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January 06, 2008

Global Food Crisis -- Credit Crunch Could Pale in Comparison
by Randy

Grains, food inflation give markets a jolt

Soaring world grain prices will keep driving food price inflation in 2008 as China and India carve out a bigger place at the table and a new dinner guest -- biofuels -- threatens to become the biggest glutton of all.

In 2007, Chicago Board of Trade prices -- world benchmarks for wheat, corn, rice and soybeans -- soared despite big U.S. harvests. Wheat prices rose 90 percent, soybeans 80 percent, corn 20 percent. U.S. prices are key because America is still the world's breadbasket, the single biggest grain exporter.

"The fact we're having higher commodity prices here will have an impact around the world on food prices," Lapp said.

Bill Lapp, former economist for food giant Conagra Foods Inc said the U.S. producer prices for food for the first 11 months of 2007 rose at an annualized rate of 7.5 percent, the highest since 1980, with the exception of the year 2003.

"We've only started to see the impact of higher costs translate into higher consumer prices," Lapp said.

One indicator that markets are watching more closely than even U.S. prices is world grain stocks. U.S. wheat stocks in 2008 will hit a 60-year low and world barley stocks a 42-year low. Global oilseed stocks are projected down 22 percent in one year.

Rice Prices Are Steaming, With Many Implications

The global commodities boom that has lifted prices of everything from gasoline to gold is now elevating rice -- a staple food for half of the world -- to its highest level in nearly 20 years.

A particular humanitarian concern is that the world's poorest consumers, many dependent on rice, often have little or no voice. "When they suffer food shortages, they starve in silence," says Joachim von Braun, director general at the International Food Policy Research Institute.

Lowest Food Supplies in 50 or 100 Years

The United States Department of Agriculture (USDA) released its first projections of world grain supply and demand for the coming crop year: 2007/08. USDA predicts supplies will plunge to a 53-day equivalent-their lowest level in the 47-year period for which data exists.

"The USDA projects global grain supplies will drop to their lowest levels on record. Further, it is likely that, outside of wartime, global grain supplies have not been this low in a century, perhaps longer," said NFU Director of Research Darrin Qualman .

Most important, 2007/08 will mark the seventh year out of the past eight in which global grain production has fallen short of demand. This consistent shortfall has cut supplies in half-down from a 115-day supply in 1999/00 to the current level of 53 days. "The world is consistently failing to produce as much grain as it uses," said Qualman. He continued: "The current low supply levels are not the result of a transient weather event or an isolated production problem: low supplies are the result of a persistent drawdown trend."

In addition to falling grain supplies, global fisheries are faltering. Reports in respected journals Science and Nature state that 1/3 of ocean fisheries are in collapse, 2/3 will be in collapse by 2025, and our ocean fisheries may be virtually gone by 2048. "Aquatic food systems are collapsing, and terrestrial food systems are under tremendous stress," said Qualman.

Severe food shortages, price spikes threaten world population

Worldwide food prices have risen sharply and supplies have dropped this year, according to the latest food outlook of the United Nations Food and Agriculture Organization. The agency warned December 17 that the changes represent an "unforeseen and unprecedented" shift in the global food system, threatening billions with hunger and decreased access to food.

The USDA has cautioned that wheat exporters in the US have already sold more than 90 percent of what the department had expected to be exported during the fiscal year ending June 2008. This has dire consequences for the world's poor, whose diets consist largely of cereal grains imported from the United States and other major producers.

The food crisis is intensifying social discontent and raising the likelihood of social upheavals. The FAO notes that political unrest "directly linked to food markets" has developed in Morocco, Uzbekistan, Yemen, Guinea, Mauritania and Senegal. In the past year, cereal prices have triggered riots in several other countries, including Mexico, where tortilla prices were pushed up 60 percent. In Italy, the rising cost of pasta prompted nationwide protests. Unrest in China has also been linked to cooking oil shortages.

All national governments are keenly aware of the possibility of civil unrest in the event of severe food shortages or famine, and many have taken minimal steps to ease the crisis in the short term, such as reducing import tariffs and erecting export restrictions. On December 20, China did away with food export rebates in an effort to stave off domestic shortfalls. Russia, Kazakhstan, and Argentina have also implemented export controls.

But such policies cannot adequately cope with the crisis in the food system because they do not address the causes, only the immediate symptoms. Behind the inflation are the complex inter-linkages of global markets and the fundamental incompatibility of the capitalist system with the needs of billions of poor and working people.

As the housing market in the United States collapsed, compounding problems in the credit market and threatening recession, speculation shifted to the commodities markets, exacerbating inflation in basic goods and materials. The international food market is particularly prone to volatility because current prices are greatly influenced by speculation over future commodity prices. This speculation can then trigger more volatility, encouraging more speculation.

The rising oil price not only affects the costs of transportation and importation. It also has a direct impact on the costs of farm operation in the working of agricultural and industrial processing machinery. Moreover, fertilizer, which takes its key component, nitrogen, from natural gas, is also spiking in price because of the impact of rising oil prices on the demand and costs of other fuels. By the same token, as oil prices rise, the demand for biofuel sources such as corn, sugarcane, and soybeans also rises, resulting in more and more feedstock crops being devoted to fuel and additives production.

BMO strategist Donald Coxe warns credit crunch and soaring oil prices will pale in comparison to looming catastrophe.

A new crisis is emerging, a global food catastrophe that will reach further and be more crippling than anything the world has ever seen. The credit crunch and the reverberations of soaring oil prices around the world will pale in comparison to what is about to transpire, Donald Coxe, global portfolio strategist at BMO Financial Group said at the Empire Club's 14th annual investment outlook in Toronto on Thursday.

"It's not a matter of if, but when," he warned investors. "It's going to hit this year hard."

Mr. Coxe said the sharp rise in raw food prices in the past year will intensify in the next few years amid increased demand for meat and dairy products from the growing middle classes of countries such as China and India as well as heavy demand from the biofuels industry.

"The greatest challenge to the world is not US$100 oil; it's getting enough food so that the new middle class can eat the way our middle class does, and that means we've got to expand food output dramatically," he said.

Wheat prices alone have risen 92% in the past year, and yesterday closed at US$9.45 a bushel on the Chicago Board of Trade.

At the centre of the imminent food catastrophe is corn - the main staple of the ethanol industry. The price of corn has risen about 44% over the past 15 months, closing at US$4.66 a bushel on the CBOT yesterday - its best finish since June 1996.

This not only impacts the price of food products made using grains, but also the price of meat, with feed prices for livestock also increasing.

"You're going to have real problems in countries that are food short, because we're already getting embargoes on food exports from countries, who were trying desperately to sell their stuff before, but now they're embargoing exports," he said, citing Russia and India as examples.

So, what is the take-away from this post?

I expect 2008 to bring much higher food prices around the globe. The main issue for US consumers (baring any calamity) will be significantly increased costs to feed the family, but we will probably see much more civil unrest and famine around the world.

On the other hand, if we do experience some type of calamity in 2008 or if food stockpiles continue to decline in the out years, we could potentially see one hell of a problem.

As an aside, I spent many months in Somalia back in 1992/93 as Operation Restore Hope (A United Nations Humanitarian Effort--before Blackhawk Down) tried to put food supplies in the hands of the starving (vs the controlling Warlords) and let me tell you, it was the most appalling thing I have ever witnessed... Thousands upon thousands of skeletal shells of human beings, trying to survive any way they could--the smell of death hanging in the stale air as untold numbers of bodies slowly decayed beneath shallow improvised graves baking in the desert sun...

Lets hope/pray we never experience something like this on our continent.

Randy
contrarian2day

Disclaimer: These articles merely reflect the opinions of this author and are by no means a guarantee of future economic conditions. Though the author strives to provide accurate and relevant data, he sometimes relies on external sources and cannot assure the reader of the accuracy contained within. Additionally, these articles are provided for INFORMATIONAL PURPOSES ONLY and are NOT MEANT to provide investment advice to anyone. For investment advice, please consult with your professional financial planner.

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