Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Iceland Volcano Ash Could Hit Global Grain Production

Commodities / Agricultural Commodities Apr 27, 2010 - 01:29 AM GMT

By: Ned_W_Schmidt

Commodities

Best Financial Markets Analysis ArticleWhat a disappointment! We had high hopes for the Icelandic volcano. Not since preparations for the Millennium Bug has our mood been so upbeat. A real shot at a good calamity seemed to be possible. Then, it dwindled to nothing more than hot flatulence rather than the real thing. But, the Icelandic volcano is still there, trying to make things right. Well, it is only day 13 of the volcano, and you know what they said about the little train.


Much of what has been written on the volcano misses the point. Some travelers stranded for a few days do not sum to a meaningful economic event. Neither is the threat of mountains of ash reigning down on Europe the concern. Whatever the size of the volcano, the accumulation of particles in the air is potentially the story. Numerous climatologists have now been quoted as saying that the volcano will not change the climate. SUVs and cow flatulence will, but volcanos will not. No, the real story is whether or not the weather for this coming crop season has been altered from that which would have existed without the volcano ash interfering with the light of the Sun reaching plants.

Whatever the accumulation of ash in the skies might be, the level of sun reaching the plants in the affected area will be less than would have been the case without the volcano. Part of the story also is fragile nature of the supply and demand balance in global Agri-Foods. Our first chart above is of the global wheat savings rate. Whatever part of production, or income, not consumed is by definition what is saved. If the value plotted in the above chart is negative, the world is consuming more wheat than it is producing.

The world got lucky in 2009, and may again in do so in 2010. Rose-colored forecast from the USDA puts the global wheat savings rate for the coming year at only slightly more than 4%. That forecast suggests little, or no, room for error. Any negative production event in world wheat, be it from volcano ash accumulation in the atmosphere or just bad luck, could force the world to turn to that which is in storage.

Some forecasters would have us believe the size of the world’s wheat reserve is immense. Further, that reserves of such size guarantee no shortages. But, are the world’s reserves really that large? In absolute terms the size is large, but one must also consider the denominator.

WHEAT: MONTHS OF CONSUMPTION IN STORAGE

MEASURE MONTHS OF CONSUMPTION
WORLD, UNADJUSTED 3.6
CHINA 7.0
WORLD, WITHOUT CHINA 3.0

As the above table indicates, when the denominator is properly considered, the world is not awash in wheat. If the large reserves of China are excluded, the world has only 3 months of wheat consumption in reserve. With only 3 months of wheat consumption in storage, any shock, however small and deemed insignificant, could unmask the inadequacies of the global Agri-Food system. At this time price is the only consideration. At some future time, availability could become more important than price.

Our second chart, above, portrays what can happen with Agri-Food prices in a very short period of time. That graph is of the USDA index of prices for hanging and boxed beef. Since the bottom in November, beef prices have risen about 25%. Annualized, that is an impressive rate of increase. The base in that graph is about 9-10 months. Given the size of that base and time required to rebuild herds, the top in beef prices will not come with a 2010 handle. Please note that calves are not produced in factories.

How can prices move such as pictured in the above graph? Globally, the Agri-Food industry is operating in the price inelastic component of the long run Agri-Food supply curve. That means that percentage price moves are far greater than percentage change in demand. Or, a small change in demand results in a far greater move in prices. Little demand can push prices up dramatically. Few, if anybody, predicted a year ago the volcano eruption. Even fewer have the ability to determine its impact on wheat prices a year from now given the existing price inelasticity of Agri-Food.

Agri-Food prices, as we have reported many times in these articles, have risen at a rate far faster than the return produced by equity markets. Even with Gold, your portfolio may not be adequate to feed your family in the coming years. To help investors understand the returns generated by Agri-Food commodities, we recently released our quarterly report on the topic, Agri-Food Commodities: An Investment Alternative. You may read that report at this link: http://www.agrifoodvalueview.com/files/Agri-Food_Commodites_An_Investment_Alternative_2010_April.pdf

By Ned W Schmidt CFA, CEBS

AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA,CEBS, publisher of The Agri-Food Value View , a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To receive the most recent issue of this publication, use this link: http://home.att.net/~nwschmidt/Order_AgriValue.html

Copyright © 2010 Ned W. Schmidt - All Rights Reserved

Ned W Schmidt Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in