Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Price 2021 Roadmap - 22nd Jan 21
Why Biden Wants to Win the Fight for $15 Federal Minimum Wage - 22nd Jan 21
Here’s Why Gold Recently Moved Up - 22nd Jan 21
US Dollar Decline creates New Sector Opportunities to Trade - 22nd Jan 21
Sandisk Extreme Micro SDXC Memory Card Read Write Speed Test Actual vs Sales Pitch - 22nd Jan 21
NHS Recommends Oximeter Oxygen Sensor Monitors for Everyone 10 Months Late! - 22nd Jan 21
DoorDash Has All the Makings of the “Next Amazon” - 22nd Jan 21
How to Survive a Silver-Gold Sucker Punch - 22nd Jan 21
2021: The Year of the Gripping Hand - 22nd Jan 21
Technology Minerals appoints ex-BP Petrochemicals CEO as Advisor - 22nd Jan 21
Gold Price Drops Amid Stimulus and Poor Data - 21st Jan 21
Protecting the Vulnerable 2021 - 21st Jan 21
How To Play The Next Stage Of The Marijuana Boom - 21st Jan 21
UK Schools Lockdown 2021 Covid Education Crisis - Home Learning Routine - 21st Jan 21
General Artificial Intelligence Was BORN in 2020! GPT-3, Deep Mind - 20th Jan 21
Bitcoin Price Crash: FCA Warning Was a Slap in the Face. But Not the Cause - 20th Jan 21
US Coronavirus Pandemic 2021 - We’re Going to Need More Than a Vaccine - 20th Jan 21
The Biggest Biotech Story Of 2021? - 20th Jan 21
Biden Bailout, Democrat Takeover to Drive Americans into Gold - 20th Jan 21
Pandemic 2020 Is Gone! Will 2021 Be Better for Gold? - 20th Jan 21
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

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

© 2005-2019 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

6 Critical Money Making Rules