Food Crisis May Threaten Your Portfolio
by
Sean Brodrick
The United Nations' Food and Agriculture Organization
(FAO) said that world cereal production may jump a
record 2.6% this year as farmers boost plantings.
In
other words, supply is fine.
Except ... wait a minute ... what's that other report I
read last month? The one that said world cereal
demand is growing at 3% a year.
Today, I'll explain why this seemingly insignificant gap
between supply and demand scares the bejeezus out of me,
and how you can protect yourself.
The gap is only four-tenths of a percent. What could
possibly go wrong, you ask?
Well, for starters ...
The World's Food Supplies Have Collapsed ...
Worldwide stockpiles of cereals (wheat, corn, etc.) are
expected to fall to a 25-year-low of 405 million tonnes
in 2008. That's down 21 million tonnes, or 5%, from
their already reduced level last year.
U.S. wheat stockpiles are at a 62-year low, even though
farmers are planting from fence-to-fence. And with the
U.S. dollar falling fast, foreign buyers are lining up
to scoop up as much of Uncle Sam's grain as they can
carry away. Wheat recently soared to the highest price
in 28 years.
Meanwhile rice, a staple food for three billion people,
is becoming increasingly scarce. World stores of rice
have shrunk from 130 million tons eight years ago to
today's stockpile of 72 million tons — enough for only
17% of annual global demand. Result — the price of rice
is up 70% in the past year.
And as for corn — well, more and more of that is used
for ethanol. The price of corn is up over 70% in the
past year and has more than doubled in the past two
years.
So
to summarize — stockpiles are at record lows. The supply
on hand can be measured in days! And growth in
production can't keep up with growth demand.
Now, let me ask you this question ...
What If Something Goes Wrong?
What if the increasingly freaky weather the world has
been enduring causes droughts on one side of the world
and floods on the other? What if there's blight or some
other major crop failure?
You can see why I believe we are one bad harvest
away from a serious global food crisis!
People will put up with a lot, but they won't put up
with going hungry ... not when they have guns. In fact,
blood is already being spilled over food ...
 Egypt
— food riots! In the time of Julius Caesar and
Cleopatra, Egypt was the bread basket of the
Mediterranean. Boy, how times have changed. Food
inflation is so bad in Egypt that people are rioting
over sky-high prices. The government-owned Egyptian
Gazette newspaper says that seven people have died
since the beginning of the year in brawls in bread
lines.
And it's not just Egypt. The World Bank says 33
countries from Mexico to Yemen have already experienced
unrest because of spiraling food costs, and 37 countries
may face more social upheavals if food prices continue
to rise.
China
says "no" to hungry Filipinos. The Philippine
government recently asked China to provide 200,000
metric tons of milling wheat, equivalent to about 10% of
annual consumption. Beijing declined, leaving the
Philippines scrambling to find more wheat.
Trouble
in Uncle Sam's breadbasket. Cold weather is
chilling the fields in the Midwest, and too much rain is
sending rivers near their flood levels. Farmers who try
to till or plant in soils that are too wet will risk
compacting their crops and other problems that result in
lower yields. On my blog last week, I published
a note from a farmer who complained that he STILL
can't get a crop in the ground:
"In 2006, we finished planting my crops on April 23.
In 2007, we were done on April 18. I don't want to
be the first guy planting, but I don't like being
third, either. Early (timely) planting won't happen
this year if the weather forecast for the coming
weekend proves accurate. Soils are completely
saturated to the point of that erosion has already
occurred and will get worse with additional heavy
rains, and are COLD. I can't tell you how cold
because I've not even checked temps yet. If planting
is not done by May 1, there will be some nervous
farmers in LaSalle County and I'll be one of them."
Now sure, that's a local story, but it's not the only
one. In fact, just this week, the USDA reported that
corn and rice plantings are being delayed by excessive
rain. A hungry world is depending on a good U.S. crop —
if we don't get one, those 37 countries the World Bank
is talking about could erupt in food riots.
How We Got Here ...
Global food prices surged 57% last month from a year
earlier, according to the FAO. There are a number of
forces driving that price explosion ...
Weather: Part of it is weather. Too
much rain in the U.S. in 2007, flooding in Indonesia and
Bangladesh and drought in Canada and Australia curbed
world stockpiles. As a result, the poorest countries may
spend 56% more on grains this year than a year ago.
Global warming will affect crop yields, and mostly not
in a good way.
Food or fuel? Ethanol production is on
course to account for some 30% of the U.S. corn crop by
2010. The International Monetary Fund estimates that
corn ethanol production in the U.S. fueled at least half
the rise in world corn demand in each of the past three
years. As corn prices go up, animal feed goes up, and
prices of other crops rise as farmers switch their
fields over to government-supported corn.
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As the economic boom in China raises
the standard of living, 1.3 billion people have
drastically increased their consumption of meat. |
Rising Demand: World Bank President
Robert Zoellick recently told a conference: "As the
Indian commerce minister said to me, going from one meal
a day to two meals a day for 300 million people
increases demand a lot."
And he's only talking about the poorest of the poor.
There are 1.1 billion people in India, and they're all
improving their diets and eating more Western foods.
Meanwhile, 1.3 billion people in China are eating a lot
better and eating a lot more meat — and it takes 7
pounds of grain to make one pound of meat! It's no
wonder why food prices in China jumped 28% in February.
Political pressures: China isn't the
only large, populous country that is curbing exports to
ease prices — and internal unrest — at home.
-
Vietnam, one of the world's three biggest rice
exporters, will reduce shipments by a million tons
this year to 3.5 million tons to ensure supplies
domestically and curb its highest inflation in more
than a decade (20% year over year — ouch!). The
government also said it's considering a tax on rice
exports. Egypt, Cambodia and Guyana have all also
put export bans on rice in place.
-
Kazakhstan just suspended its wheat exports to tame
domestic inflation. Kazakhstan is the breadbasket of
Central Asia, and the only state in the region that
exports grain, about 50% of the 21 million tons it
says it harvested last year.
-
Ukraine stopped wheat exports this month and reduced
barley exports.
-
Argentina — the world's fourth largest wheat
exporter — has effectively pushed back the date that
new shipments can leave the country.
-
India has already put restrictions on its rice
imports. And its wheat output, second only to that
of China, may drop 1 million tons to 74.81 million
tons in the March-April harvest because of a drop in
acreage.
Coming Next — Hoarding!
What's more, India may import up to two million tons to
build stockpiles — up from imports of 1.8 million tons
in 2007 — with an eye on creating a strategic reserve of
five million tons of wheat and rice to meet emergencies.
Pakistan is also talking about doubling its wheat
imports this year.
If
other countries start building strategic reserves, it
could send prices skyrocketing. And that raises the
specter of countries fighting each other over food
reserves.
Speaking of reserves, since China reportedly has as much
as 200 million tons of grain reserves, you have to
wonder why they turned down the Philippines' request for
wheat exports ... unless, maybe, they don't have as much
as they say they have.
Why would they lie? How about a powder keg with 1.3
billion hungry people sitting on it!
Or
maybe the Chinese can see the way that forces in the
agriculture market are falling into place and they
believe that no stockpile can be big enough!
How You Can Protect Your Portfolio ...
No
one wants to get rich off hunger. But you do want to
protect your portfolio from market turmoil, and the
profits on agriculture could cushion the blow for other
sectors you own that might be getting hurt.
One way to do it is with the PowerShares DB
Agriculture ETF (DBA). It tracks an index
composed of futures contracts on corn, wheat, soybeans
and sugar. It's up 17% year-to-date — pretty good
compared to the 9.5% loss for the S&P 500.
Yours for trading profits,
Sean
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