you seeing a rise in the demand for farmland?

Ashmead Pringle: Oh yes. It's across the news. You're reading about record prices for farmland-particularly in the Midwest-at auctions.

It remains to be seen if those prices will work. Some folks wonder if there's a bubble there. It certainly is going to depend on how well crop prices maintain the high levels.

We think that the best deals in farmland, domestically, are not in the Midwest, but in other states that have good growing conditions and also have good access to water-and maybe land that would be converted from timber or from other crops. But farmland has become a very, very popular asset class, though it can be quite difficult to access.

Nancy Zambell: Did the prices of farmland correlate at all with the general real estate market? Because obviously we've had a really nice housing market recently, with more demand for residential property.


Ashmead Pringle: I don't think they do, just as sort of an offhand observation. I think since 2005, when the grain markets made a secular jump up and basically doubled in price, that drove farmland a lot higher. So farmland's really been in a pretty good bull market since 2005 and 2006.

Housing, of course, was very strong until 2008 or 2009, and then the bottom fell out. It seems to be firming now, recovering some, but we're kind of getting back to where we were four or five years ago in terms of prices, whereas farmland is double-and in some cases triple-what it was six or seven years ago.

Nancy Zambell: That's really quite interesting, because I remember in the 1980s when so many people were losing their farms. It's nice to see them in demand once again.

Ashmead Pringle: Yes. You've mentioned the 1980s. The early 1980s were really a terrible time on the farm, and most folks outside agriculture didn't realize it. But it was a time of high interest rates and low crop prices back then, and the collapse of a farmland price surge prior to that. It was almost a Depression-level era on the farm.

Nancy Zambell: Switching back to commodities again: what do you look for, short-term and long-term, in the agricultural commodities?

Ashmead Pringle: In the grains, I think we're in the process of relaxing prices somewhat, especially these late-summer prices for the old crop. And some of the new crop is relaxing, as well.

So I think we'll see the markets continue to be a little on the weak side in corn, wheat, and soybeans, unless we go further into the growing season, and we have reason to be concerned about the yields.

If we don't get moisture, or we get too much heat-like last year-then the market will react and take prices up. But if we have a normal season, and we bring these crops in, then I think you'll see prices retreat to what we think the low end of their new range is, which might be $450 for corn, $5 for wheat, and $10 to $11 for soybeans.

Nancy Zambell: And then long term, do you still think we're still in a bullish commodity market?

Ashmead Pringle: I do. When you talk long term, we're looking pretty far out. There's a projection for the global population adding 2 billion or 2.5 billion people by 2040 or so, and food demand is projected to rise as a result by about 70% or 75%.

At the same time, it's not just a head count. There are another 3 billion people who are moving up the income ladder to be in a global middle class. And as they do, they're going to demand better diets-meaning more protein, fish, chicken, pork, and beef.

The interesting thing about that is, as you go up that ladder, it takes more and more grain. Fish are very efficient, maybe 1.5 pounds of fish per pound of grain. Chicken are 2 and change, and hogs are 3.5. But beef is 5 or 6. So when you add meat to a diet, grain demand goes up significantly.

But at the same time, we're going to lose cropland in a number of places-particularly China-as it urbanizes and industrializes. They're going to move 300 million people to cities in the next ten or 15 years. They lose cropland because they're going to be building roads on it, or highways, airports, factories, or apartment buildings.

And water's an issue for the Chinese, and India as well-over-pumping aquifers. It takes, Nancy, roughly 1,000 tons of water to produce a ton of grain.

Nancy Zambell: That's startling.

Ashmead Pringle: Seventy percent of the world's fresh water goes to agriculture. Countries like China, which already imports 70% of its soybeans needs, will import grain instead of importing the water.

Countries that have followed similar patterns, like Korea and Japan, also import about 70% of their grain needs now. So we see China's becoming not only a large soybean importer-which it is now-but also a large importer of other things, particularly corn.

So the demand is there, and there's just not enough arable land to just simply add a lot of it. Maybe 10% or 12% more land can be put in production, but the rest of the increase to feed everyone is going to have to come from better yields, better cropping practices, better seed technology, and better water management.
Nancy Zambell: A very interesting outlook. It sounds like the demand for commodities should be growing for quite some time then.

Ashmead Pringle: That's what we think, long term. We think that the addition of 2 billion people certainly adds demand on the food side.

But rising income and GDP, we project, is probably going to double globally by 2040 or so. And much of that growth is coming from these emerging markets. Seventy-five percent of the world's population by 2040 is going to be in India and China and Pacific Asia.

This is where the people are going to be. So that's where the food demand will be. And then rising incomes will fuel demand for many things-cars, fuel, housing, electricity, wiring, you name it-just all of the infrastructure that goes to support modern society.

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