Monday, May 5, 2008

Potential Risks to the Agriculture Boom

The agriculture boom that has taken place has been quite interesting. I've followed it somewhat closely, but haven't made any big investments in the sector. Although the sector looks promising, and many stocks have performed quite well, there are some risks that people are probably overlooking. The biggest risk that I would focus on as an investor would be the US changing policies on ethanol. There has been a lot of food inflation over the past year, and ethanol is one of the major reasons why. I understand that China and other growing economies are demanding more goods, but 1/5 of the US corn crop is going to ethanol, and we're on target to increase our ethanol output under the current policy. But a new president could change that course, and if prices rise much more, that president might have no choice. That is a pretty big risk for agriculture stocks.

I've also read various articles that a lot of the price increases have been driven by speculators in the commodities markets. Although this is nothing new, it may have to do with the rapid price increases. The fundamentals are there, but I do think some of the price rise is due to speculation.

Adding to the debate, I found an interesting quote. At Berkshire Hathaway's investor meeting, Warren Buffett was asked about this, and he had a pretty interesting response.

"There is a boom in oil and also in soybeans. Because of increases in food prices, would anyone expect to propose an excess profits tax on farmers? But what about an excess profits tax on Exxon? Situational ethics and policy making depends a lot on voters."

Politicians would never propose an excess tax on farmers, but would rather continue to subsidize them. This is actually a reason to be bullish on agriculture, but I wanted to bring up that point.

Overall, the market still looks promising for these stocks, but there are risks that cannot be overlooked, especially when the big ag. stocks have doubled many times over already.

2 comments:

J said...
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J said...
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