01/24/11 Gaithersburg, Maryland – A story I’ve been warning about for years is making sensational headlines right now.
It’s a story most people don’t realize could make a huge impact on all of our portfolios in a number of ways.
“US Crop Stock Forecasts Deepen Fears of Food Crisis” read a recent Financial Times headline. The US government cut its estimate for key crops. This came only a week after the UN warned the world faces “food price shock.” Corn and soybean prices jumped and now sit at 30-month highs. Inventories are very tight. Corn is up 94% since June!
And the world worries about a repeat of 2008, when food riots erupted in poor countries around the world.
This has been in the works for a long time. It was there for all to see. The ratio of arable land to people has been falling for decades. Gains in crop yields have slowed. Population has expanded and income levels have grown. Diets have shifted. More people are eating more meat, which is much more grain-intensive to produce.
And the love affair with biofuels puts food production in direct competition with energy. Plus, there are water scarcity issues affecting food supply. My readers have made tremendous gains from this trend by owning shares of agricultural fertilizer producers Potash (POT) and Mosaic (MOS).
I should also make the point that this fits in with another topic I’m concerned about: inflation. Now, the man on the street uses the term “inflation” to mean when prices for everything seem to go up. Or put another way, inflation is when the dollars in his pocket buy less. In truth, this is the effect of inflation. The root cause is simply money printing. When you print more money, that money has less value than if you didn’t print any new money at all.
So what we are seeing with rising commodity prices is not only the supply and demand story I led off with. It’s also the effect of paper money losing its purchasing power in the real world of things. This, too, was easy enough to see. Finally, all that money printing – the “quantitative easing” baloney you’ve heard about – is coming home to roost.
Still, it’s disconcerting to see it all playing out. For the sake of our world, I’d rather have gotten this one wrong. But we have to deal with the market we are in. So what might “Food Crisis II” mean from an investment point of view?
Food prices will have to rise: There is no way around this. We are all going to pay more for food. Wells Fargo predicts US retail food prices will rise about 4% this year. Some things will go up much more. Pork and beef could rise more than 10%.
This won’t necessarily mean that meat producer stocks are good buys, because they may not get to raise prices to fully offset the rise in feed costs. Anecdotally, for instance, The Wall Street Journal cited a Minnesota 300-cow operation that reported feed costs had doubled. Plus, I’ve listened in to the conference calls of a number of food producers – Tyson, Hormel, and Sanderson Farms. They all talk about getting squeezed by rising feed costs.
I do think these companies will be good buys sometime this year, because people will adapt and farmers will respond. Producers won’t produce meat at a loss for long. And farmers will bring every resource they have to bear. It’s been slow getting the crops in the ground so far in many places. But ultimately, there is a lot of potential supply from Brazil and the US.
Still, weather is the big wild card here. If we have a drought in the US or in Brazil, this could really get ugly.
Emerging markets are vulnerable: This follows from the above. It doesn’t really faze the typical American to have to pay 4% more at the grocery store. Food is still such a small part of the typical American’s budget. I think Michael Pollan in The Omnivore’s Dilemma points out that the US spends 9% of its income on food, which is among the lowest percentage of any people anywhere at any time in history.
The same is not true in India or China or many emerging markets. In China, people spend 50% of every incremental dollar on food. And in India, it’s more like 70%. So the rising price of food is felt more keenly in these markets.
The price of food is rising faster in emerging markets, too. 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. I could go on and on.
The point is that the emerging markets boom is not going to go far when it faces a food crisis. Already, the markets are starting to reflect this. India’s Sensex was down three straight days and off 6% to start the year. Other markets also started badly. 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.
I’m keeping a close eye on these developments. There will be opportunities in this crisis, as with all others. For instance, though rising grain prices are not good for meat producers or emerging markets right now, it’s a boon for fertilizer stocks. As the old golf saying goes, “Every putt makes somebody happy.”
Regards,
Chris Mayer
for The Daily Reckoning
Chris Mayer
Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012 Chris will release his newest book World Right Side Up: Investing Across Six Continents.
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Good and timely article, thanks! No mention though of the effect of US gov agriculture subsidies in keeping the US food prices low. I’d bet that the emerging market countries do not hand out support.
With our gov ostensibly cutting budget items, are agriculture subsidies likely to get cut and thereby impact prices?
Here is a real simple fix.
Stop propping up the stupid ethanol industry with government subsidies.
If it is commercially viable, it will sink or swim on its own. The tax payers have carried it for over 10 years. Enough already.
This would make a major difference in food prices, water quality and availability, and fuel usage.
People need to quit driving so much. Quadruple the gas tax and start rebuilding our rail systems for passenger lines.
Get a horse to ride and eat more turkey.
D&D. Most countries have some sort of price control on food. In the US it is farm support. Other countries tend to restrict wholesale and retail prices. Often top grade is exported and low grades imported. The crunch now is that even the low grades are too expensive and in short supply.
JT. Far more tax money is spent in the oil industry than in the corn alcohol business. People need quality fat and protein ( animal and nut ) to be healthy. Corn and soy are only meant to be animal feed.
Steve. How about eat the horse and the turkey and learn to walk.
Grains are NOT the natural food of ruminants…four stomached animals, not at all. So, part of the solution is to stop feeding cattle any grain. Besides, it’s better for the animal and the human who eats it that neither of them be fed grain, for the same reason…grains ADD fat to both. And, also, nearly eliminates the production of Omega-3 oil and conjugated linoleic acid [CLA] in the cattle, subsequently denying it naturally to the humans who eat them, unless those humans like to eat cold-water fist every night of the week or supplement with purchased Omega-3 oils and/or CLA. This information IS available on the Net should you care to search for it.
I have a milk cow of my own, so I learned about these things for myself in learning to care for her.
http://www.chinadaily.com.cn/china/2011-01/27/content_11923647.htm
The problem is overpopulation of the world, including U.S. Good cropland is running out. Dan Basse, president of AgResource, says “The U.S. doesn’t have the 9 million to 11 million additional acres needed to fulfill demand for plantings aacross corn, wheat, soybean, cotton and sorghum.” Also, about half of the U.S. topsoil has been eroded away or ruined from other causes. Egypt is rioting partly because food costs have risen 21% in one year.