The Rude Awakening
Wall Street, New York
Thursday, December 9, 2005 ------------------------- - Riding the bull market in all corners of the globe -
how you can grab a horn for yourself,
- What does the rise in natural gas price have to do
with China's protein intake? And,
- The breakdown of protein-powered profits and much
much more…
-------------------------
Eric Fry, reporting from beneath a foot of snow in Upper
Westchester county… Dan Denning, editor of Strategic Investments, has a theory
that goes something like this: Soaring natural gas prices
are not just an energy problem, they are a food-supply
problem…and an opportunity. Since natural gas represents at least two thirds of the
cost of producing nitrogen-based fertilizers; and since the
price of natural gas has soared to a new all-time high near
$15.00 per million Btus; fertilizer is on the verge of
becoming much more expensive. As it does, farmers may be
inclined to use less of it, thereby reducing crop yields
from32 products like soybeans. If, therefore, soybean
yields fall, prices should rise. Mix in some off-the-charts
soybean demand from China and you've got the makings of a
bull market in soybeans and soy meal. The theory may not hold up in the real world, but it sure
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By Dan Denning "Ninety-five percent of the nitrogenous fertilizers used in
America are made out of natural gas," observes Jim Kunstler
in his book, The Long Emergency, "and so it has become
indispensable to U.S. agriculture." What happens to global agricultural production, therefore,
when natural gas soars to an all-time high, like it did
yesterday? Let's query the experts… "A world of 6.4 billion people, on the way to 9 billion or
more, needs more protein than the planet's croplands can
generate from biologically provided nitrogen. Our species
has become as physically dependent on industrially produced
nitrogen fertilizer as it is on soil, sunshine, and water,"
writes Stan Cox, a scientist at the Land Institute in
Salina, Kansas. "Vaclav Smil, distinguished professor at the University of
Manitoba and author of the 2004 book Enriching the Earth:
Fritz Harber, Carl Bosch and the Transformation of World
Food Production, has demonstrated the global food system's
startling degree of dependence in nitrogen fertilization.
Using simple math, the kind you can do in your head if
there's no calculator handy-Smil showed that 40 percent of
the protein in human bodies, planet-wide, would not exist
without the application of synthetic nitrogen to crops
during most of the 20th century. "That means that without the use of industrially produced
nitrogen fertilizer, about 2.5 billion people out of
today's world population of 6.2 billion simply could never
have existed." Simply stated, therefore, no cheap natural gas, no cheap
fertilizer, less food. Or to put it another way, natural
gas shortages in America could lead to soybean shortages in
China, which could lead to rising soybean prices. For some background, let's talk about protein. "Proteins are made up of smaller units called amino acids,"
the Vegetarian Society explains. "There are about 20
different amino acids, eight of which must be present in
the diet. These are the essential amino acids. Unlike
animal proteins, plant proteins may not contain all the
essential amino acids in the necessary proportions. "Protein quality is usually defined according to the amino
acid pattern of egg protein, which is regarded as the
ideal," the vegetarians continue. "As such, it is not
surprising that animal proteins, such as meat, milk and
cheese tend to be of a higher protein quality than plant
proteins. This is why plant proteins are sometimes referred
to as low quality proteins. Many plant proteins are low in
one of the essential amino acids. For instance, grains tend
to be short of lysine whilst pulses are short of
methionine." It's clear human beings need protein. We can get it from
plants or we can get in from animals. Most of us get it
from both. China, lately, has been getting an awful lot of protein
from soybeans, many of which are grown in North and South
America. You might say, as Jim Kunstler implies, that
China's rise, strictly in terms of increased protein
consumption, would not have been possible without the oil
boom of the 20th century. No natural gas, no soybeans. No
soybeans, no extra protein boost for factory workers
working longer hours. 
China's soybean imports for the first 9 months of 2004/2005
(October-June) have jumped more than 8%. "Strong import
demand for soybeans is attributed to rising use of soybean
meal as a protein source for swine, poultry, and
aquaculture production," The USDA reports. "Strong protein
meal demand is also reflected in China's fish meal
imports." Obviously, this is good news for soybean producers and
exporters, the biggest of whom are in the United States and
Latin America. Chinese demand, by itself, provides very
solid support for a soybean bull market, even before one
considers the supply-limiting impact of rising natural gas
prices. That's one of the main reasons I recommended
soybean-processor, Bunge Limited (NYSE: BG) in the pages of
Strategic investment in August 2004. I still like this
stock, even though it has gained about 35% since my
original recommendation. Following a similar line of thinking, Steve Belmont, Senior
Market Strategist for the Rutsen Meier Belmont
Group in Chicago, also suggests a bullish position in the
soy market, specifically soy meal. "Asian affluence,
bullish seasonal patterns and low prices mean it's time to
take a look at the long side of soybean meal," Belmont
suggests. "Livestock and poultry operations the world over depend
heavily on soybean meal as a key source of feed, especially
since the threat of bovine spongiform encephalopathy (Mad
Cow Disease) has sharply curtailed the feeding of rendered
parts (ground up offal). Not surprisingly, Chinese
consumption of soybean meal has been rising rapidly. Soybean production is dependent upon copious amounts of
nitrogen fertilizer. Nitrogen fertilizer is made from
natural gas - which as we write this, is trading at $14.75
per million BTU's or roughly 3 times the price fifteen
months ago. "Cheap nitrogen fertilizer fuels the big yields that have
made soybeans and by extension, soybean meal, cheap. Remove
the nitrogen fertilizer or make it prohibitively expensive
for farmers and soy meal supply could be negatively-
affected. "Soy meal's portion of protein feed demand has increased
markedly since the early 1990s, rising from less than half
of global demand in the 1993/1994 growing season to well
over two-thirds today. We expect solid demand from the
growing nations of Asia and the potential for lower soybean
yields due to expensive nitrogen fertilizer to provide
soybean meal with long-term support. "But that's not the only reason to like soy meal…Similar
to soybeans and corn, soybean meal has a seasonal tendency
to make important lows in the winter and rally during
spring and early summer. Soybean meal is unloved and
oversold. Therefore, we believe it may be a good time to
pick up some call options." The world needs protein as much as it needs oil…Protein
is about to become much more expensive. [Joel's Note: Investment opportunities don't always come
from dusty earnings reports and company press releases -
they are often found in the kind of macro analysis that Dan
specializes in. Open positions in Dan's Strategic
Investment portfolio are up an average of 32.79%, taking
advantage of plays from Malaysia, Singapore, Canada and
Australia… If you don't have the time to jet set the world in search
of raging bull markets, check out Dan's investment letter,
Strategic Investment, and let him do the grunt work for
you. There are bulls waiting to be ridden…Find out what
else the Bull Hunter has to say by checking out this
special report here: Global gains…from your armchair
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Don't miss it. http://www.isecureonline.com/reports/GRR/EGRRFC39/ ------------------------- [Joel's Note: If you do not receive your weekend edition
sometime in the next two days you may assume that your
junior editor is occupying a hospital bed after a failed
attempt at snowboarding this afternoon. Australian's and
snow usually go together like Canadians and
surfing…poorly at best. Should we manage to make it off the mountain alive, and in
relatively sound health, you may expect your Weekend Rude
Edition in your email box, complete with all the week's
Rude reading, helpful links and special offers, in the next
two days. You can send any comments on issues from the week past, or
some words of advice on how to avoid serious injury on the
slopes, to your antipodean editor at: aussiejoel@the-rude-awakening.com And don't forget to check out your Rude website for all the
hottest stocks, best offers and all things Rude related at
www.the-rude-awakening.com Cheers, jOEL | 
