Hedge-fund managers and other institutional commodities traders are usually pretty skilled at making broad economic forecasts. But there's one variable they just can't seem to predict -- the weather.
Mother Nature often creates havoc on agricultural production, which can be good or bad, depending on your view. For the most part, this is an asymmetrical factor because big disruptions from bad weather carry much greater impact than getting a few extra bushels from good weather.
During the past year, searing heat wilted the Russian wheat harvest, torrential rains flooded Australia's fruits and vegetables crops, and a freak hailstorm destroyed the equivalent of 50,000 bags of South American coffee beans.
This time, drought is the culprit. Brazil and Argentina have suffered through a brutal dry spell that could erase about 7 million tons of soybean production, cutting the harvest from 127 million tons down to 120 million tons. These countries are the top two growers after the United States, so the damage (along with rising consumption) could lead to a sizeable drop in global supplies.
In fact, global soybean stockpiles are projected to fall by as much as 20% later this season from the same point in 2010 -- the steepest decline in 16 years.
And in keeping with my mission as Chief Investment Strategist of my newsletter, Scarcity & Real Wealth, I see real opportunity for investors to profit from this shortage. Here's why...
Roughly two-thirds of the world's soybean crop is used as the base for livestock feed. Another 16% is needed to make vegetable oil. It's also used in food and biofuels.
Clearly, there isn't quite enough to go around right now.
As with many other commodities, China just can't meet its soybean demand and is importing vast quantities. The country has a pork-heavy diet, and farmers are expected to bring 676 million pigs to market this year -- it takes mountains of soybeans to feed that many pigs.
Simply put, a growing (and increasingly richer) population means more pork and beef consumption. That takes more livestock. More livestock means more animal feed. And more animal feed requires more soybeans.
In fact, China's soybean consumption has tripled during the past 10 years. The USDA believes China's soybean imports will need to climb another 62% within the next decade to keep pace.