Give Me Bread or Give Me Death
I have always been a big fan of Jim Rogers. His old school gentleman style, with the bow tie and the folksy drawl, always seems to confound the "savy types". I often imagine what an odd couple he and Soros must have made back in the late 60's/early 70's.
For several years now
has been telling anyone who will or will not listen about the coming commodity bubble. Specifically, in regards to the basic necessities of life. While many of us think of only gold, oil and natural gas, the commodity landscape covers such daily necessities as bread and corn. Though not as volatile in the short term, they are the true indicators over the long haul.
Little pop quiz for you hotshots btw, how do most Americans consume their corn?
I am not shocked to see little discussion about this . After all, most of us are content to cover our heads with our hands and try and ride out the current storm. Focusing on stocks and bonds allows us to ignore dramatic underlying issues, which can really keep us up at night. A great example is how government subsidies have ruined the farming industry and created a supply depression that only needs one decent sized forest fire to starve millions.
We are currently witnessing the most dramatic rise in wheat prices in over half a century. Prices are up 62% since early June and last month we saw the biggest and fastest increase since 1959. For those who think this is just a momentary spike, you are ignoring the rise of a long term scourge. Luckily for us, we live in America. More accurately, lucky for us that the Midwest is in America. However, most of the world doesn't enjoy this luxury and the potential for seismic shifts in global markets is a plausible result.
One of the most ignored and discarded terms in finance is "correlation" often relegated to the thesis papers of stat and econ PhDs, global markets are more directly correlated and integrated now then ever. Wheat is arguably the most important financial commodity in the world today. We can do without almost anything we care about, but in a world where we have lost nearly all of the masculine survival instincts of our ancestors, the farmer remains our ultimate protector. Not the army. Not the law.
Not the government.
The farmer.
Short term, we worry more about Bernanke, Obama and Blankfein, but the truth is that the future of global economics lies in its roots, not in its offshoot derivative branches. With a mushrooming global population and skyrocketing demand for existential resources, the wheat markets will be ones to watch in not just the coming days, but the coming years and decades.
Take a note monkeys, and let Mr. Rogers tell you about his neighborhood one more time.
If cash is king, then wheat is the God who manifests destiny.
Here's the full Journal article for those who are interested in the fine points:
Global Wheat Shortage Feared as Prices Surge
By LIAM PLEVEN And TOM POLANSEK
Wheat prices have staged the most drastic rise in more than 50 years, as a drought in Russia fuels growing worries that it could lead to a global shortage of the grain.
Harsh heat and a lack of rain in Russia have killed half of the crop in some hard-hit areas. The slump in production in one of the world's most fertile breadbaskets has pushed prices up 62% since early June, and last month saw the biggest and fastest increase since 1959.
Wheat prices, which briefly rose above $7 a bushel on Monday, are at their highest level since September 2008, the year when low supplies of the grain fueled a global food crisis that led to riots in several countries.
"That's a massive increase in a very short time frame," said Terry Roggensack, an agriculture specialist at the Hightower Report, a Chicago-based commodities firm. "It is a scramble period."
While prices are still well below the levels of 2008 and global stockpiles are much stronger than they were two years ago, the specter of the 2008 shortage looms large, particularly for countries that can't depend on their own production.
This weekend, Egypt, the world's largest wheat importer, bought 180,000 metric tons of wheat, its second purchase in the past two weeks and more than it had initially planned. China is warning local businesses against grain hoarding. In India, officials have allowed once-plentiful stockpiles to rot in fields, leaving many people hungry and driving up local prices.
All are seeking to avoid a repeat of 2008, when Egypt, Haiti and Pakistan were among countries hit by riots over rising food costs. At one point, the World Bank said higher commodity costs had pushed up food prices 83% in three years. Commodity prices plunged amid the darkest days of the financial crisis later that year and in 2009. But even then, some analysts predicted a food crisis would return when the economy recovered.
Russia's troubles are having an even bigger impact in part because many of the world's wheat exporters have experienced some crop problems. Big exporters like Canada have struggled with excessive rains, while Australia has battled locusts. Patches of wheat-growing regions in the European Union also have been struck by drought.
The problems have caught the global wheat market off-guard. As recently as June, prices were at a nine-month low and down nearly 21% for the year. Now, they are up 28%, though they are still only a little over half the peak in 2008, when prices neared $13 a bushel.
Monday, front-month wheat, for September delivery, closed up 4.8% at $6.9325 a bushel.
In the developed world, the rising prices could pinch food makers, which may hesitate to push the cost to consumers.
"It would likely take greater inflation for these food companies to pass these costs onto their customers," said Andrew Lazar, a Barclays analyst.
The wheat-market drama also is likely to reignite the debate over the role that investors play in the commodities markets. On Monday, the World Bank said speculators may be a short-term driver of volatility in food prices, though it said supply-and-demand fundamentals ultimately triumph. Prices of cocoa, coffee and pork bellies have also recently soared.
In Russia, the fields of the traditionally fertile Volga River region are strewn with withered wheat stalks.
In the worst-hit areas, half of the crop is lost, and surviving plants are expected to yield half as much as in previous years.
Russia and the Ukraine had been expected to supply 18% of the wheat traded internationally.
But the severe weather has curbed those expectations. And some even worry that exports from Russia may shrink to zero, either because of market forces or through government mandate.
The Russian Grain Union now is predicting production this year of 72 million to 78 million metric tons of wheat, as well as some rye, barley and other crops. That is down from 81 million to 85 million tons.
Some say that it is early days and that there will still be plenty of wheat to go around, even with Russia's vastly depleted crop. The U.S. Department of Agriculture recently increased its forecast for the nation's wheat crop. In the U.S., this year's harvest is expected to be strong, thanks to mild weather.
The USDA estimates that there will be almost 30 million tons of wheat in U.S. stockpiles at the end of next May, a 23-year high. By comparison, in 2007-08, U.S. inventories dropped to an all-time low of 8.3 million tons.
In early July, the U.S. government estimated world supplies at a comfortable 187 million metric tons, well above the 124 million tons produced back in 2007-08, when food riots hit several nations.
Russia's forecast reductions due to the weather would shave roughly 10 million tons off the current total, which "still does not bring us anywhere close to the tightness in world supply that we had in previous years," said Mr. Roggensack.
Back then, the wheat market faced other pressures, as well. The 2007-2008 marketing year was marked by droughts in both Australia and the Black Sea region that were compounded by the U.S.'s shift to corn planting to feed ethanol production.
China's top economic-policy planning agency warned last week that it will bar businesses found guilty of hoarding grains from state grain purchases. The National Development and Reform Commission called for businesses to strictly observe minimum purchase prices.
"Some businesses are blindly 'following the wind' in raising prices," the commission said.
In India, the problem is different. The world's second-largest wheat grower banned exports in 2007 in order to boost local supplies and prices, and stocks are high. Moreover, strong seasonal rains are leading to expectations of a bumper crop. But grains the government stockpiled after last year's drought are being stored under thin plastic sheets, and some is already washing away. The result: The rotting grains have contributed to India's rising food prices. Local wheat prices have risen about 12% to 1,230 rupees ($26.52) per 100 kilograms in the past three months.
"It is gross mismanagement and negligence," says D.H Pai Panandikar, a New Delhi-based economist and president of the RPG Foundation, a think tank. "If only you had handed over the grain to the private sector, not a grain would have been lost. But now, it is nobody's grain."
—Caroline Henshaw, Biman Mukherji and William Mauldin contributed to this article.
Not worried We have enough corn left over to put a 12% ethanol blend of gasoline into our cars. Additionally, we are extremely inefficent when it comes to grain use. Typically, the vast, vast majority of our corn destined for food use is fed to livestock who convert anywhere from 3-10 calories of corn into one calorie of animal products. If we were to all become lacto-ovo vegetarians, corn consumption would probably drop by 50%.
A much more important commodity than corn is fresh water required for agriculture- and that eventually goes back to energy and desalinization technologies. The Ogallala aquifer is running out of water, and there's no good replacement for it right now. Hopefully, Pioneer and Monsanto can come out with drought-resistant corn that can subsist on a handful of inches of rain per summer before that happens.
If you are worried about corn/grain production, I recommend buying agricultural property in the Great Lakes region. The Great Lakes have been producing corn without irrigation for 200 years and likely will for centuries to come. Actually, if we can get 15-20 people together who want to contribute $10-20K each, we can form a partnership to buy an 80 acre farm in Michigan or Wisconsin where the climate makes corn and other agriculture largely sustainable.
PM me if you want to expand on this idea. Not something I want to do today, but I'd like to kick the idea around. This having been said read "Nature's Metropolis" by William Cronon if you already haven't. It is epic, but certainly something any Illinoisian will appreciate.
My original point was more globally oriented. YES....we in America are cool. We have been blessed and my underlying message is to have a greater level of gratitude and humility for it. The rest of the planet, however, is way to reliant on small agricultural production pockets. I see wheat, corn, oats and other softs in general as far more likely culprits for future conflict than oil, for example. Just my $0.02.
As far as water, THAT is a very interesting topic of discussion. Water commoditization will almost certainly have to happen in the next half century and few are prepared to discuss the issue, let alone do something about it.
I asked a CME official about the issue once...
He swallowed a thick lump, broke a sweat bead and changed the subject...
Without speaking to HOW a college student has a conversation with a CME bigwig, the CME official's eyes probably would have lit up like a cash register if this coversation actually happened. The businessmen in Chicago might be more down to earth than the ones in New York, but it doesn't mean they're less indifferent to the world's problems.
As much as I enjoy crushing dissent. This subject should stay private. If you want details PM me, if not, please take comfort in the knowledge that my stories come from experience.
Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong...
-AR
+1 for the midwest
+1 for corn not water
Yes this is an issue, but I think there is far more to it than just this. The problem is in order to feed the world farming has become a science. The days of a mule tilling the fields is over with.Shit, Cornell has one of the best Ag programs in the country. If you want to be a farmer today you need to know finance, weather, biology and business much more then just planting seeds and waiting. In the USA we are fine, we have it down. Why worry is overseas.
India, China, Africa ( all the countries so I say the continent) are struggling with growing populations and almost antiquated farming practices. China maybe not so much, but India is struggling with this as well as Africa.
http://online.wsj.com/article/NA_WSJ_PUB:SB1000142405274870361590457505…
http://maps.grida.no/go/graphic/evolution_of_the_world_grain_production…
We donate all this food to these countries, but what we need to do is export our knowledge. We need to teach advanced farming techniques. I think a wonderful opportunity for micro finance would be a joint venture between John Deere and Kiva or something.
The world is incredibly fertile, we just need to get everyone producing at a level that we do. There is also an argument to be made that the world simply cannot all have a US standard of living. The amount of grains and farm land used to support our Beef eating diet would reek havoc if adopted elsewhere.
Thank god Beef is off limits for a Billion people lol.
I still think water is the most important. If Wheat supplies dropped a little we could switch to other grains or legumes. Not saying that Wheat is not important, but we can do with a little less. You start constricting the drinking water supplies and there will be issues.
Ok, we seem to be building a solid consensus on the water issue. Except for my man that likes corn.
Agree with you as usual, Tone...one caveat, however, farming is still hard labor. With all the technological/intellectual aspects that have been added to the mix it is still a grind before anything else. Early to bed, early to rise. I think we can't disqualify the fact that being a farmer "just ain't sexy" (whatever that means). In today's world, image has as much to do with career choice as health, wealth and happiness...if not more so.
The truth is people everywhere (especially in the "3rd world") are enamored with status gigs. I have a ton of family overseas and close friends overseas, who would rather work for peanuts in a dress shirt, then shovel shit for a heavy payload. Never discount the power of sloth and mental masturbation to bring down the modern world.
People just don't want to work the land much, anymore...
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