03/04/2007 - 22:00

Fuel could drive rural recovery

03/04/2007 - 22:00

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It has been a long time since anyone thought seriously about investing in WA’s Wheatbelt region for the potential of a substantial future capital gain. But, big changes in the world of food and fuel could be just the trigger to start that train of thought.

Briefcase is not suggesting that you rush out and buy a quarter-acre block in Northampton or Narrogin, though there are signs that these are the sort of towns which might emerge as major beneficiaries from growing food crops to make fuel.

Ethanol and biodiesel are becoming such an important part of the global fuel mix that the consequences for world food production are fascinating – verging on the grim.

Essentially what’s happening is that cars and trucks are starting to consume so much fuel made from one-time foodstuffs, such as wheat and corn, that prices for those commodities are starting to rise sharply, which is bad news for hungry people in Africa, but good news for Western world farmers.

Before looking at precisely what’s happening in the food versus fuel debate, Briefcase thought it useful to jump a few steps ahead and pose the ‘what if’ question. How will a major new market for wheat, and other cereal crops, affect prices and, by extension, the prices for everything that makes up a country town – from property to the value of the corner store.

In effect, what we’re looking at is the flipside of what Briefcase has explored a few times over the past year.

Previous examinations of the ‘bio’ fuels question have looked at the poor performance of the companies making the stuff; but what was not considered then is that one of the reasons manufacturers of fuel are not delivering on their promise, the rising price of raw materials, is the very thing that will benefit farmers.

So, instead of fretting about the people trying to make a dollar out of biofuels, why not look at the people likely to be winners from higher food (or biofuels feedstock) prices, and that means the farmers of the world, and the small communities that serve them.

After decades of tough times, and with property prices a fraction of Australia’s capital cities, it is possible that the ‘crops for fuel’ phenomena could be the just the fillip to restore life to the forgotten corners of the country.

•••

Why, you might ask, is Briefcase suddenly so interested in the long-term implications of food versus fuel. The answer lies in a single figure – 18 per cent, because that is already the proportion of corn grown in the US for ethanol production; and it’s rising rapidly.

In fact, food versus fuel,cuts much deeper than US corn prices.

According to the latest reports on the condition of the world ‘soft commodities’ market, we are at the start of a boom to rival what we’ve seen in ‘hard commodities’ such as minerals and metals.

The numbers that jump off the page include:

• global grain supplies are at their tightest for 20 years, down to 20 per cent of annual demand, and expected to slide further as demand rises for both human consumption and from biofuel makers;

• wheat prices are close to double what they were two years ago; and

• there are signs of strengthening in the markets for cocoa and sugar.

Already there are signs emerging in the world’s financial centres that the smart money owned by rich investors, and tossed around gaily by hedge fund managers, is being diverted from hard commodities to the soft sector.

While the evidence is there to demonstrate that the market for soft commodities is changing, the real question are how far, and how fast?

Some less cautious commentators might say that this is a job for a crystal ball. Briefcase is more confident than that. It reckons that, just as we all failed to spot the start of the hard commodities boom in 2002, so too are we guilty of failing to identify that exactly the same forces which have driven nickel, copper, iron ore, oil and coal prices through the roof are at work in the soft sector.

If searching for a single word to explain this phenomena, it’s the same one on everyone’s lips – China.

The billion people busily buying stainless steel sinks and refrigerators (which need nickel copper, and iron ore) are the same people demanding food on their tables, and fuel in their cars.

For Australia, and Western Australia in particular, the advent of a soft commodity leg to the global resources boom could easily prove to be the icing on a very rich cake indeed.

•••

If there is a cloud on the horizon, and Briefcase is nothing if not a cloud spotter, it lies in the latest developments in the world of private equity, and in the apparent outbreak of irrational exuberance that always signals the end of a bull market on the stock exchange.

What caused these thoughts is the proposed $US80 billion bid by the big British bank, Barclays, for the its Dutch rival, ABN Amro.

From reports trickling in from Europe, this is being seen as the mother of all merger proposals, but pitched at a level that is causing some people to gasp.

In one well-reasoned argument, it was noted that the world’s financiers have moved into one of their routine phases of ultra-optimism, which brings with it a need to do ever-higher priced deals without really thinking about the long-term consequences, such as whether the price reflects dinkum future earnings, or if it is simply generated off a spreadsheet loaded with nonsense guestimates.

If the Barclays attempt to become one of the world’s dominant banks is not food for thought about a correction, then the stream of justifications, explanations and excuses pouring out of the private equity spin masters certainly is.

Over the past few days, Briefcase has seen a small mountain of reports that can all be described as rationalisation of the private equity phenomena sweeping the world.

But behind every carefully crafted document there is smell of rat.

Every word from the private equiteers simply seeks to validate an argument that ridiculous prices can be paid for any business because 30 per cent of the costs of that business can be stripped out in the first week of new ownership by sacking half the staff, and by loading the business to the gunwales with debt.

As to the future of that business…well that will be a problem for the next owner.

So great is the concern about this use of debt and radical business restructuring that some countries in Europe, including Germany, are considering limiting the tax deductibility of debt.

If that happens, it’s game over for the private equity (leveraged debt) game and tears before bedtime for thousands of later players.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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