KEVIN KERR: AG boom is still on

MINNEAPOLIS (MarketWatch) -- It seems lately that consumers get hit at every turn. Rising gas prices, health-care and living expenses, job losses and soaring costs of food, it's a perfect economic storm.

As oil flirts with $120 a barrel and corn shoots up over $6 a bushel, it's clear that demand is real for both commodities, and yet there's also a bit of froth in those prices as well. How much of it is speculation?

Many claim it is caused by a weak dollar and speculation -- that is naïve. While the U.S. Federal Reserve policy of "print until the ink runs out" is certainly playing a big role in these price increases, it's not the only culprit.
With the implosion of Bear Stearns Cos., investors realize that anything is possible and the Fed can only do so much to help once panic sets in. For consumers, the reality is that prices are going up and it's important to lock in certain commodities.

Take for instance the rationing of rice sales by Costco Wholesale Corp. (. Is this the speculators buying up stocks of rice? Hardly. I shop at Costco but have never bought a bag of rice, and now I probably couldn't. Small restaurants are buying up all they can find because prices are simply out of control. It's real demand by real people.

Corn concern
Many traders, especially equity traders, regard the agriculture market as another bubble and believe that it will all implode soon. It's happened before and it will happen again, they say. Well maybe, but this is not your grandfather's agriculture market, and surging global demand and exponential increases in world population have changed everything. Traders need to realize that the matrix has been reset and that grains are especially vulnerable.

Corn, wheat, soybeans, cotton, and rice are all in demand and yet supplies are at risk, and threats include weather, financing, fuel costs, protectionism and poor farming practices.

I recently met with a group of corn and soybean farmers as well as feedlot operators, and the conversation was positive but also fearful. The overwhelming sense of farmers here is that the average urbanite is unfazed by what farmers are going through. After all, costs for the average farmer are up more than 100%. Profit margins have narrowed or become non-existent and fuel costs, especially diesel, have been a killer.

Farmers feel that the average consumer blames them and think the farmer is getting rich of these food costs; when in reality there are no yachts in Waseca, Minn., only farmers trying to grow their crops and take care of their families.
The increase in input costs has been as big a burden on farmers as it has on the rest of us. The average person living in the city is relatively unconcerned as long as the water is running, they have a job, the ATM works and there is food on the shelf. Most urbanites are likely more concerned with who got the boot on "American Idol" then the possible approaching food disaster.

One thing is for sure, agriculture markets are not like other commodities, and demand and pent-up demand are real. This year, the corn crop needs to be a bumper crop or there will be a shortfall. It's likely that we will have a low yield crop, and $7.50 corn is a real possibility.
Corn-based ethanol remains the law of the land, and like it or not, nothing is going to change in an election year. All bets are off until we know who will be president.

Price adjustments
I have been hearing for three years that corn price couldn't possibly go any higher. I heard that argument at $2.50, $3, $4.50 and $5. Now here at $6.20, the same bearish absolutes are being spouted from all over the place and my indicators tell me that it's simply not true.

With corn and other crops at these levels, the agriculture stocks are doing great. Deere Co. (SYT 58.76, -0.42, -0.7%) have done well and have a lot more upside potential.

Farmers tell me that tractors and farm equipment are going for a premium, and if you want a new tractor from Deere, sales are so brisk that you will be waiting until spring or summer of 2009.

Meanwhile, Monsanto and Syngenta are developing seed sprays that help seed to endure cold, wet conditions and only germinate once ground temperatures reach optimal levels -- a huge advance in seed technology. And as farmers tell me here in Minnesota, it used to cost about $22 an acre to seed now it's about $75, so farmers are reluctant to plant in cold wet conditions like they have now in the Midwest.
The new reality for food costs is here, and for investors the opportunities are plentiful not only in the future markets, but in the equities that serve agriculture as well.