Goldman Predicts 20 Years of Agricultural Commodity Inflation, Um, Appreciation

Goldman Sachs and Jim Rogers seem to be on the same page as far as commodities, or at least agricultural commodities, are concerned. Both foresee a protracted bull market in foodstuff due to improve diets in the third world and supply strains.

From Bloomberg:

Selling soybeans at their highest prices in three decades and corn while it flirts with the 1996 peak is a money-losing trade, according to Goldman Sachs Group Inc. and Deutsche Bank AG.

Corn at $4.55 a bushel is “cheap,” Frankfurt-based Deutsche Bank says. Goldman Sachs in New York expects soybeans to rise 29 percent in 2008, the best investment in commodities. Investors who followed the banks’ advice and bought raw materials last year profited as the Standard & Poor’s GSCI Index advanced 33 percent, beating the 3.5 percent gain in the S&P 500 Index and the 9.1 percent return from U.S. Treasuries, according to data compiled by Merrill Lynch & Co.

Rising wealth from Shanghai to Sao Paulo is leading to better diets and straining corn and soybean supplies just as record energy prices boost sales of biofuels. Even after rising 17 percent in 2007, corn costs about $2 a bushel after adjusting for inflation, compared with a $7.80 high in 1974.

“We are in the early stages of a rally that could last 20 years” in agriculture, said Christopher Wyke, product manager at London-based Schroders Plc, which manages $3.5 billion in commodities and is buying more corn and soybean contracts while reducing energy holdings. “Prices are historically cheap.”

Not since the Soviet Union harvest failures of the 1970s have food prices risen so quickly. European Central Bank President Jean-Claude Trichet said Dec. 19 that the region faced a “more protracted” period of elevated inflation than expected because of food and oil prices.

World soybean inventories will plunge 23 percent in the 2007-2008 marketing season to 47.3 million tons from a record 61.1 million the previous year, the U.S. Agriculture Department estimates….

Rallies in agricultural markets historically last about two years, boosting prices by 135 percent, according to Michael Lewis, the London-based global head of commodities research at Deutsche Bank. Prices may climb as much as 250 percent during three to four years in this cycle, he said. The rally in agriculture markets started in the fourth quarter of 2006.

Farmers are planting more acres to take advantage of the price rise, which could damp gains. The U.S. national corn yield has more than doubled to 153 bushels an acre in 2007 from 71.9 in 1974, while the soybean average has jumped 74 percent to 41.3 bushels from 23.7 in 1974, government statistics show.

Droughts from Ukraine to Australia have cut crop yields, sending prices for wheat to a record in December and soybeans to a 34-year high. Corn rose to $4.62 a bushel in Chicago trading today, the highest since 1996. Farmers are planting more wheat at the expense of corn, soybeans and cotton.

Wheat farmers worldwide may increase plantings by 4 percent, the London-based International Grains Council said in November. In the U.S., the world’s largest wheat exporter, growers will sow 64 million acres (26 million hectares) in the year ending May 31, up 6 percent, the Agriculture Department said in October.

“We’ll continue to see a battle for land between the grains,” said Matthew Sena, an analyst at New York-based Castlestone Management LLC, which oversees $800 million. “The run-up in wheat prices will prevent a dramatic supply response for soybeans and corn.”….

“The severity of these factors means that there’s a better chance of this being the longest and biggest agricultural rally ever,” said Colin Waugh, portfolio manager at New York-based Galtere International Fund, which manages $1.3 billion in commodities and related investments.

The biggest winners from the U.S. energy bill signed by President George W. Bush on Dec. 20 may be companies including Archer Daniels Midland Co. of Decatur, Illinois, and Sacramento- based Pacific Ethanol Inc. The legislation requires biofuels production to increase to 36 billion gallons in 2022 from 7.5 billion in 2012….

The rise in crop prices is creating the “risk of social unrest,” said Roland Jansen, whose $129 million Mother Earth Resources fund in Liechtenstein gained 28 percent in 2006, more than double the returns of commodity indexes. “We’ve already seen it happen, like in Mexico. China will probably release stocks to pacify the population. There’s a real danger of unrest there.”

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