The Real Crisis is Beginning to Unfold… and It’s Not Financial Pt. 1
Commodities / Food Crisis Jun 22, 2009 - 02:30 PMBy: Graham_Summers
The real crisis is coming… and it’s coming fast.
Indeed, it started last year, almost entirely off the radar of the American public. While all eyes were glued to the carnage in the stock market and brokerage account balances, a far more serious crisis began to unfold rocking 30 countries around the globe.
I’m talking about food shortages.
Aside from a few rice shortages that were induced by export restrictions in Asia, food received little or no coverage from the financial media in 2008. Yet, food shortages started riots in over 30 countries worldwide. In Egypt people were actually stabbing each other while standing in line for bread.
The developed world, most notably the US, has been relatively immune to these developments. For us, gas hitting $4 a gallon was a bigger deal than any hike in food prices. But for much of the developing world, in which food and basic expenses consumer 50% of incomes, any rise in food prices can have catastrophic consequences.
And that’s not to say that food shortages can’t hit the develop world either.
According to Mark McLoran of Agro-Terra, the Earth’s population is currently growing by 70-80 million people per year. Between 2000 and 2012, the earth’s population will jump from six billion to seven billion. We’re expected to add another billion people by 2024. So demanding for food is growing… and it’s growing fast.
However, supply is falling. Up until the 1960s, mankind dealt with increased food demand by increasing farmland. However, starting in the ‘60s we began trying to meet demand by increasing yield via fertilizers, irrigation, and better seed. It worked for a while (McLoran notes that between 1975 and 1986 yields for wheat and rice rose 32% and 51% respectively).
However, in the last two decades, these techniques have stopped producing increased yields due to their deleterious effects: you can’t spray fertilizer and irrigate fields ad infinitum without damaging the land, which reduces yields. McLoran points out that from 1970 to 1990, global average aggregate yield grew by 2.2% a year. It has since declined to only 1.1% a year. And it’s expected to fall even further this decade.
Thus, since the ‘60s we’ve added roughly three billion people to the planet. But we’ve actually seen a decrease in food output. Indeed, worldwide arable land per person has essentially halved from 0.42 hectares per person in 1961 to 0.23 hectares per person in 2002.
It’s also worth noting that diets have changed dramatically in the last 30 years.
For example, in 1985 the average Chinese consumer ate 44 pounds of meat per year. Today, it’s more than doubled to 110 pounds. That in of itself is impressive, but when you consider that it takes 17 pounds of grain to generate one pound of beef, you begin to see how grain demand can rise exponentially to population growth with even modest changes to diet.
It also helps explain why stocks-to-use for wheat and corn are now at their lowest levels in 30+ years.
If you’re unfamiliar with stocks-to-use ratios, they are used to determine the amount of food carried over in excess of current demand. Measured as a percentage of demand (so if stocks-to-use is 16%, the total worldwide stocks is currently 116% of demand), stock-to-use are a good measure of how much extra food we’ve got left over after demand.
Currently the stocks-to-use ratios for corn and wheat are 17% and 23% respectively. On the surface, this sounds like we’ve got a lot of extra food lying around. But you’d be very mistaken to think that: remember a stocks-to-use of 0% would indicate we’re producing just enough food to meet demand in real time. At that point, one bad harvest and people start starving.
Now, stocks-to-use usually runs inverse to price (if supply goes lower, prices rise). And stocks-to-use for wheat and corn are at their lowest levels since the ‘70s. At that time, grains prices were more than three times as high as they are now.
Make no mistake, agriculture is at the beginning of a major multi-year bull market. We’ve got rapidly growing demand, reduced production, and decade low inventories. I can’t tell you when prices will begin to spike (timing is especially difficult given the degree of financial speculation in commodities), but at some point in the not-so-distant future, food prices will go up… WAY up.
I’ll detail how to profit from this trend in tomorrow’s essay. Until then…
Good Investing!
Graham Summers
PS. I’ve put together a FREE special report detailing how to play the coming agriculture boom as well as other inflation hedges that can protect you portfolio from the Fed’s money printing. You can pick up a FREE copy at: www.gainspainscapital.com.
Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.
Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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