Posts Tagged ‘food’

Five potential emergencies- food crisis

Thursday, April 29th, 2010

Today, we will resume the series on the self-sufficiency theme- food.

Global agriculture entered a new bull market since 2003. Look at this chart:

World Grain Production, Consumption

As you can see, the world has been consuming more grain that it produces for years already. There was a bumper crop in 2008-2009, but 2009-2010 is expected to return to deficit. That means, in the big picture trend, global grain inventory is running down. As Sean Brodrick wrote in The Ultimate Suburban Survivalist Guide,

The trend in global stockpiles has been lower- hitting 31-year-lows in 2008- as once-mighty surpluses were used up.

In the context of rising global population who needs at least an additional 31 million tons of grains per year. In addition, as the emerging consumers from China and India become wealthier, they are consuming more meat, which requires even more grain.

Also, if you believe in climate change (e.g. global warming), we can expect more floods, droughts, heat waves, cold snaps, crop-devouring pests around the world, which will affect agriculture yields.

Food inventory deficits are bad enough. Consider the fact that the average US meal travels about 1500 miles to get from farm to plate means that means that a looming energy emergency (see Five potential emergencies- energy crisis) will compound the problem further. Since much of the developed world is run on tight margins (see Another Achilles Heel of modern society- narrow margin), all it takes for many people to go hungry very quickly is an oil crisis. As Sean Brodrick wrote in The Ultimate Suburban Survivalist Guide,

The average supermarket only has about three to four days worth of food stocks on its shelves. In an emergency situation or real disaster, this food is going to disappear in a matter of hours as people stock up.

So, each day as you eat your meal in front of you on the table, do not take them for granted.

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Posted in Advertising/Affiliates, Self-Sufficiency | 6 Comments »

Will deflation win?

Thursday, August 21st, 2008

In just a few months ago, the talk in town was price inflation. Oil, food and commodity prices were rising, as we wrote Who is to blame for surging food and oil prices?. Today, the talk is different. US house prices have never stop falling. Gold, oil and base metals are falling. There is even talk about the end of the commodity boom, the end of the commodity “super-cycle.” Economic slowdown and recessions are the expectations of the market.

Long time readers of this publication should never be surprised to see this is happening. As we said back in March last year in Inflation or deflation first?,

If you have been with us long enough, you may have heard us mulling over both the threats of inflation and deflation on the global economy (see Spectre of deflation and Have we escaped from the dangers of inflation?). You may be wondering whether we are contradicting ourselves. How can both threats exist simultaneously? Since one is a general rising of prices and the other is the opposite, are they not mutually exclusive?

At this current phase of the financial crisis, we are experiencing deflation. It is reported that the US M3 money supply is currently “collapsing.” A falling money supply is the definition of deflation, for which the symptoms will be falling asset prices, which if prolonged enough, will lead to falling consumer prices. But before we go off to celebrate falling prices, remember that this is an evil type of deflation because it is the type that is associated with bad debts, bankruptcies, unemployment, falling income, bank runs and so on. The angelic type of deflation is caused by rising output and production, which is clearly not the case in the debt-addicted Western economies but more true for China with its government-forced savings.

When the US money supply shrinks, it increases in value relative to the other currencies as the US dollar gets repatriated back to make up for the dwindling supply of cash back in the US. That’s why we are witnessing a rally in the US dollar and a fall in commodity prices as there is a mad scramble to liquidate whatever assets to raise cash.

With the current legal powers, the US Federal Reserve is quite powerless to stop deflation (see Are we heading for a deflationary type of recession?). It can cut interest rates, but it cannot force people to borrow. Even at 2% Fed fund rate, the shrinking M3 money supply is proof that monetary policy is still tight (see What makes monetary policy ?loose? or ?tight??). Will the Fed continue to cut interest rates? It had already tried but failed a few months, which resulted in skyrocketing oil and gold prices. We doubt Ben Bernanke is going to try it again.

Meanwhile, the US Treasury is preparing open up the bottomless coffers of the US government to nationalise Freedie Mac and Fannie Mae, who are essentially insolvent. The question is, with the US budget deficit already in the red (plus the massive current account deficits), where is the money going to come from to do that? If a savings-less individual spend more than he/she earns, that individual is basically bankrupt. But for governments, it is a completely different story. They can make up for the shortfall by borrowing from the public by selling newly issued government bonds. As a last resort, it can sell the bonds to the Federal Reserve, which is called “monetising debt” or printing money.

Will it get that bad? It can if the deflation threatens to shock and awe the entire nation into a Greater Depression. By then, as we said before in A painful cleansing or pain avoidance at all cost?,

Even if Ben Bernanke is an Austrian economist, political pressure alone will do the job of forcing him to act otherwise. This is the Achilles? heel of democracy. The mob will scream at the Fed to bail them out by ?printing? money (i.e. pump liquidity into the economy in the form of cutting interest rates). Should the Fed refuse to comply, we can imagine the mob storming the Federal Reserve to demand the head of Ben Bernanke. Therefore, the Fed will have no choice but to acquiesce to the desire of the mob, whose aim is to avoid immediate pain as much as possible.

Therefore, as we advised before in Recipe for hyperinflation,

Therefore, watch what the US government is doing with the monetary ?rules? in its attempt to fight deflation.

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Posted in Economics/Finance, Looking Forward | 8 Comments »

Who is to blame for surging food and oil prices?

Thursday, May 22nd, 2008

Imagine you are standing in a typical petrol station in 1974 on a typical day (there was an oil shock in 1973). This is what you may see back then:

Cars queued for hours to get petrol in 1974

Now, imagine you get sucked into a time warp and time-travelled to today on 2008. This is what you may see:

A typical petrol station in 2008

So, let’s say a passer-by told you that petrol price had doubled more than 2 ½ times over the past 2 years, would you laugh at the passer-by? “Yeah right!” you may say. “Where’s the queue and rationing?”

Indeed, this is what has happened. As we said before in The Problem that can throw us back into the age of horse-drawn carriages, there are good reasons why the oil price rose over the past decade. In fact, this is true for commodities in general (e.g. base metals, food). As we explained before in Why are the poor suffering from food shortages? and Example of a secular trend- commodities and the upcoming rise of a potential superpower, there are good reasons for this. Already, we are hearing of food riots in the Middle East and Asia.

Yet, strangely, these upward price movements seem unreal. Where’s the queues and rationing? How do we explain this?

Two days ago, in the U.S. Senate Committee on Homeland Security and Governmental Affairs hearing, this question was put forth: Financial Speculation in Commodity Markets: Are Institutional Investors and Hedge Funds Contributing to Food and Energy Price Inflation? Here, we must give special thanks to one of our readers, Zoo for highlighting this piece of information at Picture of a fiat money.

Here, let us zoom into the testimony of Michael Masters, who is the Managing Member and Portfolio Manager, Masters Capital Management, LLC. As our reader Zoo said, “It seems it is the testimony of Michael Masters, a hedge fund manager, which made all the Senators sit up and take notice (sic).” This is Michael Masters’ introduction in his testimony:

Good morning and thank you, Mr. Chairman and Members of the Committee, for the invitation to speak to you today. This is a topic that I care deeply about, and I appreciate the chance to share what I have discovered.

I have been successfully managing a long-short equity hedge fund for over 12 years and I have extensive contacts on Wall Street and within the hedge fund community. It’s important that you know that I am not currently involved in trading the commodities futures markets. I am not representing any corporate, financial, or lobby organizations. I am speaking with you today as a concerned citizen whose professional background has given me insight into a situation that I believe is negatively affecting the U.S. economy. While some in my profession might be disappointed that I am presenting this testimony to Congress, I feel that it is the right thing to do.

You have asked the question ?Are Institutional Investors contributing to food and energy price inflation?? And my unequivocal answer is ?YES.?

That’s a strong categorical statement. Unlike many mainstream financial commentators, Michael Masters did not fluffed around with the “on-the-other-hand” and “having-said-that” types of answer. It is as clear as you can get, backed up by evidence, charts and numbers.

So, how do we explain such a spectacular rise in commodity prices without the queues and rationing? Michael Masters answered,

What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets

Just who is this “new category” of market participants? Is it China and India? No! The rising demand of these two giant nations had been gradually brewing and simmering over the past decade and will continue to the next decade and beyond. Their demand are hardly a shock. Michael Masters pointed the finger at:

Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.

To give you a sense of scale of their share on the commodities futures contracts, Michael Masters gave an example:

According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculators’ [institutional investors’] demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!

There are a few more examples given by Michael Masters in his testimony. What happened was that these institutional investors hoarded commodities through the futures market, affecting futures price, which in turn affected the spot prices (i.e. the real world market price). The spot prices are the prices that we all face in our daily life.

In additional, these institutional investors (which Michael Masters called “Index Speculators” are a completely different breed from the traditional speculators. The latter were relatively small fries who (1) had limited supply of money, (2) specialised in certain commodities and (3) price conscious (i.e. they are careful with what price they pay for). The Index Speculators are poles apart. They have vast amount of money (fiat money in US dollars) to be distributed among “key commodities futures according to the popular indices” and are not conscious about the price they pay. They think in terms of portfolio asset allocation, which means that if they decide to allocate, say 2% of their assets into a specific commodity, they will “buy as many futures contracts as they need, at whatever price is necessary, until all of their money has been ‘put to work.’ ” Unlike the traditional speculators who buys and sells, Index Speculators never sell because they treat commodities as some kind of quasi-assets. You can expect such behaviour to have colossal impact on commodity prices.

How did all these Index Speculators came about? Michael Masters explained,

In the early part of this decade, some institutional investors who suffered as a result of the severe equity bear market of 2000-2002, began to look to the commodity futures market as a potential new ?asset class? suitable for institutional investment. While the commodities markets have always had some speculators, never before had major investment institutions seriously considered the commodities futures markets as viable for larger scale investment programs. Commodities looked attractive because they have historically been ?uncorrelated,? meaning they trade inversely to fixed income and equity portfolios. Mainline financial industry consultants, who advised large institutions on portfolio allocations, suggested for the first time that investors could ?buy and hold? commodities futures, just like investors previously had done with stocks and bonds.

The value of assets devoted to commodities by these Index Speculators grew from just US$13 billion in 2003 to US$260 billion as of March 2008. Over these 5 years, the prices of commodities grew by an average of 183%. In 2003, they were small fries in the commodities futures market. Today, they are the largest force in the market.

Why is it that no one seems to know about this phenomenon? Michael Masters believes that (emphasis in the original testimony):

The huge growth in their demand has gone virtually undetected by classically-trained economists who almost never analyze demand in futures markets.

To compound the effect of Index Speculators on commodity prices, it must be noted that the commodity futures markets are much smaller than the capital markets. For example, it is 240 times smaller than the global equity market. Thus, every dollar on commodity futures has a much greater impact on prices than the same dollar on equities. To compound the problem even further, it was observed that their demand increases prices, which in turn increases demand even more. That is, hoarding begets more hoarding.

So, let’s return to the petrol problem. Let’s say OPEC increases production in an attempt to help bring down the price of oil. Or the world decides to to embark on an oil fast. Will that work? You can see that these Index Speculators can easily pour more money into the oil futures sink hole.

Sad to say, through a loophole, the US Commodities Futures Trading Commission (CFTC) allows such speculators “unlimited access to the commodities futures markets.” As Michael Masters explained,

The really shocking thing about the Swaps Loophole is that Speculators of all stripes can use it to access the futures markets. So if a hedge fund wants a $500 million position in Wheat, which is way beyond position limits, they can enter into swap with a Wall Street bank and then the bank buys $500 million worth of Wheat futures.

In the CFTC?s classification scheme all Speculators accessing the futures markets through the Swaps Loophole are categorized as ?Commercial? rather than ?Non-Commercial.? The result is a gross distortion in data that effectively hides the full impact of Index Speculation.

So, whose fault is this? We can blame these Index Speculators. But as we said before in Connecting monetary inflation with speculation,

Thus, by further inflating the supply of money and credit in the financial system at such a time, there comes a situation whereby there are excess liquidity without adequate avenues for appropriate investments.

Is it surprising to see the arrival of the Index Speculators?

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Posted in Commodities, Economics/Finance, Food, Oil | 41 Comments »

Why are the poor suffering from food shortages?

Tuesday, April 15th, 2008

Recently, there are a lot of news headlines about rising food prices and food-related riots and unrest. As this news article, Food inflation, riots stir concern reported,

Finance ministers meeting in the US to grapple with the global financial crisis have also struggled with a problem that has plagued the world periodically since before the time of the Pharaohs: food shortages.

Surging commodity prices have pushed global food prices up 83 per cent in the past three years, according to the World Bank – putting huge stress on some of the world’s poorest nations.

Is this a fairly recent phenomenon? In February and July last year, we touched on this looming food crisis in Corn as food or as fuel? and Prepare for more food price inflation respectively. Finally, in October last year, we had identified three macro-themes about this looming food crisis in Why are food prices rising?. So, you can see that this food problem has been in the makings for quite a long time already. It is only recently that it has received great attention in the media.

We have been thinking about this food problem for quite a long time, wondering whether there is a root reason for this slow-motioned tragedy. As we read the news media about this problem, the reasons seemed to be quite fragmented. Somehow, our intuition tells us that there must be an underlying force behind all these reasons. So today, we will attempt to come out with a theory to explain how it comes about, while hoping that we do not fall into the narrative fallacy that we talked about in Mental pitfall: Narrative Fallacy.

Today’s journey will begin in China. At the end of 2006, China’s rural population stood at around 737 million. From 1990 till today, we estimated around 230 million rural peasant Chinese migrated from the countryside to the cities (source: China’s rural population shrinks to 56% of total). Our guess is that the majority of the rural migrants are males. Over the past couple of decades, it is this mass migration that provided the vast quantity of labour to propel China’s rise as a major economic power. It is China’s economic power in manufacturing that enabled the debt-induced over-consumption and low inflation of the West, especially in the English-speaking nations (look at the US’s mighty trade deficits). Compared to Western standards, China’s peasant farming is not as efficient and productive per capita. Now, if around 230 million rural peasant Chinese (mostly males, and the males do most of the farming) migrated to the cities’ manufacturing related jobs, it is clear that Chinese farm output has to fall significantly. Also, China as a whole is getting wealthier than before and as a result, consumes more meat, which in turn consume grains for livestock, thus competing against the demand for human-consumed food. Therefore, to feed China’s vast population with significantly reduced farm output, food imports have to rise significantly, which puts upward pressure on the world’s food prices.

Next, China’s rise over the decades raises the consumption of commodities greatly, including energy. As we said before in The Problem that can throw us back into the age of horse-drawn carriages,

In summary, supplying environmentally sustainable energy indefinitely at a rate fast enough is a colossal global problem that must be solved. If not, the latter generations will not live better than the current generation.

With rising energy costs, the US embarked on a foolhardy ethanol program in the name of energy ‘independence’ (see Prepare for more food price inflation). This program resulted in even more diversion of more food production resources into fuel making, reducing the food supply even more.

In the more affluent Western nations, food production takes on a more capital-intensive form. These capitals requires energy. With rising energy costs, food prices have to rise because of the increasing cost of production and distribution.

To make matters even worse, food is tend to be much less income and price elastic, especially for the poor. That is, no matter what, people have to eat even if their income falls or if the price rises. This is unlike the more discretionary items like clothing whereby people can reduce demand in response to falling income or rising prices. As a result, any increase in the cost of producing food is easily passed on to the consumers in the form of higher prices.

When the effects of climate change and drought get thrown in, the situation becomes even more serious.

The more we look at it, the more we feel that the global economic growth of the past decade is not sustainable without serious environmental, food, energy and commodities repercussions. That is why we see that a severe global recession is a necessary evil. Otherwise, more sufferings and permanent damage will occur even for the future generations.

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Posted in Commodities, Economics/Finance, Food, Market Observations | 8 Comments »