Food Fight

"The Almanac says it's time to start plantin'."
--Myra Fleener (Hoosiers)

Although Howard Simons presents some interesting analyses and they're almost always thought provoking, this one provokes me into thinking that he's missed the mark when it comes to agricultural commodities.

Near the outset, he claims that the constant dollar price of wheat has declined 77% since the end of WWII while world pop has more than tripled. To be sure, farming efficiency has improved dramatically over the past few decades but some data that supports his claim would have been more convincing.

He goes on to graph the relationship between 'relative CPI' per the BLS and general commodity index prices. The relationship portrayed is not that strong when you really look at it (again, perhaps some correlation data might add insight). Plus, as Mr Simons acknowledges, the CPI data are a highly tortured lot.

His final graph plots ag returns versus other asset classes since 1991. Since ags are currently below other assets classes at the end of the horizon, he concludes that this asset class is an unworthy investment. However, if the end of the horizon happened to have been late 1997 or early 2008, then ags would have come out on top. As an aside, it's strange that he did not anchor all series to the beginning time period.

Note also from this graph that ags tend to be uncorrelated to other asset groups--a characteristic that facilitates diversification.

Like all asset classes, commodities go thru cycles--some long and some short in duration. One thesis on commodities, including ags, is that we're early in a long cycle upleg--one that actually got going about 10 yrs ago. Off those lows in 2001, ag prices increased by a factor of about 5 before the 2008 pullback. Current prices are about double 2001 levels.

Historically, these long cycles tend to last 15-20 yrs in commodities. When I consider factors likely to color the future, such as growing food demand by developing countries and lagging farm capacity, and combine them with the technical long cycle pattern, it's hard for me to arrive at similar conclusions to Mr Simons. (It is, of course, such differences that make markets). To me, agricultural commodities seem an interesting investment idea--from both a growth and diversification p.o.v.

position in ags