A Day's Wages for a Loaf of Bread

2010 Food Crisis Means Financial Armageddon

December 18, 2009

Market Skeptics - If you read any economic, financial, or political analysis for 2010 that doesn’t mention the food shortage looming next year, throw it in the trash, as it is worthless.

There is overwhelming, undeniable evidence that the world will run out of food next year. When this happens, the resulting triple digit food inflation will lead panicking central banks around the world to dump their foreign reserves to appreciate their currencies and lower the cost of food imports, causing the collapse of the dollar, the treasury market, derivative markets, and the global financial system. The US will experience economic disintegration.

Over the last two years, the world has faced a series of unprecedented financial crises: the collapse of the housing market, the freezing of the credit markets, the failure of Wall Street brokerage firms (Bear Stearns/Lehman Brothers), the failure of Freddie Mac and Fannie Mae, the failure of AIG, Iceland’s economic collapse, the bankruptcy of the major auto manufacturers (General Motors, Ford, and Chrysler), etc… In the face of all these challenges, the demise of the dollar, derivative markets, and the modern international system of credit has been repeatedly anticipated and feared. However, all these doomsday scenarios have so far been proved false, and, despite tremendous chaos and losses, the global financial system has held together.

The 2010 Food Crisis is different. It is THE CRISIS. The one that makes all doomsday scenarios come true. The government bailouts and central bank interventions which have held the financial world during the last two years will be powerless to prevent the 2010 Food Crisis from bringing the global financial system to its knees.

So far the crisis has been driven by the slow and steady increase in defaults on mortgages and other loans. This is about to change. What will drive the financial crisis in 2010 will be panic about food supplies and the dollar’s plunging value. Things will start moving fast.

Early in 2009, the supply and demand in agricultural markets went badly out of balance. The world was experiencing a catastrophic fall in food production as a result of the financial crisis (low commodity prices and lack of credit) and adverse weather on a global scale. Meanwhile, China and other Asian exporters, in effort to preserve their economic growth, were unleashing domestic consumption long constrained by inflation fears; and demand for raw materials, especially food staples, was exploding as Chinese consumers worked their way towards American-style overconsumption, prodded on by a flood of cheap credit and easy loans from the government.

Normally, food prices should have already shot higher months ago, leading to lower food consumption and bringing the global food supply/demand situation back into balance. This never happened because the U.S. Department of Agriculture (USDA), instead of adjusting production estimates down to reflect decreased production, has been adjusting estimates upwards to match increasing demand from China. In this way, the USDA has brought supply and demand back into balance (on paper) and temporarily delayed a rise in food prices by ensuring a catastrophe in 2010.

It is absolutely key to understand that the production of agricultural goods is a fixed, once a year cycle (or twice a year in the case of double crops). The wheat, corn, soybeans and other food staples are harvested in the fall/spring, and then that is it for production. It doesn’t matter how high prices go or how desperate people get, no new supply can be brought online until the next harvest at the earliest. The supply must last until the next harvest, which is why it is critical that food is correctly priced to avoid overconsumption, otherwise food shortages will occur.

The USDA, by manufacturing the data needed to keep supply and demand in balance, has ensured that agricultural commodities are incorrectly priced, which has lead to overconsumption and has guaranteed disaster next year when supplies run out.

The world is blissful unaware that the greatest economic/financial/political crisis ever seen is a few months away...

Fastest Food Inflation Since Riots Means Milk Up 39%

December 14, 2009

Bloomberg - Falling production in commodities from rice to milk is bad news for just about everyone except investors.

Rice may surge 63 percent to $1,038 a metric ton from $638 on Philippine imports and a shortage in India, a Bloomberg survey of importers, exporters and analysts showed. The U.S. government says nonfat dry milk may jump 39 percent next year, and JPMorgan Chase & Co. forecasts a 25 percent gain for sugar. Global food costs jumped 7 percent in November, the most since February 2008, four months before reaching a record, according to the United Nations Food and Agriculture Organization.

Farm prices this year lagged behind copper futures that doubled and oil’s 57 percent increase. A recovery from the worst recession since World War II would spur food demand and boost costs for buyers of commodities including milk processor Dean Foods Co. while increasing the number of hungry people that the UN says now exceeds 1 billion.

“Agricultural commodities will be a great investment in the next three to five years,” said Oliver Kratz, who manages $10 billion as head of Global Thematic Strategy investments at Deutsche Bank AG’s DB Advisors in New York, including $3 billion in agriculture.

For those who can’t afford to pay more for food, there’s the “painful” risk of hunger, he said.

Expanding populations and higher incomes are boosting consumption in China and India. China’s milk demand is recovering after domestic supplies were tainted with melamine, a chemical used in making plastics that killed at least six babies and sickened almost 300,000 children. Droughts in India and Argentina and typhoons in the Philippines have reduced output.

Food-Price Risk

“Inventories are extremely low in a number of grains markets,” Barclays Capital said Dec. 10. “The prospect of a further bout of food-price inflation in 2010 cannot be ruled out since many of the factors that contributed to higher prices in 2007 and 2008 are still a feature.”

Stockpiles of corn and rice will drop before the 2010 harvest for the first time in three years, U.S. Department of Agriculture data show. The International Sugar Organization forecasts a second straight global supply deficit in the year through September 2010, and the USDA predicts stores of the sweetener will drop to the lowest level since 1995.

Pork, Poultry

Wholesale-pork prices in the U.S. are up 27 percent this year, heading for the first annual gain since 2004, as farmers hurt by two years of losses cut the domestic breeding herd to the smallest level since the USDA started collecting the data in 1964. Chicken output is sliding in the U.S., where the number of eggs placed into incubators each week is headed to the lowest quarterly average since 2002.

“The tendency for food prices is up, it’s not down,” Unilever Chief Executive Officer Paul Polman said Dec. 11 in a Bloomberg Television interview in Copenhagen. Rotterdam- and London-based Unilever, the largest consumer-product company after Procter & Gamble Co. in Cincinnati, makes Lipton tea, Hellmann’s mayonnaise and Bertolli sauces. “We need to be sure that we have the food supply, that we don’t waste, and that we continue to get increasingly efficient means to get that food to the consumers,” Polman said.

The risk of accelerating prices may be muted by “healthy” gains in inventories, including wheat, according to the FAO. Supplies in warehouses are enough to meet about 23 percent of global demand, compared with 19 percent two years ago, the FAO said last week. Inventories are “far more comfortable” than during last year’s crisis, the UN agency said.

More Wheat Supply

Global wheat stockpiles on May 31 are expected to jump 17 percent to an eight-year high of 190.9 million metric tons, after production last year reached a record 682 million tons, the USDA said Dec. 10.

Food costs jumped to a record in June 2008 as wheat, corn, rice, oats, soybeans, animal feed and cooking oil reached the highest prices ever. Indonesia, Argentina and India restricted trade to protect supplies, according to the UN. Shortages sparked about 60 riots from Haiti to the Philippines before the global credit crisis and recession sent prices plunging.

Global economic recovery means there is “increasing pressure on food prices to rise,” Nomura International Plc said in a report.

“Volatility in price and supply are with us for the predictable future,” according to Josette Sheeran, the executive director of the UN’s World Food Program. “Risk is the new normal when it comes to food.”

... Food output will need to rise 70 percent in the next four decades as the global population expands to 9.1 billion in 2050 from 6.8 billion, the FAO estimates. Seven nations in sub- Saharan Africa, the world’s most famine-prone region, will see per-capita income fall next year, according to the UN, fueling an increase in hunger, which the organization now estimates affects 1.02 billion people.

“The politicians had best be able to at least feed their populations or they’re going to have uprisings,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, which manages $220 billion. “One of the first things, other than clean water and a toilet, that people want when their per capita income rises is food.”

Farmers Scramble to Finish Harvest from Hell

November 13, 2009

Reuters - Brothers Steve and Ron Pierce spent most of an hour in a chilly northern Illinois field last week clearing a clog of soybean chaff from the guts of their combine, using a mix of tools and their bare hands.

"The beans get tough when they pick up moisture," Steve Pierce said.

The clog had idled the $260,000 harvester, another delay in what has been the harvest from hell across the U.S. Midwest corn and soybean belt.

The clock is ticking on farmers like the Pierce brothers all across the Midwest as they scramble to bring in the largest U.S. soybean crop on record and the second-largest corn crop before winter arrives.

Late-maturing crops and persistent rain throughout October halted fieldwork, making this the slowest start for the U.S. harvest since the 1970s. The delays -- and questions about crop quality -- have kept Chicago Board of Trade grain markets on the boil.

"Just look at the price of corn from October to now. The delayed harvest has had a bullish impact on prices," said Terry Reilly, an agricultural analyst with Citigroup.

PRICES UP

CBOT corn futures are up about 15 percent since October 1. CBOT soybeans, already supported by strong export demand from China, are up about 7 percent.

On Thursday, fresh concerns about mold in the corn crop helped bolster prices for CBOT soymeal, an alternative ingredient to corn in livestock feed rations.

The United States produces 40 percent of the global corn crop and 35 percent of all soybeans, and is the leading exporter of both commodities.

In a normal year, farmers would be nearly finished harvesting the two primary crops, which help feed people across the globe, from Europe to Asia to Africa.

By November 1, U.S. farmers had brought in only half the soybean crop and one-quarter of the corn, well below the five-year averages of 87 percent and 71 percent, respectively.

Because of the late harvest, some analysts say the true size of the U.S. corn and soybean crops might not be known until well into 2010 -- possibly even after the USDA issues its "final" production numbers in January.

"This is the latest harvest we've had in a very long time, so there are lots of questions out there that we would not have normally," said Patrick Westhoff, co-director of the Food and Agricultural Policy Research Institute at the University of Missouri.

"It's really tough, in a year like this, to get a handle on things"...