In the 1974-75 hockey season, 24-year old Guy Lafleur had his breakthough season in the NHL, scoring 53 goals for les glorieux, the Montreal Canadiens. To say he was popular would be a ridiculous understatement. The best player in the game, in the world, Lafleur was more than human. He was a god. And in 1974, a god’s salary was $100,000.
This summer, 24-year old Mason Raymond, a promising forward who scored 23 goals for the Vancouver Canucks last year, signed a two season contract extension. Although over the years, your correspondent has switched his allegiance to the Canucks, I am not so partisan as to declare Raymond a deity. Yet in the 2010-11 season, Raymond will earn $2.5 million, or 25 times Lafleur’s 1974 salary.
Figure 1: In 1974, Lafleur Earned $100,000
In 1974, the year that the Knight Street bridge was completed (at a total cost of $15 million, including approaches), the average price of a detached house in the city of Vancouver was $40,000. In 2010, the year that the Vancouver Art Gallery announced plans for a new downtown home (at an estimated cost of $350 million), the average price of a detached house in the city of Vancouver is $1 million, an increase of 25 times from 1974.
It all seems proportional, does it not? Yet, I have a final comparison. In 1974, a bushel of Kansas wheat, weighing about 60 pounds and providing the main raw material for about 90 loaves of bread, changed hands regularly at $5. On the first of July, 2010, thirty-six years later, the Kansas City Board of Trade recorded the cash price of a bushel of wheat at $4.91.
It is hard to believe, but a bushel of wheat, even after a rather healthy price spike in the summer of 2010 is within 40% of the nominal price from January 1974. On either a relative or absolute basis, these prices do not make sense to me. Wheat has to rise.
Figure 2: Kansas City Wheat Contract Price (Per Bushel)
|
Year |
Jan. Opening Price ($US) |
Dec. Closing Price ($US) |
|
1970 |
$1.38 |
$1.54 |
|
1974 |
$5.26 |
$4.28 |
|
1980 |
$4.50 |
$4.95 |
|
1990 |
$4.07 |
$2.89 |
|
2000 |
$2.77 |
$3.59 |
|
2010 |
$5.47 |
$7.20 (Aug 10) |
Source: KCBOT
While this post is generally a bull call on wheat, it also is worth considering the likelihood that hockey player salaries (which more generally might be a proxy for discretionary consumer spending in North America) may need to fall. To return to the Lafleur vs Raymond example for a moment, if we priced Lafleur’s 1974 salary in terms of bushels of wheat, he earned 20,000 bushels per year. The relatively unheralded Raymond earns 500,000 bushels of wheat in 2010, or the equivalent of the total harvest from 10,000 acres of prime US farmland. No doubt there have been kings who earned less.
Figure 3: Mason Raymond— 23 Goals, 500,000 bushels per year
The Case for Wheat
Sometimes investment ideas are very complicated. Sometimes not so. The basic thesis that wheat and other grain prices have to rise (both in relative terms and in nominal terms) is one of those not so complicated ideas. Money supply has increased approximately 10x from 1974, moving a lot of other prices with it. Wheat, over that period is up only 40%. Something’s got to give.
Figure 4: US Money Supply – Upwards and Onwards
In terms of supply and demand, there are certain factors which might trigger an upward mean-reversion for wheat prices. If global warming might change weather patterns unpredictably, then probability suggests that some of those changes might have negative supply effects on field crop production in breadbasket regions like Kansas, Saskatchewan or the Ukraine. Uncertain production equals higher prices.
Likewise, wheat’s demand equation may change somewhat going forward. I think the development of a middle class in the old “third world” may include a much broader demand for items such as hamburgers and baguettes. Particularly as enriched diets include more meat protein, the demand for feed grains should grow rapidly, supporting higher grain prices.
Other factors that may have held down wheat prices, such as government farm subsidies, and liberal trade in agricultural products, may not always continue to hold sway. Russia's export ban on grain this summer due to drought conditions reminds us that trade restrictions and geopolitics have often interfered with normal market economics in the grain business, sometimes resulting in price rises.
How to Capitalize
There are a few exchange-traded funds that provide direct grains exposure. The i-Path UBS Grains Sub-Index ETF is one (NYSE:JJG). A Canadian grains ETF offered by Horizons is closing down, possibly a bullish indicator.
Another option is to own grain terminal operations like Viterra (TSX:VT) or Archer Daniels Midland (NYSE:ADM). The advantage of the terminal operators is that their businesses are positively leveraged to grain commodity prices. I discussed this issue at length a few years ago with a very old (and lonely) Merrill Lynch grains analyst. With reference to the 1970’s, he noted that when grain prices rose, producers preferred to store more inventory and elevators filled up. In such an environment, terminal operators gain both from rising inventory values and rising throughput charges on reduced storage capacity.
Figure 5: Archer Daniels Midland Share Price History
It is true that we have witnessed a great many lean years in the grains business. Yet from a valuation point of view, it seems unlikely that wheat can move any way but up, particularly relative to some of the rocketing asset classes of the past decades. For investors in grains, seven fat years may be on their way.
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