"Food prices" where, and for whom? I tend to be frustrated when non-macro investors step in to make broad commodity calls because these systems are much more dynamic than any given cause-effect relationship. Many commodity prices — especially those most important to the average person — are driven in all kinds of crazy directions by government action, and they can stay that way indefinitely. With food prices in particular, I can't think of a single issue that's more instantly (and intensely) political. Why wouldn't world governments just step in to drive down prices? What levers would they use to do so if they felt they had to? How do these second- and third-order effects interact with the possibility of opportunities in this space?
The US once decided to prop up its local cotton growers with subsidies that negatively impacted competition in Brazil. The WTO declared those subsidies unlawful in 2004, the US appealed, and after years arguing in appeals, Brazil still prevailed. With appeals settling in the delicate aftermath of the GFC, rather than repeal the local subsidies, and unwilling to face retaliatory taxation from Brazil on US exports, the US decided it was easiest to just pay Brazilian cotton farmers $147 million/year. "Fuck it, write 'em a check."
The US is already seeing intense political pressure to "do something" about inflation, and of course more interventionist regimes like China's are already much more heavily involved with trying to manage commodity prices. What happens when this becomes something that gets broad fiscal firepower behind it?
In Diary Of A Very Bad Year, the anonymous hedge fund manager being interviewed remarks that his firm actively avoids taking a directional position on any of the major currency crosses because they tend to be mean reverting over time and they're ultimately driven by central banks and fiscal policy makers. He remembers going to an "idea pitch" dinner with other hedge fund managers, and everyone was very bullish on the euro, bearish on the dollar:
"Now, considering that everyone at the table being super-bearish on the dollar probably meant that they were already short the dollar and long the euro, I went back and basically looked at my portfolio and said: “Any position I have that’s euro-bullish and dollar-bearish, I’m going to reverse it, because if everybody already has said ‘I hate the dollar,’ they’ve already positioned for it, who’s left?” Who’s left to actually make this move happen? And who’s on the other side of that trade? On the other side of the trade is the official sector that has all sorts of other incentives, nonfinancial incentives, political incentives. They want to keep their currency weak to promote growth or exports or jobs. Or they have pegs, peg regimes, that they need to defend, and they don’t really care about maximizing profit on their reserves. They’re not a bank trying to maximize profits, they have broad policy objectives—and infinite firepower."
I wouldn't disagree that there's possible opportunity here, but I really want to hear the part where those opportunities are aligned with (and not facing off against) the counter-parties with infinite firepower and no profit incentive.
Great analysis. I have been accumulting shares of WEAT, SOYB, and CORN for some time. I think there is still upside left, and I don't think the risk it near as large.
"Food prices" where, and for whom? I tend to be frustrated when non-macro investors step in to make broad commodity calls because these systems are much more dynamic than any given cause-effect relationship. Many commodity prices — especially those most important to the average person — are driven in all kinds of crazy directions by government action, and they can stay that way indefinitely. With food prices in particular, I can't think of a single issue that's more instantly (and intensely) political. Why wouldn't world governments just step in to drive down prices? What levers would they use to do so if they felt they had to? How do these second- and third-order effects interact with the possibility of opportunities in this space?
The US once decided to prop up its local cotton growers with subsidies that negatively impacted competition in Brazil. The WTO declared those subsidies unlawful in 2004, the US appealed, and after years arguing in appeals, Brazil still prevailed. With appeals settling in the delicate aftermath of the GFC, rather than repeal the local subsidies, and unwilling to face retaliatory taxation from Brazil on US exports, the US decided it was easiest to just pay Brazilian cotton farmers $147 million/year. "Fuck it, write 'em a check."
The US is already seeing intense political pressure to "do something" about inflation, and of course more interventionist regimes like China's are already much more heavily involved with trying to manage commodity prices. What happens when this becomes something that gets broad fiscal firepower behind it?
In Diary Of A Very Bad Year, the anonymous hedge fund manager being interviewed remarks that his firm actively avoids taking a directional position on any of the major currency crosses because they tend to be mean reverting over time and they're ultimately driven by central banks and fiscal policy makers. He remembers going to an "idea pitch" dinner with other hedge fund managers, and everyone was very bullish on the euro, bearish on the dollar:
"Now, considering that everyone at the table being super-bearish on the dollar probably meant that they were already short the dollar and long the euro, I went back and basically looked at my portfolio and said: “Any position I have that’s euro-bullish and dollar-bearish, I’m going to reverse it, because if everybody already has said ‘I hate the dollar,’ they’ve already positioned for it, who’s left?” Who’s left to actually make this move happen? And who’s on the other side of that trade? On the other side of the trade is the official sector that has all sorts of other incentives, nonfinancial incentives, political incentives. They want to keep their currency weak to promote growth or exports or jobs. Or they have pegs, peg regimes, that they need to defend, and they don’t really care about maximizing profit on their reserves. They’re not a bank trying to maximize profits, they have broad policy objectives—and infinite firepower."
I wouldn't disagree that there's possible opportunity here, but I really want to hear the part where those opportunities are aligned with (and not facing off against) the counter-parties with infinite firepower and no profit incentive.
great stuff, as always
Thank you very much for your amazing substack.
How do you think this may impact in Food and Staples Retailing stocks?
There is value in the market out there. Look at lastminute.com, trading on 6x EBIT with net cash.
Very useful post, thanks. And for pointing out current backwardation in the strip prices. Perhaps this is where the opportunity is.
Great analysis. I have been accumulting shares of WEAT, SOYB, and CORN for some time. I think there is still upside left, and I don't think the risk it near as large.