The Food Crisis, A First-Hand Report

Whether his travels take our commodities guru, Kevin Kerr, to the Middle East or the Midwest of the U.S., the stories are very similar. Most people are concerned about the rising costs of agricultural commodities. And they should be. The commodity boom is real.

I am racking up the frequent flyer miles this year. My travels in 2008 have taken me to exotic locales like Singapore, Hong Kong and Dubai, as well as somewhat less exotic locales like the American Midwest. But guess what, the Midwest is the place that’s making the headlines in Singapore, Hong Kong and Dubai. The soaring price of agricultural commodities like wheat, corn and soybeans is one of the biggest news stories on the planet right now.

But ag commodities aren’t just a huge news story, they are also one of the most exciting trading opportunities of 2008 and beyond.

Whether my travels take me to the Middle East or the Midwest of the U.S., the stories are very similar. Most people are concerned about the rising costs of agricultural commodities. And they should be. The commodity boom is real. It is not a bubble, no matter how many folks wish that it were.

In fact, now you have all of these dollar bulls coming out and saying that the worst is over for the dollar and that the commodity bubble will soon burst. They say that the commodities markets are simply speculator-driven. I disagree. Do you remember as a child wishing for something, wishing so hard, yet it didn’t come true? Wishing for something to happen does not mean it will be so. (I never did get that red bike.)

The dollar will probably bounce a little higher, but the same problems that drove the dollar into the basement will persist, and even worsen. The Fed can’t just snap its fingers and wipe away a credit crisis with some stimulus checks. Too many folks are subscribing to the idea that the consumer will somehow come to the rescue and spend our way out of recession. That’s pure fantasy.

The hope that the commodity bubble will burst is also a fantasy. The fact of the matter is that we are in a new paradigm for commodities and the old-school thinking about how commodities used to be traded has to be changed. And this is true of most commodities – none more so than the agricultural ones. Sure, speculation is a part of this puzzle, but to say it’s all speculators and hedge funds that are causing the run-up is a sad mistake.

As I sit here writing this column, I am watching CNN out of the corner of my eye, and on the air is Jonathan Stevens, a baker from a Massachusetts company called Hungry Ghost Bread. He is starting to grow his own wheat and encouraging his customers to do the same. Not a bad idea. For a 50-pound bag of organic flour, he used to pay $25, but now pays around $60. So in back of the store, the bakers are now growing their own wheat. Now, while farming in your backyard may not seem very practical, it’s becoming part of a new reality: If you want to be sure you have the food you need – absolutely sure – you’ll want to grow it where you live.

Most of the world’s inhabitants already understand this essential reality. America’s are just starting to re-discover it. In fact, we’ve even made up a new word to describe this ancient necessity of growing food where you live. The word is "locavore" and it means someone who eats food grown locally. Wow! Very trendy!

Demand for ag commodities is real and it is worldwide. Meanwhile, supplies are stretched thin. So any "supply shock" has the potential to cause prices to soar even higher. A new supply shock might be developing right under our noses. The planting season here in the U.S. is getting off to a very bad start, as the weather has been awful. Torrential rains have flooded many fields, making planting impossible. The U.S. Department of Agriculture reports that only 10% of the corn crop west of the Mississippi has been planted, compared to a five-year average of 35% for this time of year.

Plantings for soybeans, spring-wheat and rice are also trailing behind their five-year averages.

Therefore, this year’s corn crop could be extremely disappointing. Some of the other crops might also disappoint. In my trading service, Resource Trader Alert, we are betting on much higher prices in soybeans and corn, and we are using option spreads to take advantage of this.

My annual meetings with Midwest farmers are always helpful. But my recent meetings with farmers in Minnesota were particularly helpful. Not only did I gain some insights about this year’s crops, I also learned a great deal about the soaring prices of fertilizers and other farming "inputs." The long and short of it is that input costs are rising about as fast as commodity prices. So many farmers are getting squeezed.

And these rising input costs are here to stay, which probably means that rising grain prices are also here to stay. Yes, prices will fluctuate dramatically. But the bull market in agricultural commodities is very, very real.

Why deny it? Why not trade it?


Kevin Kerr
for The Daily Reckoning
May 08, 2008

Attendees at the conference Kevin spoke at earlier this week paid $10,000 per ticket to learn how he does what he does. Now, these are guys who run tens, sometimes hundreds of millions of dollars, so that’s not going to break their bank, but it’s not something everyone can afford.

In addition to his media appearances and conference globetrotting, Kevin has been a regular to the pages of The Daily Reckoning for years.

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.

The above was taken from Kevin’s book, A Maniac Commodity Trader’s Guide to Making a Fortune. In the book, Kevin dispels the common myths and misconceptions about these markets, offering an insider’s view of what he calls "the last bastion of pure capitalism on Earth." Whether you’re a novice or an experienced trader, Kevin’s down-to-earth, clear-cut guidance will make you savvier, more confident, and more able to jump right in and grab those profit opportunities that are waiting for you.

A quick look at the numbers:

Yesterday, the Dow fell more than 200 points. Oil, up $1.69, hit a new record. The dollar rose to $1.53 per euro. And gold lost ground…dropping down to $871.

Up, down…up, down…what’s going on? Is the economy recovering? Is the stock market giving us the "all clear?" Is the smart money buying the United States of America again?

No. No. And no. At least, not in our humble, timid, looking-over-our-shoulder and keeping-our-fingers-crossed opinion.

Yes, dear reader, here at The Daily Reckoning headquarters we are sometimes right…sometimes wrong…and always in doubt. What are we in doubt about today? Practically everything. Still, that doesn’t stop us from having opinions.

But let’s begin by looking at Consumeris Americanus, a species that has been having its share of trouble lately. Its habitat is threatened by falling house prices…its food supply has become more expensive. What’s the outlook?

First, this report from Bloomberg:

"U.S. consumer borrowing jumped more than double the amount economists forecast in March, indicating a slowing economy is forcing Americans to accumulate credit-card and other forms of debt.

"Consumer credit increased by $15.3 billion for the month to $2.56 trillion, the biggest monthly rise since November, the Federal Reserve said today in Washington. In February, credit rose by $6.5 billion, previously reported as an increase of $5.2 billion. The Fed’s report doesn’t cover borrowing secured by real estate, such as home-equity loans.
"Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.

"’Consumers are strapped as incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression,’ said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. ‘The days of extracting cash from one’s home to spend on goods and services are long gone.’"

But wait? The feds clearly want to protect this endangered species. These dinosaurs vote! So, they’re sending out ‘rebate’ checks…they’re cutting rates…they’re spoon feeding the banks so they’ll be able to help the consumer out with more credit on easier terms.

Richard Benson comments:

"For the average American, this rebate check represents only one car, credit card, or partial mortgage payment. When you consider it cost well over $60 now to fill up the gas tank for a mid-sized car, and a lot more to go out to eat, it won’t go very far.

"On the household front, millions of homeowners haven’t even finished paying their heating bills from last winter, and over six million Americans asked for energy assistance funds so their power wouldn’t be shut off. (In California alone, 1.7 million households are behind on their utility payments.)

"Signs of the stretched consumer include the following stunning facts:

– Home equity loans have a seven percent delinquency;
– Subprime mortgages, past due over 60 days, are pushing 14 percent;
– Over one million homes are in foreclosure and three million more are empty, and up for sale;
– Ten million homes have mortgage balances greater than their value. (No wonder some homeowners are walking away from them);
– In the auto market, 25 percent of all car loans are higher than the car is worth. (The average balance these cars are underwater for is $4,300!)

"Jobs are also falling off a cliff. If it hadn’t been for the Birth Death computer model at the BLS creating service jobs out of thin air, the payroll data would have shown over 280,000 people actually lost their jobs in April. Currently, 2.7 million workers have exhausted their unemployment benefits, and with no job prospects or income, hello collector!"

Meanwhile, the rising price of food has forced a record 28 million Americans onto food stamps. Trouble is, says the bleeding heart press, the giveaways don’t go as far as they used to. Many are "still hungry," according to a CNN report.

It’s true that we haven’t lived in the United States for more than 10 years. But we used to live right in the heart of the Baltimore ghetto. There, almost everyone got food stamps and other taxpayer-financed freebies. What we recall is that people tended to be overfed…not hungry.

But, back to our doubts and opinions…

Consumeris Americanus isn’t looking his best. But so what? The newspapers tell us that the ‘worst is behind us.’ The credit crunch is over, says Buffett. The housing crisis is over, says the Wall Street Journal. And just look at the stock market…

The stock market is said to look ahead. It is thought to see through the headlines…through the noise and opinions…and through the theories…to tell us what is really going on.

Look, say the bulls, the stock market is doing well; there’s nothing to worry about. The chartists say the next move is up. The Dow Theory folks say we’re still in a bull market. The dreamers are hoping for Dow 15,000.

Of course, they’re right about one thing; there’s nothing to worry about. We’re just talking about money. But anyone who thinks the stock market really predicts future money trends hasn’t been paying close attention. In early January 1990, the key Japanese stock index was over 39,000. It had risen like a rocket for the preceding five years. Surely, it saw more growth and prosperity ahead, right?

But that very same month, Japan, Inc. ran into a serious problem. The stock market crashed…and the economy went into a long slump – from which it still hasn’t recovered.

In the United States 10 years later, again the stock market had registered steady, impressive gains over the preceding five years. The NASDAQ was going almost straight up. Surely, stock prices signaled more growth and prosperity ahead, right?

Nope. The NASDAQ crashed…the Dow sank…and in real terms, after a decade, even in the Dow stockholders are still down 20% to 30%.

No, dear readers, the stock market is often blind, deaf and dumb. It can’t see ahead. It can’t hear the warning whispers. And it can’t put 2 and 2 together.

*** "What beautiful weather…" we said to a colleague yesterday. "It looks like the beginning of summer in London, doesn’t it."

"The beginning? You better enjoy it. This might be the end of summer too."

London is not known for its great weather. Sometimes, a few lovely weeks in May or June may be all the summer Londoners get.

*** "You may be able to print your way out of a recession," said another colleague this morning, "but you can’t mint your way out."


"In the U.S.," he explained, "because of price increases in the metals markets, it now costs more than 5 cents to make a new nickel. And here in England, if you melt down two pennies, you get 3 pennies worth of copper."

*** And here’s more, from the Washington Post, on Japan’s self extinction:

"Japan celebrated a national holiday on Monday in honor of its children. But Children’s Day might just as easily have been a national day of mourning.

"For this is the land of disappearing children and a slow-motion demographic catastrophe that is without precedent in the developed world.

"The number of children has declined for 27 consecutive years, a government report said over the weekend. Japan now has fewer children who are 14 or younger than at any time since 1908.

"The proportion of children in the population fell to an all-time low of 13.5 percent. That number has been falling for 34 straight years and is the lowest among 31 major countries, according to the report. In the United States, children account for about 20 percent of the population.

"Japan also has a surfeit of the elderly. About 22 percent of the population is 65 or older, the highest proportion in the world. And that number is on the rise. By 2020, the elderly will outnumber children by nearly 3 to 1, the government report predicted. By 2040, they will outnumber them by nearly 4 to 1.

"The economic and social consequences of these trends are difficult to overstate.

"Japan, now the world’s second-largest economy, will lose 70 percent of its workforce by 2050 and economic growth will slow to zero, according to a report this year by the nonprofit Japan Center for Economic Research.

"Population shrinkage began three years ago and is gathering pace. Within 50 years, the population, now 127 million, will fall by a third, the government projects. Within a century, two-thirds of the population will be gone.

"In what is now being called a "super-aging" society, department and grocery stores have recorded declining sales for a decade…"

*** Food riots have broken out in several countries…including several oil producers. The oil exporters find they need to spend more and more of their loot feeding their own growing populations. Several have tried to invest in more local food production, but have been stopped by a lack of water.

*** Here’s something interesting. Our Buenos Aires correspondent, Horacio Pozzo, tells us that U.S. company, Amyris, has gotten together with a Brazilian company, Crystalsev, to produce a sugar-caned based bio-diesel fuel which is "equal or better than diesel from petroleum." Several large companies from Europe and America are moving to Brazil to take part in the development of bio-diesel fuels. And Fiat Powertrain Technologies says it will launch a motor designed to run on ethanol – also in Brazil, in 2010.

*** Finally, more than a million Americans are being fed and housed, courtesy of state, local and federal governments. They’re the lucky ones…paying no mortgages…losing no jobs; they don’t even have to buy bread. Still, life in U.S. prisons is probably no picnic.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning