Harsh Times - A New Normal

By: Richard Mills | Fri, Apr 8, 2011
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As a general rule, the most successful man in life is the man who has the best information

The approaching storm I wrote about in last year's article The Rising Cost of Survival has certainly struck many countries with a vengeance. I thought it would be an appropriate time to revisit.

In 2008, a spike in food prices resulted in food riots around the world. The recession brought prices down while record crops allowed some stockpiles to be rebuilt and gave us a respite from the turmoil.

Unfortunately 2010 was a disaster for crops and their stockpiles. Severe droughts, record heat waves and fires combined with floods to cut crop outputs and global grain stockpiles, at the end of the 2010/11 season, were at a three-year low of 341 million tonnes.

By the end of 2010 the global price of food had hit a new record high - the UN's Food and Agriculture Organization's (FAO) index of 55 food commodities hit 214.7 points - the previous high was 213.5 in June 2008.

Food prices are forecast to grow by more than another 30% this year. In a worst case situation of critical shortages, analysts, in a survey conducted by Bloomburg, say prices could skyrocket by as much as 75%.

FAO Food Price Index

The FAO said last December that global output of all cereals (including rice, wheat and corn) will drop 1.4 percent to 2.23 billion tonnes this season, while demand will rise 1.8 percent to 2.26 billion tonnes. That will push global stockpiles 6 percent lower to 525 million tonnes, and mark the first cereal deficit since the 2008 food crisis.

"If people don't have enough to eat, they only have three options: they can revolt, they can migrate or they can die." Josette Sheeran, executive director of the UN's World Food Program

Almost half of the planets population lives on less than $2.50 a day - roughly 1.4 billion people live on less than $1.25 per day. The world's extreme poor exist almost exclusively on what is a buy today, eat today plant based diet - wheat, corn or rice provide the bulk of their calories. When food prices soar these people lack the money to feed themselves and their children - when your living on a couple of dollars a day, or less, and most of your income already goes to feed your family there's no money to cover a price spike in the cost of survival.

In 2008, global food prices spiked to all-time highs, and hunger riots erupted from Haiti to Morocco. In January, 2011 protests and food riots began in Algeria and quickly spread. For the second time in only three years we're facing a full blown food crisis:

"The power of population is indefinitely greater than the power in the earth to produce subsistence for man". Thomas Robert Malthus

Malthusian pessimism has long been criticized by doubters believing technological advancements in:

would keep crop production ahead of the population growth curve. Malthus's prediction hasn't come true because, so far, rising agricultural yields have always outpaced population growth. Unfortunately yield increases have generally leveled off and supply is barely keeping up with demand.

"The way humanity manages or mismanages its nature-based assets, including pollinators, will in part define our collective future in the 21st century. Human beings have fabricated the illusion that in the 21st century they have the technological prowess to be independent of nature. Bees underline the reality that we are more, not less, dependent on nature's services in a world of close to seven billion people." Achim Steiner, UN Undersecretary-General and UNEP's Executive Director

Many vegetables, fruits, nuts, legumes and seed crops are dependent on pollination and that service is provided mostly by bees - one of the most important global pollinators of native plants.

"The chess-board is the world; the pieces are the phenomena of the universe; the rules of the game are what we call the laws of Nature. The player on the other side is hidden from us. We know that his play is always fair, and patient. But also we know, to our cost, that he never overlooks a mistake, or makes the smallest allowance for ignorance." Thomas Henry Huxley, biologist

The bumblebee is disappearing - bumblebee numbers are declining in Europe, Asia and North America. Honey bees are also disappearing at an alarming rate - colony loss in North America, since 2004, has resulted in fewer managed pollinators than any other time during the last fifty years.

"Sovereign nations are beginning to stockpile food to prevent unrest. You artificially stimulate much higher demand when nations start to increase stockpiles." Jim Gerlach, A/C Trading

Governments are scrambling to lock up world supplies of grain while they can:

"This is only the start of the panic buying." Ker Chung Yang, commodities analyst at Singapore-based Phillip Futures

The U.S. Department of Agriculture said corn stockpiles, on March 1, declined 15 percent from a year earlier as demand for animal feed, fuel and food climbed. In the week ended March 24, U.S. exports for delivery before Aug. 31 doubled to 1.91 million metric tons from a week earlier. Supplies held by farmers fell 26 percent from a year ago and represented 52 percent of total U.S. stockpiles, the smallest since 1973

"Declining U.S. grain supply was a surprise, and the market is adjusting to a tightening situation. Export demand improved." Chad Henderson, market analyst for Prime Agricultural Consultants Inc.

All of this puts added pressure on prices. And there's more:

Currently there is a drought in China which has affected 35.1 percent of their wheat crop. China's drought may cut the chance of rebuilding global stockpiles. China bought 116,000 metric tons from the U.S. in the week ended March 17, the most for any week since July 2005 and in China 2010 was a net importer of corn for the first time in 14 years.

In an emergency China could bid up and buy whatever they want because of the massive size of their US dollar component of foreign reserve holdings.

"Because there is already much more capital available in the world than hard commodities, speculators can increase the price of consumable commodities, like foodstuffs or energy, much higher than traditional consumers and producers can react. When derivative markets are linked to commodity markets, this nearly unlimited capital from the financial sector can cause excessive price volatility." Hedge fund manager Mike Masters

Cereal Production


Climate change

In 2010 the world's breadbaskets of Russia, the US, Australia, China, Brazil and Argentina were slammed by heat waves, flooding, droughts or freezing weather.

The worry about, and direct threat of, ongoing climate change impact on agriculture isn't about the slow almost imperceptible changes caused by a gradual shift in our weather patterns. The greatest worry is that climate change might intensify already extreme events.

And with extreme events being exacerbated by climate change an already stressed agricultural industry (by loss of arable land, shortage of fresh water for irrigation, increasing human population, staple food crops used for bio-fuel production, increasing energy costs and developing countries changing diets) is increasingly having a more difficult time feeding and clothing the world.

Many climatologists believe that the ongoing climate change the earth is undergoing will increase the frequency and severity of extreme weather events. According to insurer Munich Re, 2010 had the second highest number of natural catastrophes since 1980 and most were weather related.

Continuing climate change is a fact, unseasonable weather and permanent changes in precipitation patterns are becoming the norm rather than the exception.


Conclusion

This week wheat and soybeans are up 8 per cent and corn hit a record high of US$7.73 a bushel.

According to the U.S. Department of Agriculture (USDA) farmers in the US expect to plant one of the largest corn and soybean crops in history. Wheat production is up in China, Russia and the Ukraine - India is enjoying strong rice harvests. Growers in Brazil and Argentina have reaped bumper harvests. But production is barely keeping up with demand.

The USDA says inventories of corn and soybeans are plummeting. The supply of corn is at a 15-year low and soybean inventories are at record lows. Canola inventories are also down.

"World agricultural markets have become so finely balanced between supply and demand that local disruptions can have a major impact on the global prices of the affected commodities and then reverberate throughout the entire food chain." A recent report from HSBC

Living on the edge - US grain production filled critical shortages in world supply three times in the last five years:

"This has been a demand-driven bull market. I do not think we can see a big enough increase in U.S. acreage to rebuild inventories back to a comfortable cushion in one year. It is going to take two years of good weather and good yields. There is absolutely no room for any weather problems anywhere in the world this year." Jim Farrell, chief executive officer of Omaha-based Farmers National Co.

Good weather, and good yields for two years in a row just to get back to comfortable levels?

The International Monetary Fund (IMF) said, in a recent report "Over time, supply growth can be expected to respond to higher prices, as it has in previous decades, easing pressure on food markets, but this will take time counted in years, rather than months."

It is estimated that the population of the world reached:

Over the next fifty years, as we add another 4.5 billion people to the world's population, global demand for food will increase almost 70% if population growth predictions are correct.

Already approximately 1 billion people go to bed hungry each night. Somewhere in the world someone starves to death every 3.6 seconds - most are children under the age of five.

"Rising food prices are a threat to global growth and social stability and the world is just one poor harvest away from chaos." Robert Zoellick, president of the World Bank

We have to realize that higher food prices and the resulting civil unrest are not a temporary condition but a New Normal and adjust ourselves accordingly.

Is a New Normal, the coming Harsh Times, on your radar screen?

If not, maybe it should be.

 


 

Richard Mills

Author: Richard Mills

Richard (Rick) Mills
www.aheadoftheherd.com

Richard Mills

Richard lives with his family on a 160 acre ranch in northern British Columbia. He invests in the resource and biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com. His articles have been published on over 400 websites, including: SafeHaven.com, WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Beforeitsnews, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire, Indiatimes, Ninemsn, Ibtimes, Businessweek, HongKongHerald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com and the Association of Mining Analysts.

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