Monday, January 21, 2008

Food... Food... Food.

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We talk about this nearly every week [Only Lonely Voice Agrees with Me on Food Inflation] but it is definitely finally starting to hit the mainstream news - or at least those "darn liberals" at the NYTimes. :) As I keep saying, I think food the next 5 years, will be what crude oil was the past 5. And it is not exactly a product one can cut back on when times get tough - hence my commentary that the potential for social strife if this continues is far far greater than anything crude oil could produce. (Remember those 1 billion rural Chinese)

Want to see something holding up better than gold? Check out Powershares DB Agricultural Fund (DBA) - a product that tracks futures of corn, soybeans, wheat, and sugar. I looked at this name briefly in the September entry 'This MOO for You? An ETF to play the Global Agricultural Boom'

Its only ostensible competitor, the Powershares DB Agriculture Fund (DBA), takes an entirely different approach to the space. DBA invests in agricultural futures contracts, while MOO invests in agriculture-related companies. The two are driven by completely different dynamics, and have performed very differently: DBA is up 9.67% year-to-date, while the index underlying MOO is up 32.40%.

I considered adding this product to the fund at the time, but thought it would probably be a slowly appreciating asset. How wrong I was. Price when I wrote the entry in early Sept? $27. Price now? $36.50. +35%. Food indeed is a 'store of value' - even better than gold (with more use! Can't eat gold).

Now when you see the futures for actual food, and what farmers are getting for food, and try to reconcile this with the 30% drop in fertilizer stocks you must ask - why the divergence? Nothing more than pure panic and "shooting the generals" in the fertilizer stocks. It's all interconnected - prices for food go up, farmers have more money, farmer can spend more on products whether it be fertilizer or equipment. However, the market is in panic mode and is throwing everything out.



We've seen how great gold is running as people flee to safe havens, inflation hedges, and hedge against the world central banks printing money out the wazoo. But look at whom is out performing...



Back to the NY Times piece
  • Rising prices for cooking oil are forcing residents of Asia’s largest slum, in Mumbai, India, to ration every drop. Bakeries in the United States are fretting over higher shortening costs. And here in Malaysia, brand-new factories built to convert vegetable oil into diesel sit idle, their owners unable to afford the raw material.
  • This is the other oil shock. From India to Indiana, shortages and soaring prices for palm oil, soybean oil and many other types of vegetable oils are the latest, most striking example of a developing global problem: costly food.
  • The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter.
  • In some poor countries, desperation is taking hold. Just in the last week, protests have erupted in Pakistan over wheat shortages, and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home, and China has put price controls on cooking oil, grain, meat, milk and eggs.
  • According to the F.A.O., food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen.
  • The urban poor, the rural landless and small and marginal farmers stand to lose,” said He Changchui, the agency’s chief representative for Asia and the Pacific.
  • A growing middle class in the developing world is demanding more protein, from pork and hamburgers to chicken and ice cream. And all this is happening even as global climate change may be starting to make it harder to grow food in some of the places best equipped to do so, like Australia.
  • In the last few years, world demand for crops and meat has been rising sharply. It remains an open question how and when the supply will catch up. For the foreseeable future, that probably means higher prices at the grocery store and fatter paychecks for farmers of major crops like corn, wheat and soybeans.
  • There may be worse inflation to come. Food experts say steep increases in commodity prices have not fully made their way to street stalls in the developing world or supermarkets in the West.
  • Governments in many poor countries have tried to respond by stepping up food subsidies, imposing or tightening price controls, restricting exports and cutting food import duties. These temporary measures are already breaking down. Across Southeast Asia, for example, families have been hoarding palm oil. Smugglers have been bidding up prices as they move the oil from more subsidized markets, like Malaysia’s, to less subsidized markets, like Singapore’s.
  • No category of food prices has risen as quickly this winter as so-called edible oils — with sometimes tragic results. When a Carrefour store in Chongqing, China, announced a limited-time cooking oil promotion in November, a stampede of would-be buyers left 3 people dead and 31 injured.
  • Cooking oil may seem a trifling expense in the West. But in the developing world, cooking oil is an important source of calories and represents one of the biggest cash outlays for poor families, which grow much of their own food but have to buy oil in which to cook it.
  • American farmers have been planting more corn and less soy because demand for corn-based ethanol has pushed up corn prices. American soybean acreage plunged 19 percent last year, producing a drop in soybean oil output and inventories.
  • Chinese farmers also cut back soybean acreage last year, as urban sprawl covered prime farmland and the Chinese government provided more incentives for grain.
  • Concerns about nutrition used to hurt palm oil sales, but they are now starting to help. The oil was long regarded in the West as unhealthy, but it has become an attractive option to replace the chemically altered fats known as trans fats, which have lately come to be seen as the least healthy of all fats. “Four years ago, when this whole no-trans issue started, we processed no palm here," said Mark Weyland, a United States product manager for Loders Croklaan, a Dutch company that supplies palm oil. “Now it’s our biggest seller.”
Well I learned a new thing in this article - even the push away from trans fat is having an effect adding to this crisis. And it is a crisis. Even though you never hear about it in the mainstream financial press - as we have angst over stupid financial decisions by our financial innovators or if Ben should cut 25 basis or 50 basis or heck 75. Meanwhile a potential catastrophe is developing in the background... but hey at least we won over the Iowa farmers vote with more subsidies for corn ethanol. I keep saying it... this initiative is one of the biggest and far reaching boondoggles we will ever see. With some of the most far reaching effects and unintended consequences. And I am not sure how it gets reversed... which is the troubling part of it all.

Maybe CNBC will start talking about it by this summer.

No position but considering DBA on a pullback

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