Monday, March 31, 2008

Reuters: Tensions Rise as World Faces Short Rations

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I've posted comments about the coming food crisis for many months - and quite a few just last week. I plan to continue to, as I am reading it almost nowhere in the investing "world" - outside of the social acrimony, this has the potential to be very destabilizing to many of the areas, frankly, I like to invest in, so it's a big issue. Maybe this will be my Peter Schiff issue - the one I called early that when it comes to fruition will draw me nationwide fame and accolades? Somehow I think not. But at least you'll know first...

Remember, my key terms here are "agflation" and "food protectionism" (the latter being when countries start to horde their own resources). I need to create a new blog label for all the entries on this topic as it's becoming a pervasive theme - I think I'll go with food crisis. Again the scary thing is... we are just beginning down this crisis. This could be Darwinism playing out in front of our eyes in the years ahead - only the limiting factor will be wealth. If you're poor, your done - if you're not you survive. Scary stuff.

Tensions Rise as World Faces Short Rations
  • Food prices are soaring, a wealthier Asia is demanding better food and farmers can't keep up. In short, the world faces a food crisis and in some places it's already boiling over. Around the globe, people are protesting and governments are responding with often counterproductive controls on prices and exports -- a new politics of scarcity in which ensuring food supplies is becoming a major challenge for the 21st century.
  • Plundered by severe weather in producing countries and by a boom in demand from fast-developing nations, the world's wheat stocks are at 30-year lows. Grain prices have been on the rise for five years, ending decades of cheap food.
  • World population is set to hit 9 billion by 2050, and most of the extra 2.5 billion people will live in the developing world. It is in these countries that the population is demanding dairy and meat, which require more land to produce.
  • "This is an additional setback for the world economy, at a time when we are already going through major turbulence. But the biggest drama is the impact of higher food prices on the poor," Angel Gurria, head of the Organization for Economic Cooperation and Development, or OECD, told Reuters.
  • Global food prices, based on United Nations records, rose 35 percent in the year to the end of January, markedly accelerating an upturn that began, gently at first, in 2002. Since then, prices have risen 65 percent.
  • In 2007 alone, according to the U.N. Food and Agriculture Organization's world food index, dairy prices rose nearly 80 percent and grain 42 percent.
  • "The recent rise in global food commodity prices is more than just a short-term blip," British think tank Chatham House said in January. "Society will have to decide the value to be placed on food and how ... market forces can be reconciled with domestic policy objectives."
  • After long opposition, Mexico's government is considering lifting a ban on genetically modified crops, to allow its farmers to compete with the United States, where high-yield, genetically modified corn is the norm. The European Union and parts of Africa have similar bans that could also be reconsidered.
  • A number of governments, including Egypt, Argentina, Kazakhstan, and China, have imposed restrictions to limit grain exports and keep more of their food at home. (food protectionism) This knee-jerk response to food emergencies can result in farmers producing less food and threatens to undermine years of effort to open up international trade.
  • "If one country after the other adopts a 'starve-your-neighbor' policy, then eventually you trade smaller shares of total world production of agricultural products, and that in turn makes the prices more volatile," said Joachim von Braun, director general of the International Food Policy Research Institute in Washington. (it is human nature to self preserve and take care of your own, so I believe this is the path we are destined for)
  • In Argentina, a government tax on grain led to a strike by farmers that disrupted grain exports. Vietnam and India, both major rice exporters, announced further curbs on overseas sales on Friday, sending rice higher on U.S. futures markets.
  • In the next decade, the price of corn could rise 27 percent, oilseeds such as soybeans by 23 percent and rice 9 percent, according to tentative forecasts in February by the OECD and the U.N. (I think a lot more than that)
  • Waves of discontent are already starting to be felt. Violent protests hit Cameroon and Burkina Faso in February. Protesters rallied in Indonesia recently and media reported deaths by starvation. In the Philippines, fast-food chains were urged to cut rice portions to counter a surge in prices.
  • The Chinese, whose rise began in earnest in 2001, ate just 20 kilograms (44 pounds) of meat per capita in 1985. They now eat 50 kilograms (110 pounds) a year. Each pound of beef takes about seven pounds of grain to produce, which means land that could be used to grow food for humans is being diverted to growing animal feed.
  • As the West seeks to tackle the risk of global warming, a drive towards greener fuels is compounding the world's food problems.
  • "Turning food into fuel for cars is a major mistake on many fronts." said Janet Larsen, director of research at the Earth Policy Institute, an environmental group based in Washington. "One, we're already seeing higher food prices in the American supermarket. Two, perhaps more serious from a global perspective, we're seeing higher food prices in developing countries where it's escalated as far as people rioting in the streets."
  • Similarly, palm oil is at record prices because of demand to use it for biofuel, causing pain for low income families in Indonesia and Malaysia, where it is a staple.
  • But despite the rising criticism of biofuels, the U.S. corn-fed ethanol industry enjoys wide political support because it boosts farmers, who suffered years of low prices, and that support is likely to continue. [Mar 27: Farm Lobby Beats Back Assault on Subsidies]
  • John Bruton, the European Union's Ambassador to the United States, predicts that the world faces 10 to 15 years of steep rises in food costs. And it is the poor in Africa and, increasingly, South East Asia, who will be most vulnerable. (but they don't buy stocks, so nothing to worry about)
  • "It's actually the greatest time in the world to be a farmer around the world," Babcock said. "We are going to see fairly substantial increases in production because farmers have never had such a large incentive to increase production."
  • But others note that expensive seeds and fertilizers are out of reach of farmers in poor countries.
  • Around the beginning of the 19th Century, British political economist Thomas Malthus said population had the potential to grow much faster than food supply, a prediction that efficient farming consistently proved wrong. Now, at the beginning of the 21st century, some are revisiting his predictions.
Posts just from last week on the subject
  1. Mar 24: UN Agency Appeals for $500M to Avoid Food Aid Cuts
  2. Mar 25: This Day in Agriculture
  3. Mar 26: US Government's Humanitarian Relief Agency Cutting Back
  4. Mar 27: UN Report: Asia Faces Jump in Food Costs
  5. Mar 28: This Day in Food Crisis - Rising Rice Prices Spark Concern Across Asia
These stories and my downbeat long term outlook on this crisis are the bedrock for the thesis to continue to invest in the entire agriculture theme, specifically the fertilizers and (once hedge funds are done playing with it) back into the Powershares DB Agriculture Fund (DBA).

So at this point it appears the only ones stressing this are Cramer, me, and Don Coxe [Jan 18: One Lonely Voice Agrees with Me on Food Inflation]. January was about the same time the very first inklings of this problem finally started hitting the press [Jan 21: Food... Food... Food], but it still appears to be largely ignored. The warning signs of this potential uptick in agflation is the main reason I have been watching the main US food producers (Smithfield Foods (SFD), Tyson Foods (TSN), Pilgrims Pride (PPC), and Sanderson Farms (SAFM)) as far back as last summer at the beginning of the blog. Remember, my next prediction is a future shortage of beef.... that might take 9-18 months to play out... but as it becomes more expensive to raise cattle, they will get slaughtered in larger numbers *now* causing a shorter term glut and suppressed prices, but potentially leading to a longer term shortage as the economics simply do not work without a meaningful increase in prices (which US consumers will at some point balk at due to their stagnant real (inflation adjusted) wages).

Inflation - it is truly the most sinister of taxes...

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