Food prices are headed back to the historic peaks they hit in 2007-2008. Last time I wrote about food—on January 14–that was the headline.
A little more than two weeks later that observation seems old hat. Events in Tunisia and Egypt—and elsewhere in the world—have run ahead of that post.
This round of the food crisis—which started off as pretty much a replay of the 2007-2008 crisis—has moved to a new level of seriousness. Governments have been rocked by protests that are about a whole lot more than the price of supply of bread. But at the same time governments can see that soaring food prices acted as a trigger to turn long-term dissatisfaction into massive street action. The math isn’t all that hard to understand: when, as in Egypt, 40% of the population is living on $2 as day or less, a 10% to 20% spike in the cost of bread is a huge catalyst.
Government hoarding, which in the last crisis pushed food prices to levels unjustified by actual supply and demand, is going to be much, more worse this time because it will be greater in volume, more extended in duration, and will include more commodities. In fact I think the food crisis will be the motivating example for a huge shift in global economic policies in the developing world that will result in a pull back from efforts to reduce market subsidies for everything from rice to cooking oil to gasoline and kerosene.
The worse the food crisis gets, the less governments willing governments from Beijing to Jakarta to Tehran will be to pursue market reforms.
So how much worse will the food crisis be this time around?
Take a look at Algeria. Last time I wrote about this topic https://jubakpicks.com/2011/01/14/food-prices-are-back-to-2008-peaks-here-are-10-stocks-that-tap-into-the-trend/ the Algerian government had been besieged by riots over the price of sugar and bread. No surprise that the Algerian government bought 900,000 metric tons of wheat in the early part of January.
That was before the outbreak of the protests in Tunisia and Egypt. On Wednesday, January 26, the Algerian government bought 800,000 additional metric tons of wheat. That brought the total for 2011—which is all of four weeks old—to 1.7 million metric tons. Algeria is one of the world’s biggest importers of wheat in normal times. But buying usually comes in at 5.5 million metric tons a year. At the current pace, the government would more triple that in calendar 2011.
Until Tunisia, when protests actually succeeded in ousting a long-term autocratic regime, the current food crisis seemed like it was going to be an almost replay of the 2007-2008 crisis. First, bad harvests from Russia, Australia, or India start prices climbing. Second, food-producing countries such as Russia, the Ukraine, or Vietnam slap on export restrictions to make sure their domestic markets have enough food. Third, food-importing governments make massive purchases to build up stockpiles, just in case, essentially turning into food hoarders.
Last time around prices fell once the weather turned, hoarders started selling stockpiles, and the global economic crisis meant people had less money to spend on food.
This time the weather may yet cooperate—more on that later—but we’re still in the early stages of hoarding when it seems like panicked governments compete to see who can stockpile the most.
Forget about such “minor” moves as Algeria’s purchase of 1.7 million tons of wheat. Bangladesh, one of the world’s top three rice importers, on January 27 said it will double its purchases to 1.2 million metric tons from an initial estimate of 600,000 tons. Indonesia has put in a huge order for 800,000 tons of rise, equal to two-thirds of last year’s entire total for rice imports.
Top that? Easy. Saudi Arabia, one of the top 10 wheat importers in the world, has announced it will increase wheat imports until it doubles its stockpiles. The goal is to increase wheat holdings to a full year’s supply.
Thanks to good rice harvests in Thailand and Vietnam rice prices, while moving up to $550 a metric ton last week, are still way below the $1,000 a metric ton peak of 2008.
Consumers of wheat should be so lucky. In Chicago last week soft wheat rose to a 29-month high. In Paris European milling wheat climbed to the highest level since March 2008 and is only 10% of so below the all-time peak of September 2007.
Surging commodity prices aren’t limited to wheat, rice, corn, and soybeans either. Sugar prices, for instance, are near a 30-year high. The European Union had said only two months ago that it would allow export of an additional 350,000 metric tons of sugar. Now it looks like Europe will wind up increasing sugar imports. With global sugar inventories at their lowest level in decades, that shift has put sugar prices on track to set a new high above 35 cents a pound in February.
How did we get back to a global food crunch so quickly? In retrospect the decline in the price of food commodities caused by the global economic crisis was a brief pause that didn’t change the long-term trend toward higher prices.
Look at the fundamental drivers of that trend.
On the demand side a rising global population where rising incomes cause more people to want to eat up the food chain by consuming more wheat in the form of bread and more corn and soybeans in the form of grain-fed beef, pork, and chicken.
On the supply side a shortage of new arable land that could be brought into production. Encroachments from urban areas and from industrialization that take arable land out of production. Environmental pollution from toxic metals or from polluted water than reduced the amount of global farmland. Water shortages (either from actual shortages of water or from pollution that made available water supplies unusable) that reduced yields or made harvests more erratic or even made farming impossible.
Efforts to bridge that demand/supply gap include increasing yields by applying more fertilizer especially in developing economies, improving yields by planting new kinds of seeds, reducing the impact of periodic droughts by developing drought resistant seeds and increasing the use and efficiency of irrigation.
Thank of it as a race between the factors that increase supply and those that increase demand. It’s a race where the outcome is certainly still in doubt.
But it’s also important to notice that the factors that in the long-term increase supply don’t have much ability to increase supply in the short-term. If there’s a drought in Argentina or the Ukraine, creating drought-resistant seeds that might be ready for planting in five or ten years is irrelevant. If government panic leads to a run on wheat supplies, applying more fertilizer or increasing irrigation doesn’t create food supplies on a time scale that addresses the current problem.
I can’t tell whether the current spate of disruptive weather is simply one of those things or a trend fueled by the extra energy that global warming feeds into the world’s atmosphere and oceans (I favor the later interpretation) but bad weather adds another short-term challenge to global food supply that long-term “solutions” don’t address in the short-term. That’s an important addition to the crisis since weather forecasters from Australia floods and drought) to Columbia (floods) are forecasting that we’re in for serious bad weather (given global patterns of farming) fueled by the La Nina weather pattern over the Pacific.
But add the weather to the list of short-term factors, including government hoarding and political upheaval that long-term solutions don’t begin to address.
Figuring out how to invest in the long-term efforts to make supply meet demand is pretty straight forward—and you and I have been through this drill before, most recently in my January 14 post. Buy shares in seed companies such as Syngenta (SYT), DuPont (DD), and Monsanto (MON). By shares in fertilizer producers Potash of Saskatchewan (POT), Yara International (YARIY), Agrium (AGU) and, increasingly Vale (VALE). Buy irrigation stocks such as Lindsay (LNN).
Finding stocks that will go higher in the near-term because of the short-term reactions in the commodity market and to commodity prices is harder. One good bet is agricultural machinery makers such as Deere (DE) and CNH (CNH) because higher commodity prices mean higher farm incomes mean higher sales of farm equipment. Commodity producers will benefit, obviously, from higher commodity prices but there aren’t a lot of publicly traded companies that fit that description. One I can suggest is Cosan (CZZ), a dominant sugar producer and processor in Brazil. (The Brazilian stock market has been falling as the Banco Central do Brasil raises interest rates but I think commodity prices outweigh interest rates in this case.) The big commodity trading companies such as Bunge (BG) and Archer-Daniels-Midland (ADM) will likely be able to profit from this volatility, since volatility offers a trader opportunity to make (or lose) money.
I suspect that there will be opportunities for investors to do the same (to make and lose money, that is) from the way that the food crisis will spill over into government decisions about other commodities. I’m sure that plans to cut fuel subsidies are getting a second look in Indonesia and China, for example.
And in the coming months we’re going to feel the effects of Egypt and Tunisia on global inflation and interest rate decisions. Rising food prices was one catalyst in Egypt but so was a lack of jobs, and especially a lack of jobs for college educated youth. Unemployment among college graduates was already causing sleepless nights n Beijing before the protests in North Africa. I’m sure it’s getting even more attention now.
And I’m just as sure that politicians and government officials from Ankara to Beijing are thinking about how willing they are to slow their economies—sacrificing job growth—in order to fight inflation.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Agrium, CNH, Cosan Deere, Lindsay, Syngenta, Yara International, and Vale, as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
Folks, let’s keep it civil (I know, a dirty word in today’s national political climate, but, nonetheless a valuable goal for us all…)
Ogreggy, does your PO and your shrink know you’ve broken out of the home for the mentally deranged? You should stop what you’re doing, call 911 and ask for the paddy wagon to come pick you up. Maybe they’ll take pity on you and put you back into your anger management classes instead of state prison where you no doubt belong.
mbakon–the post isn’t about the food crisis in Egypt but about the global food crisis. And a pig is a pretty good symbol of the increasing global demand for more protein (produced by feeding pig and chickens and cattle corn) as incomes rise.
One thing that would help lesson the food shortage would be to eliminate the stupid conversions of food to energy. Here in the mainland US that would be the corn to ethanol programs. Ethanol is fine, but it can be made from husks and stalks and just about any other biomass — they only use corn kernels because the equipment is simpler and the conversion rate is higher.
Another example would be the recent pilot program by Hawaiian Electric (HECO) to use palm oil in gas turbines for power generation. So we propose to take tankers full of food from Indonesia and Malaysia and ship them half way around the world just to substitute it for diesel? Meanwhile children in places like Bangladesh, which is a relative stone’s-throw away from the source countries, starve to death.
To quote the inimitable philosopher, Pogo, “we have met the enemy, and he is us.”
@southof8: No idea why you mentioned the cost of your wool suits or other clothing items — clothing tends to be a tiny percentage of the average person’s budget. If you are buying new suits often enough to be able to monitor prices, you are definitely in the affluent category.
Food costs are going up all over the world even if not in your little yuppie haven. Food riots have been in the news in multiple countries. Even in the US, food prices are stable not declining.
Lease terms on your yuppie mobile? The 2010 vehicle will have little in common with the 2002 model — but beyond that your yuppie neighbors are not buying volvos anymore. That’s supply and demand, not inflation or deflation.
Rich people like yourself don’t need mortgages (except maybe for tax writeoffs). For middle class people, the mortgage rate is irrelevant. Mortgages require 30% down and proof of income (which is probably down). The rates are whatever, but the banks aren’t lending so the rate is pure hype. And in any event, property taxes are up across the board
Energy costs are WAY up. The local AAA office near me predicts we will pay $4/gal gas this summer. Normal people spend way more on energy costs than silly wool suits
Healthcare costs are up double digits — Blue Cross reports the average increase this year was 21%. For many families (and all RETIREES), health care expenses are an enormous cost — only an out of touch yuppie would care about the cost of Trader Joe coffee.
Education costs — whether embedded in local property taxes or reflected in tuition rates — are up high single to low double digits. For normal people, this is a huge percentage of their budget
If one looks at the budget of a typical consumer, the cost of living is increasing significantly. I have no idea what @southof8 is spending at Tiffany’s, but that isn’t reflective of the broad economy anyways.
Where the ^*(& did southof8 decide Bernanke’s incompetence was a partisan issue? No one else even mentioned his politics.
@mbakron — I am not Egyptian, but was wondering about Muslims eating swine. I thought it was unlikely, but didn’t want to say anything to offend Jubak since I wasn’t sure
Irony: An article about a food crisis in Egypt topped with a picture of a food they don’t eat in Egypt.
I tend to do the food shopping in my household. My wife does the clothes shopping, we both buy gas. She seems to find clothes cheaper than ever- my wool suits, her wool and silk suits, cotton tees, leather shoes. Definitely no inflation there.
I got braeburn apples for .69 a pound the other day. YUM!! I can still get pork shoulder for 1.39 a pound and chicken breasts for under 3 a pound. Thighs even cheaper. Coffee is still 12 bucks or so for the extra large size of french roast at trader joes. Albertsons continues to have specials on soda- usually 2 twelvers for 7 bucks; occasionally 3 for 9.
veggies are priced fairly consistently at either the farmers market or the grocery store.
We’ve driven the new 2012 volvo S60 on offer at 299 a month on a 36 month lease, and are comparing it to the Acura TL at 430 with nothing down. Our last volvo in 2002 was 399 a month.
Rents are stable; actual ownership costs are down (labor is cheaper, mortgages are cheaper, construction materials are static, property assessments are down).
Gas prices, and prices dependent on gas prices (airline tix, eg) are up. that I will concede.
I know the commodity traders are bidding up the prices on raw commodoties, but I’m not seeing it pass through to the grocer, the cafe’ or the car dealer. Where is all this inflation that everyone is so certain is occurring?
When did the issue of inflation become so political? Bernanke was appointed by both a republican and a democrat. Same with Greenspan. Reagan would have been smart to appoint volker to another term, but one has to go back more than 30 years to find a fed chief that wasn’t considered non-political. So the Bernank is now the devil, who deserves to be publicly flogged for not saying, essentially, let them eat cake?
Odd.
@wsm
that Bernanke did foolish things already is hardly a good reason to let him continue or to do a second foolish thing to try to fix the first foolish thing he did.
Bernanke no longer has credibility; he should just resign.
As for restructuring the economy… that is hardly the same thing as deflation. Too many bankers is not going to get solved by lowering interest rates to zero even if it was.
Bernanke is 100% responsible for ALL the food riots occurring around the world. He readily acknowledges that he is trying to run inflation, and he is succeeding in spades. There is no deflation.
The housing bubble bursting is just that and nothing more. The dot-com bubble bursting wasn’t deflation either. If you want to make that (absurd) argument, you would have to have counted the “inflation” when the bubble was created (which is also fake, and NEVER counted by the crooks on Wall Street). A bubble gets created and destroyed, and net net you are right back where you started. No inflation, no deflation.
Printing money (literally or electronically) to keep the bubble from collapsing is inflation. The rest is just a shameful con-job from insolvent banks.
@ ogreggy –
Fair enough, CPI does not literally encompass housing prices. I was referring to the OER component as the housing proxy. And I am no apologist for CPI as a great measure of inflation – I’m just saying it is widely used as such (rightly or wrongly).
But even taking your anecdotal view of inflation, if you own a home, then housing is automatically an ENORMOUS component of your personal inflation/deflation picture.
I am not saying you ‘have an obligation to clean up the mess he made’. The fact that you still did not answer this question demonstrates the point I am trying to make – namely, given the conditions that exist now, there are no ‘good’ solutions. This characterizes the reality that we live in – the problems are complex and nasty. No matter how critical you are of the decisions that got us where we are, I have yet to come across anyone who points to viable alternative courses of action vs. just criticizing the current courses of action.
I agree with you that ‘our economy is going to restructure’ – that is the only possible ultimate outcome. But that ‘restructuring’ is just another way of saying that we must have massive deflation in order to bring housing (and other assets’) prices back toward some semblance of balance with our stagnating incomes. It is simple supply and demand in a floating exchange rate global economy.
@wsm
First, the BLS (keepers of CPI) say it is *NOT* a measure of inflation. Doesn’t matter how many TV heads use it as such, it is not and never was an inflation measure. Even the Fed (both Greenspan and Bernanke) say CPI does a terrible job measuring inflation.
If you had done your homework, you would know that housing prices are **NOT part of CPI** … CPI includes owner equivalent rent only… the investment/savings portion of housing prices are excluded — both in the housing bubble and now.
I merely pointed out that the clueless twit running the Federal Reserve claimed that the housing bubble was deflationary (when he earned his Helicopter Ben nickname) and he also claims the housing collapse is deflationary. Bernanke contradicts himself because he has no idea what he is doing — never did.
Me? I look at inflation based on my own cost of living. That is the “index” I have to match / beat with my investments in order to maintain purchasing power in my portfolio. I don’t allow a clueless central economic planner tell me what to think.
Its crazy to suggest that the cost of living in New York City is in any way comparable to the cost of living in rural areas of New York state — yet that is what CPI tries to do.
Anyone who actually looks at the cost of living (instead of parroting the TV) would know crude oil prices have climbed almost 14% per year for the last ten years. That filters into almost every product in the economy. Health care costs have been climbing double digits for several decades. Even if health care costs are “hidden” from you via employer insurance, it is still part of your total compensation — you are still paying it even if you chose not to see it.
Food prices are causing riots all over the world; we happen to live in a country where we can afford to ignore the increases (for now).
We don’t have deflation, we have a clueless fool who is arrogant enough to think he can micro manage a $14 trillion economy … and we have an ethically challenged Wall Street that profits from the public believing the hype.
What should Bernanke do? He didn’t listen to anyone for the last ten years, he isn’t going to start now. I find it absurd for you to think I have an obligation to clean up the mess he made. I think Bernanke should resign in disgrace.
The US lived way beyond its means for the last 40-50 years … and sooner or later we have to pay the piper. I don’t believe in fate, but I definitely believe we will now face the consequences of our earlier behavior — even if a clueless fool in Washington tries to order the tide not to come in.
Our economy is going to restructure, no matter what the Fed does. We have too many bankers, too many lawyers, too many bureaucrats — we have a shortage of engineers, software programmers, etc.
Bernanke’s arrogant actions serve only to postpone that adjustment — and the price of postponing the adjustment is inflation. Lots of it.
@ ogreggy –
I would indeed argue that the housing bubble was highly inflationary. Again, since housing is the largest component of CPI (a broadly used measure of overall inflation), it is pretty obvious that the bubble in housing was highly inflationary.
If you say “There is no deflation in the US”, you are simply choosing to ignore the largest component – housing. Fine if you want to pick and choose, but just be clear that’s what you’re doing.
And, not surprisingly, you failed to provide a viable alternative as to what Bernanke should be doing differently, given that we are where we are now.
@wsm:
If you want to disagree, fine. But don’t drag out the same foolish non-arguments that Wall Street has been hustling for years.
If you want to consider falling housing prices, then you must also consider rising housing prices. Not one “deflationista” suggested Fed Funds should have been 15-20% in 2006 when home prices were skyrocketing. Not even the Clueless Bernanke himself.
But now home prices are falling and suddenly they count? This is the central “argument” of deflation theorists…. you only want to count items that are falling, and ignore everything going up.
Bernanke was warning of deflation from the minute he got to Washington — all through the housing bubble and through the housing collapse. One or the other might hold up, but not both.
There is no deflation in the US, hasn’t been in years. Its just a scam for Wall Street to hustle money out of the public. We have “deflation” because banks need to be recapitalized after they went insolvent — so the Bernanke gives them an absurdly steep yield curve. That’s not deflation, that is cronyism.
Unless you argued that the housing bubble was inflationary (and no one did) — you can’t now claim that it is deflationary. Its just a lie.
Jim – your stock choices are all great for investing in the short-term food crisis, but many of them are priced for perfection. Which of these stocks are still reasonably priced?
@ ogreggy –
djpoints has it right. You’ve got it wrong.
While I’m not even sure what’s meant by “Wall Street’s deflation”…by far the largest component of the CPI is housing. And housing is…you guessed it – DEflating currently. So, yes, deflation is the name of the game domestically.
If you choose to only consider food, energy, or any other single element, then you can claim whatever you want about inflation.
The fact is, we now have some inflation in things we need (food, energy, etc…) and massive deflation in the things we want (housing).
Also, what is your suggestion regarding what “clueless Bernanke” should do, given where we are now? Please don’t say “we shouldn’t have gotten here in the first place…” We are where are – what should he be doing differently?
The reason the inflation/deflation debate is such a heated one is because we are actually experiencing both — depending on the asset class.
Therefore, we have ‘BI-flation’, coined in the early 2000’s, and rarely ever mentioned by the media.
Egypt and Tunisia are not rioting because food inflation is “going to” come, or “has started”. Actual inflation has been a huge problem all over the world for at least a year.
People can no longer pretend Wall Street’s “deflation” scam has any validity. Deflation has the same level of truth as bank CEOs claiming that 2007 was a “temporary” liquidity issue, and was not bank insolvency.
Inflation isn’t coming – its been here quite a while. Increasingly, the educated middle class can’t live with the lies of the political elite.
This problem isn’t isolated to emerging economies. If clueless Bernanke doesn’t re-connect with reality soon, we may have protests in the USA.