Sunday, November 11, 2007

Corn, Wheat, Soybeans, now Cotton? A World of Shortages

I have written many pieces on 'shortages' [Shortages Here, Shortages There] - especially those of the agricultural type. This planet was not built for so many people moving into the consumer stage and a world of shortages is developing - while there will be ebbs and flows, I think the next 20 years will show persistent and rampant inflation, and perhaps some serious unrest over natural resources.

Even something as benign as cotton is now going to be at risk. Why? Why bother to plant something when you can plant something else for so much more money? It's a vicious cycle - when one thing is not planted, it's price goes up - then when farmers switch back to the crop whose price is going up, another shortage appears. And it continues - on and on... as the world's population grows and modernizes. Everyone talks about the very real risks in crude, but I'd argue an even more serious long term issue will arise from the most basic element - water. But I'll leave that subject to another day. I keep coming back to this agriculture trade as one of the most immune to a global slowdown - while (base) metals have some risk from a slowdown in global GDP, the forces at work behind urbanization and more progressive diets (along with more droughts, less farm land, less farmers) won't cease whether China GDP is 12% or 4%.

Keep all this in mind when the CNBC talking heads crow about CPI at 1.9% and how "everyone is over reacting to inflation." Also the story below speaks to the growing protectionism I see only growing over time across many countries as they all experience higher prices, and strains on resources.... keep in mind our wonderful politicos are still subsidizing energy companies (with crude at all time highs), and corn (at all time highs) - there is no subsidy that once given, will ever be taken back - that loses votes. And no one wants to lose votes.

Cotton Subsidies Prompt Trade Concerns
  • Growing cotton has rarely been a more risky proposition than it is now, which is precisely why cotton farmer Frank Williams is planning to sow his fields with wheat. From Williams' California fields to the Texas plains, farmers are plowing under cotton -- once the king of U.S. agriculture -- to seed crops that make more money.
  • Cotton also has lost ground for another reason that became apparent this week as the Senate debated the 2007 farm bill: The United States' cotton subsidy program is enmeshed in a global trade battle. Last month, the World Trade Organization ruled subsidies handed out to American cotton farmers broke international trade laws, opening the door for foreign countries to levy billions of dollars in penalties against the U.S.
  • The current bill on the Senate floor leaves those programs virtually intact, despite the threat of further legal complaints and concerns that international sanctions ultimately could cause layoffs and patchy unemployment.
  • For Williams, that risk, coupled with predicted water shortages, is too much to bear. "We can probably do just as well growing grain with just the same amount of water or less," said Williams, 56, who plans uproot the downy Upland cotton he grows in Firebaugh, about 160 miles southeast of San Francisco, and leave in only a lucrative, organic variety of the crop. "It's just not worth it."
  • This year, cotton acreage nationwide dropped 28 percent, hitting an 18-year low at 11.1 million acres, according to the U.S. Department of Agriculture. Acreage dropped by about 22 percent in Texas, the national leader, and by nearly 20 percent in California, which ranks seventh in domestic production. The sharpest declines were in the Southeast and Mississippi Delta regions, where drought has parched fields that grew the crop since before the Civil War.
  • In 2003, the Brazilian government took its case against American cotton to global trade court, claiming U.S. farm subsidies were driving down the worldwide price of cotton and harming Brazilian farmers. Two years later, the WTO sided with Brazil, an emerging cotton heavyweight, and forced the U.S. to eliminate a particular cotton payment.
  • "We're telling farmers to go ahead and grow conventional cotton for a market that has come under a WTO cloud," said Ken Cook, president of the Environmental Working Group, a nonprofit organization that advocates for farm policy reform. "All that does is get us into trouble with our trading partners."
  • "U.S. cotton production and U.S. acres are all down, and world cotton prices are at some of the highest levels they've been at in the last five years," said Gary Adams, chief economist with the National Cotton Council. "I question how they could make a claim as to the U.S. program having any detrimental impact on any other producers."
  • Still, the threat of billions of dollars in sanctions helped motivate Sens. Richard Lugar, R-Ind., and Frank Lautenberg, D-N.J., to write an amendment they plan to introduce on the Senate floor next week to eliminate subsidies for cotton and all other commodities and replace them with an insurance-type program that all farmers could participate in.
  • Brazilian diplomats said they weren't optimistic that would be enough to satisfy their farmers. "This farm bill will continue the practice of giving subsidies to U.S. producers," said Emerson Kloss, second secretary for agriculture and biofuels at the Brazilian Embassy in Washington. "I can tell you that will be a problem for us."
Long inflation; no matter what the government tells us.

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