I am still on alert for a larger pullback in the market. The larger picture suggests the SPX will li...
Egypt has escalated the food crisis and shifted global economic policy on inflation too
02/01/2011 8:30 am EST
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 http://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/
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