- Published on Friday, 06 January 2012 08:00
- Written by Sara Nunnally, Editor, Inside Investing Daily
- Hits: 2012
There are some odd disruptions in the nation's agriculture industry. The bottom line... it's getting more expensive to eat.
As many of you know, I bought a farm in Wisconsin a little over a year ago. It's not your traditional farm with acres of corn to be harvested. Rather, we wanted a place for our myriad of dogs and five horses.
Now, we don't grow our own hay, but we're lucky enough to get hay from a friend for a good price. The going rate around here is about $3.25 a bale for first cutting.
But prices are much more expensive in California. Folks are paying between $16 and $20 a bale!
At that rate, it might be possible to ship hay from Wisconsin to California at a profit...
Just to give you an idea of how much a difference in price that is, we go through two bales a day to feed our five horses, plus a little extra. Here, that's about $7.50 a day. In California, we might be paying $40 a day! The horse farms are taking a huge hit, but the dairy and cattle farmers have it much worse...
Here's what's so confounding to me, and makes the prices in California much higher than they have to be.
It's actually cheaper to ship hay to China than it is to Central California. According to Bloomberg:
Ocean freight costs about $30 a short ton (0.91 metric tons) to send hay to Asia from Los Angeles, compared with $53 to truck the crop from southern California to the center of the state, according to Greg Braun, the president of Border Valley Trading LLC, a Brawley, California-based exporter. Prices for alfalfa, the most common variety, surged 62 percent in a year and reached a record $186 a ton in July, government data show.
One of the reasons behind this strange price turnover is ships bringing goods from Asia aren't getting enough cargo to fill their containers for the trip back. Hay is filling those gaps... and it's creating a bit of a shortage of hay for U.S. dairy farmers, who are already paying 63% more for corn compared to last year.
Hay prices are up as much as 45% from last year.
And that means farmers are spending 65% of their milk production profits on feed, says Tom Barcellos, a dairy farmer in Porterville, Calif.
Beef cattle farmers are also feeling the pinch. About half of what cattle eat in their lifetime is hay. The rest comes from corn and wheat and other grains.
Add to this shipping issue a major drought in Texas, and you've got even more of a shortage.
In fact, while the Midwest may get three cuttings a year from hay crops, Oklahoma and Texas will walk away with just one cutting. And Texas is the biggest grower in the U.S.
The Washington Post reports, "Alfalfa farmers across New Mexico have been turning away customers since early fall. Arizona is about out, and a number of dairies in southeastern New Mexico have had to go to the Dakotas to get orders filled."
In other words, the drought and shipping-made shortage have turned hay into gold.
So how can you turn that "gold" into profits?
Well, you can go to the source, and become a hay farmer. It's not a bad idea when you look at the numbers. Acreage in the Midwest is getting more valuable every day. Find a place with a stable water source, and you're sitting on money.
We've been telling you to buy farmland as an unconventional investment for a while now. In fact, Aaron Gentzler, editor of Unconventional Wealth, and our editorial director here at Inside Investing Daily, has been hitting this theme pretty hard.
His article on Wednesday told you that a recent recommendation was up 16% based on an agricultural backlash against ethanol.
I know not everyone wants to spend 12 hours a day out in the fields. And hay isn't traded on any commodities or futures exchange.
But cattle are. And so is milk. The dairy industry, after tripling incomes in 2010, will likely report a drop of 13% for 2011. If you trade futures, this might be a way to capture some gains from higher hay prices, in an indirect way.
You could also short companies that sell meat products, such as Hormel (HRL:NYSE) or Tyson (TSN:NYSE), or dairy products, such as Dean Foods (DF:NYSE). You should remember, though, that these stocks are also an indirect play on hay -- even more so because they deal with "finished" products being brought to market.
There is another interesting thing, though. Take a look at this two-year chart:
This is BRF-Brasil Foods S.A. (BRFS:NYSE). It's one of the largest milk and foodstuffs producers in Latin America, and has a big international reach, with its products sold in 110 countries. The company has increased its meat production every year since 2001, and in the third quarter of 2011, BRFS reported an 18.5% increase in meat sales and an 8.2% increase in dairy products in Brazil. Exports climbed 6% in the quarter.
It'll be a few weeks before we get full-year figures for 2011, but this international company might be a way to play the rising costs of meat and dairy without the knee-capping prices of hay.
Editor's Note:. Did you know that milk was the hottest commodity of 2011? Not gold... not silver... but milk. Here's a link to some other alternative assets that have caught investors by surprise. Follow this link for details.
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