Invasion of the Locavores

The days of the 3,000-mile Caesar salad are coming to an end. With diesel prices at record highs, Americans just can’t afford to get their food from all over the country. Something has to change – and soon. Kevin Kerr explores…

As you know, Byron and I travel near and far to find the most cutting-edge information on everything from energy and metals to agriculture and emerging markets. We have found that seeing something for oneself is truly the best way to judge what may be the next great investment opportunity.

After all, the guy sitting behind a desk on Park Avenue almost certainly has no idea what is really going on with farmers and what is going on in their heads this year.

I know what is going on inside the heads of the farmers. This spring, I went to visit farms in the Midwest, as I do every year.

It was a Saturday in mid-April when I pulled up to the Miller Armstrong Building in the sleepy farm town of Waseca, Minn. Waseca is also home to a federal penitentiary and Jeff Skilling, former Enron CEO and allegedly one of the "smartest guys in the room." Now he is a convicted felon, serving time.

I drove into town and watched the cattle grazing outside the prison. I wondered for a moment if those cows knew they had a famous neighbor. They didn’t seem to care. The cows seemed more concerned about where to find some food. It was certainly foreshadowing what I was about to hear from the farmers.

I was greeted by my friend and Outstanding Investments member Geb Singlestad. Geb escorted me to a casual meeting at the Armstrong hall building. Charlie Nedoss of Peak Trading and about 15 other farmers accompanied me. One reporter showed up. Everyone introduced themselves, and we all grabbed some coffee. I spoke with the reporter for a few minutes, and the meeting began.

The thing about small-town America is everyone is friendly, but cautious. Geb invited all these farmers to the meeting. Later on, we learned that most of them thought we were there to sell them something… We were not.

Most of the farmers showed up out of respect for Geb, because he is a sort of patriarch in the community. The meeting was scheduled to last about 45 minutes, but once it got going, we covered so much ground and there were so many questions that we ended up being there for 2½ hours.

The questions came fast and furious. One farmer asked, "Do these people in Washington or in the cities know how much we are paying for our input costs? Do they have any clue how much the farmer is being squeezed?"

The best question of all, in my opinion, was asked a few times. "What will it take? How high will prices have to go to get people to change?"

I said that I think prices will have to go much, much higher before urbanites even consider switching off American Idol and protesting in the street. The farmers realize that most people in the country have no idea about either the process or the cost of what it takes to get their dinner from field to fork.

One farmer belted out, "As long as they have groceries on the shelves, lights on, the ATMs working and their jobs, then all is well. They don’t have a clue."

There has always been a line between city and suburb dwellers and their rural counterparts. Most people in urban areas have little understanding of how much work goes into generating our food supply and then transporting it to each and every city.

Just the volume of diesel fuel usage to grow the crops is astounding. Agriculture is a very fuel-intensive undertaking. With diesel prices topping $4 and rising, the costs continue to climb at the grocery store.

After our meeting with the farmers, Geb took Charlie and me to see the newest ethanol plant being built in Janesville, Minn. This new structure is a 110 million-gallon ethanol plant. It has several rail lines being built to run directly into the plant. The outside of the building itself is huge. The towering cranes were working full tilt while we were there, and the parking lot was full of workers’ cars. The one thing that neither Charlie nor I saw was a water supply. An ethanol plant uses a huge amount of water, so where will it come from?

It seems with ethanol, as with so many things, the answer from the government often comes after a major project is already well under way. For the last eight years, the Bush administration has seemed to be more likely to do first and fix later. What’s the old saying? "Better to ask for forgiveness than permission."

Anyway, the ethanol plant has provided many good jobs in the area and is slated to produce a real boom for the local economy. That’s all well and good, but is it sustainable?

In his book The Long Emergency, James Howard Kunstler discusses the 3,000-mile Caesar salad. He discusses how we all have become used to getting our food from all points of the country and world, and how that will need to change. The farmers whom I met with feel the same way.

The days of being able to transport produce and grains across the country are facing such high costs from diesel that it will put them out of reach for many consumers. Sure, people in America are not starving. At least, not yet. But what they are doing is donating less to food banks, and feeding their children watered-down soup and soda, instead of milk.

With egg prices surging 26% and milk prices near record levels, consumers are making very difficult choices. My own aunt leaned into me at dinner recently and said, "Ya know, I bought a container of whipping cream and it was $7. That’s crazy." Yes, it is crazy, and the even more insane thing is that prices may well have much further to go.

The farmers I met with are struggling with some of the highest input costs they have ever faced, and for some, it means that with all the massive expenses of running a farm, their margins are shrinking fast. Most of the farmers wondered what I think would happen if food stopped showing up on shelves in the city and the power went out and the ATMs shut down. You know what would happen? Panic.

The divide between the food source and the end-users is wide. As costs continue to skyrocket, we better begin to appreciate and support our farmers, because the long emergency is here and time is running out.

As I said my goodbyes to the farmers, Scott walked with me on his farm and showed me all his new farm equipment. One tractor, a John Deere, looked brand-new. He told me that Deere simply has no equipment in stock, because sales are so red-hot. He said it’s much the same for Caterpillar and others. So even as the farmers complain about higher input costs and consumers in the cities complain about higher food costs, the beat goes on.

The solutions are not at all clear, but it is obvious that we need to begin to think locally. Food sources will need to be closer to the final consumers. The old way is simply not sustainable anymore.

In the brave new world, we will all likely have to become "locavores." A locavore is someone who eats food grown locally. That would be a major shift difficult for most of us to fathom. But like it or not, it’s a change that is not going to be a choice. It will happen regardless of how much we fight it. Really, the question is how high of prices are we willing to pay in the meantime.

Regards,

Kevin Kerr
for The Daily Reckoning
June 18, 2008

Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

For a very limited time, you can join the small circle of investors who get Resource Trader Alert, Outstanding Investments – and the rest of the research and investment services Agora Financial has to offer – for life.

What goes around, comes around…

Every country in the world has had to put up with finger wagging and scolding from U.S. officials. The U.S. economy was the world’s best for so many years – and American experts, government officials, professors and consultants never got tired of saying so.

But now…as the Rolling Stones put it… "Tables turn and now her turn to cry." Now, the tears are coming from the United States; the foreigners are doing the scolding.

Bloomberg reports that U.S. housing starts are at their lowest level in 17 years. Housing prices are going down too, while consumer prices go up – both apparently at a faster and faster rate.

Producer prices in the United States rose 1.4% last month, following an increase of 0.2% the month before…annualizing the two months gives us a rate just shy of 10%.

Meanwhile, prices paid by producers were 7.2% higher than a year ago.

Worldwide inflation is about 7%, says Bill Gross of PIMCO. And since price inflation has now been globalized, there is no escaping. Here in Britain, consumer price inflation, officially, is running at its highest rate in 10 years.

"There is really nothing we can do about it," said an analyst at this morning’s investment meeting. "We’re a small island. We have to import things from overseas. Prices are rising everywhere. How can they not rise here? We’re just at the beginning of this trend. It’s going to get worse."

It is going to get worse everywhere. Inflation is in the pipes. Soon, it will be backing up in the bathtub drain and spilling over from the sink. Over the last 15 years, the world has seen huge inputs of ‘liquidity’ – cash and credit from central banks and the financial industry. Everyone was perfectly happy when this juice was going into asset prices. But one by one the bubbles have popped…and now the liquidity goes where it is unwelcome – into commodities, food, and fuel.

Consumers and central banks are both trapped. Central banks want to lower rates and increase liquidity in order to stimulate a sagging economy. But their inflation no longer swells assets prices and nourishes economic growth; now it leaks into consumer prices.

And the poor American consumer…he spent his entire career preparing for an economy that no longer exists. He has a big house…a big car…and, often, a big mortgage. America’s far-flung suburbs were invented when gasoline was only about 25 cents a gallon and real U.S. incomes were rising. We remember it well. We’d drive into a gas station and tell the pump monkey: "Let me have $2 worth." Heck, 2 bucks’ worth was all you needed. You got eight gallons – enough to last you all week. Now, gasoline is $4 a gallon…and real incomes are scarcely higher than they were in the late ’60s. And now the typical commuter lives too far out in the suburbs to walk to work. And even if he could, this item from the Wall Street Journal offers little comfort:

"Pain at the Other Pump: Shoe Prices Rise." The story tells us that footwear is going up too – about 10% to 15% next year, which "would be the largest single-year increase in more than 50 years."

And the poor man didn’t bother to save money, because he didn’t need to. His house rose in price…and there was always someone ready to lend him money when he needed it. But now…the cost of credit is going up too.

What we are looking at is big. It’s an historic turnaround. In financial terms, it is the end of the era of cheap credit. In cultural terms, it’s the end of the prosperous, suburban U.S.A. as we have known it…the U.S.A. that we grew up in.

The last credit expansion began, by the way, with the Reagan Revolution, in the very early ’80s, with bond yields over 15%. It ended either in 2003 or 2005 or a couple weeks ago. Yields on the 10-year Treasury note fell below 4% on several occasions. But now they are rising. Investors fear rising inflation. Even at current rates, they still buy treasuries at yields below the rate of consumer price inflation. But they’ll regret it, in our opinion. The trend seems to be up. It is the beginning of what probably will be a long period of higher inflation rates…higher bond yields…and tighter credit generally.

So too have we entered into a period of higher energy costs. The price of oil hit a new intraday high yesterday at nearly $140. It will probably drop back below $100…but the days of $10…$20…or even $50 oil are probably gone forever.

And the suburbs? Are they dead too? We don’t know…but hope so; we never liked them.

All this is bad news for people who organized their lives on cheap oil and cheap credit – especially those for whom it is too late to make big changes.

USA Today reports, for example, that the rate of bankruptcy is skyrocketing among old people. From 1991 to 2007, the rate went up 150%. But for those 75 to 84, the rate has exploded 433%.

The poor codgers. It’s bad enough being old. Imagine being broke too.

*** A few weeks ago, the Indians were giving America a piece of their mind. This week, it’s the Chinese. The subprime crisis was caused by Washington’s "warped conception" of market regulation, said a Chinese banking regulator… and the Chinese media has gone so far as to compare China’s decisive action in Sichuan Province after the earthquake to the Bush administration’s diddling after Hurricane Katrina.

"U.S. credibility and the credibility of U.S. financial markets is zero everywhere in the world," says Joseph E. Stiglitz, a professor of economics at Columbia University.

"Anybody looking at this from the outside says, ‘There’s been a lot of hot air coming out of the U.S., so why should we listen to these guys when they didn’t know how to manage risk?’"

The Chinese yuan has gone up 11% against the dollar so far this year.

*** When it rains, it pours. The Midwest has seen the worst flooding in 15 years…pushing up grain prices even higher.

But it could be worse. You could be in Argentina, from which our colleague Paola Pecora reports on the latest conditions (farmers are blocking roads to protest tax increases):

No market for grains
Running out of food and fuel
Inflationary expectations rising
Consumers expect to consume 24% less than the year before
220 roads blocked
An actual 20% drop in consumption spending
74% of people expect higher prices
Increasing poverty
Fall in foreign exchange reserves at the Central Bank
Public debt higher than before the default of 2001
Flight of bank deposits
Real incomes falling

"Things get worse every week," writes Paola.

Until tomorrow,

Bill Bonner
The Daily Reckoning