Copper, Food Prices and Strength of the Global Economy

The week begins with another record high for copper and the suggestion, from an unlikely source, that the Federal Reserve may be sowing the seeds of its own demise.

First, our friend “Dr. Copper,” as it’s sometimes known. The red metal is used in so many things – electrical wiring, plumbing, computers, air conditioning, refrigeration, defibrillation, horseless carriages, etc. – traders use its demand, and consequently its price, to “diagnose” the global economy.

At $4.59 a pound, the good doctor would seem to be saying the global economy is fit as a fiddle. Or…indicating the onset of fever. From its panic low around $1.25, the copper price has nearly quadrupled in just two years.

“Emerging market demand has been the big driver behind industrial metals,” Chris Mayer, editor of Capital & Crisis, discusses the more likely scenario in a recent MarketWatch article. Hence, “these metals would also seem the most susceptible to any slowdown.”

And what are the chances of that? Pretty significant. “The industrial metals as a group are unattractive simply because I believe that emerging market demand will slow,” Chris says. “There is too much hitting these countries too fast.”

Like oil. It’s back to $100 a barrel, using the yardstick of Brent Crude that’s becoming the new world standard.

And food. “All around the world, emerging markets have a big problem with rising food prices,” Chris wrote his Capital & Crisis readers last month. And that problem’s set to get worse, judging by this development.

The US Grains Council forecasts China’s imports of corn are set to explode sevenfold in just a year – from 1.3 million metric tons in 2010-11 to 9 million in 2011-12.

Nine million tons would double the previous record of 4.3 million tons set 15 years ago after a disastrous crop. If true, the high numbers will be driven by three factors:

  • China was hit with drought last year
  • But the country’s growing middle class demands more meat…and most cattle and hogs are fed corn.
  • Worse, China has depleted its stockpiles. “We learned the government normally keeps stocks at 30%” of annual demand, says Terry Vinduska, US Grains Council chairman, “but they are currently a little over 5%.”

“In China, people spend 50% of every incremental dollar on food,” Chris continues. “In India, it’s more like 70%. So the rising price of food is felt more keenly in these markets” than we feel it in the West.

Prices are rising faster in both of those markets. “In India, food prices are up 18% and at their highest level in a year. China has the same problem. Prices rose 5% in November alone.

“All around the world, emerging markets have a big problem with rising food prices. Indonesia’s president is trying to get people to grow their own chili peppers. And the South Korean government recently released emergency stores of cabbage, pork, mackerel, radish and other staples.

“The emerging markets boom is not going to go far when it faces a food crisis. And if China and India and the rest slow down, it’s going to have a huge impact on all those stocks and commodities most sensitive to emerging market growth.”

We’ll be watching both food prices and copper to see if and when this fever turns to chill.

Addison Wiggin
for The Daily Reckoning