By Saijel Kishan
Jan. 2 (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.
Falling Inventories
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.
Soybean consumers face a ``large deficit'' in supplies because of increasing sales to China and production of biofuels, according to Goldman Sachs, the world's biggest securities firm.
``There are still good investment opportunities in the oilseed,'' Goldman analysts led by Jeffrey Currie said in a Dec. 11 report.
Goldman predicts soybeans will reach $14.50 a bushel. Investors who buy $10 million of November contracts on the Chicago Board of Trade would earn $2.9 million should the forecast prove accurate. A hedge fund that borrowed money to increase the bet using margin could turn that $10 million into about $59 million.
Corn Versus Wheat
Soybeans for March delivery jumped as much as 31.25 cents, or 2.6 percent, to $12.455 a bushel today on the Chicago Board of Trade and were at $12.40 as of 8:51 a.m. local time.
The bank forecast December 2008 corn prices will increase 12 percent to $5.30 a bushel from $4.735 now. Goldman recommended buying corn and selling wheat in a ``spread'' trade to exploit changes in the relative value of the crops.
Corn for March delivery climbed as much as 6.5 cents, or 1.4 percent, to $4.62 a bushel today in Chicago, the highest since June 1996.
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.
`Battle for Land'
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.''
Biofuels Demand
Castlestone invests about $100 million in commodities, and Sena said the fund has been adding to its corn and soybean holdings while cutting investments in wheat.
Demand for biofuels, made from corn, oilseeds and sugar, is growing as countries seek to cut their dependence on fossil fuels after oil rose to a record $99.29 a barrel in November. Demand is straining the availability of farmland as well as water supplies.
``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.
Population Growth
U.S. ethanol prices at $2.2157 a gallon on average are 11 percent cheaper than New York wholesale gasoline futures at $2.4908 a gallon.
Crop prices ``will show a tendency to go up, and the reason is the growing world population, changing food patterns and limited availability of land,'' said Martin Richenhagen, chief executive officer of Agco Corp., the second-largest U.S. maker of tractors and combines after Deere & Co. ``This is good news for the farmer.''
Higher food prices may cause faster inflation. U.S. consumer prices increased 0.8 percent in November, the most in more than two years. Inflation in the 13-nation euro region accelerated to 3.1 percent in November, the fastest since 2001, according to Eurostat. Japan's core consumer prices rose at the fastest pace in more than nine years in November.
Tortilla Prices
Developing nations will feel the greatest pain. The cost of corn tortillas in Mexico, where shortages in 2006 boosted inflation, may rise 13 percent this year, according to Gruma SAB, the world's largest maker of corn flour. Food prices in China, the fastest-growing economy, increased 18.2 percent in November.
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.''
To contact the reporter on this story: Saijel Kishan in London at skishan@bloomberg.net
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