Food costs skyrocket across the globe… how the latest surge means more than just higher prices
Kevin Kerr on the U.S. agricultural crisis just around the corner
Legendary investor says U.S. market has hit a bottom… for now
Byron King on the latest DOD energy project… and how you can profit from it
Bernanke called to Congress again… our thoughts on his latest testimony
Food the world over continued to surge in price yesterday.
Last week, we were shaking our heads at rice’s parabolic run up to $19. Yesterday in Chicago, futures busted through $20 per 100 pounds. Chicago rough rice jumped 42% in the first quarter and has more than doubled in the last 12 months.
Markets in Thailand and Vietnam rose to new all-time highs, as well.
“Thirty-three countries around the world face potential social unrest because of the acute hike in food and energy prices,” announced World Bank chief Robert Zoellick, one of the catalysts for yesterday’s buying spree. For those nations, “there is no margin for survival.”
Accordingly, nations across the globe are scrambling to shore up food supplies and nix exports. In addition to new trade controls imposed by India, Egypt, Vietnam Cambodia, the Philippines and China, Saudi Arabia announced it too would cut import taxes, including totally eliminating its wheat tariff.
“It’s more than just commodity prices rising,” Chris Mayer notes. “We could actually see shortages of certain commodities. You have Saudi Arabia and India scrapping import duties on foodstuffs to try to encourage more supply.
“On the other side, you have countries such as Vietnam saying rice exports will fall 11% this year. That has far-reaching effects. For one thing, it will change the way people spend their money — more on food — and it will also encourage agricultural investment.”
Corn and wheat — the American diet staples — also shot up yesterday. Wheat popped 4%, to $9.36, in Chicago on word of exceptionally dry conditions in the Great Plains and abnormally wet soil in the Midwest. Wheat traded as high as $13 in March, but has since backed off.
Corn, on the other hand, found itself at a new record high yesterday. Corn for May delivery rose to just under $6 per bushel.
“This cold, wet start to April,” explains Kevin Kerr, “means farmers may not get corn into the ground before May 1. That is devastating. If cold, wet weather persists in the Corn Belt and farmers don’t plant until after May 1 and then, as in ’83, we see dry weather come in around June, well, then you can kiss this crop goodbye.”
Even if farmers managed to sow their crops, Kevin tells us that current yields based on planting intentions have no room for error… nothing less than a near perfect harvest will satisfy demand.
“A disaster would take only a nod from Mother Nature. Last year, Australia and China — maybe this year it’s our turn to get spanked. I have decided to head out to see some of my farmer friends in Minnesota and Iowa with my family in a couple weeks. I will keep you posted on how the fields look as I visit each of their farms.”
The 5 will tag along for the ride… stay tuned.
Even sawdust prices have doubled over the past year. According to the AP, a significant decline in lumber production this year has damaged global sawdust supply. Demand for the stuff — for animal bedding, particleboard, and fast-food hamburgers — is evidently considerable.
Due to the slowdown in housing, U.S. sawmills shipped about 114 million board feet of lumber per day during the first quarter — a 15% decline from the same period in 2007. Down nearly 30% from 2006, says the U.S. Forest Service.
The U.S. stock market remained mostly flat yesterday. Traders kept major indexes unchanged most of the day, apparently content with Tuesday’s massive rally. Traders looked like they might dump shares across the board after Ben Bernanke admitted that the U.S. economy might contract this year. But by the end of the day, neither the Dow, S&P or Nasdaq fell more than a few tenths of a point.
“We had a good bottom,” legendary investor George Soros said yesterday of the rally following the JP Morgan/Bear Stearns buyout. But “This will probably not prove to be the final bottom,” he added, suggesting that this faux-bottom might last from six weeks to six months.
“I don’t think we are halfway through the fallout, because to think what happens in the financial markets doesn’t affect the real economy is nonsense… This whole crisis underscores the conceit of many in the markets that we can pretend to understand the properties of complex asset structures when they have cyclical sensitivities, and we have not experienced those since they were created.”
Like the U.S. markets, dollar trading was mixed yesterday and this morning. The dollar index still trades around 72.5, and as we write this morning, we see a slight bias toward buying those belabored greenbacks. The euro trades for $1.56, pound for $1.99 and yen 102.
Crude oil has endured a volatile 24 hours…the black goo rose 4% yesterday, to nearly $105, on a surprise decline in gasoline stockpiles, courtesy of the U.S. Energy Information Association. In spite of recent reports indicating that Americans were cutting back gas consumption, the EIA said supplies fell 4.5 million barrels last week, double the decline expected by the Street.
This morning, crude futures are being sold off on word that crude oil supplies are growing and some dollar strength. Last we checked, a barrel of the light sweet stuff was trading for $103.
For once, gold didn’t budge as oil prices swung up and down. The precious metal has been stuck in a tight range most of the week, just below $900.
“I’ve got some ‘inside baseball’ information on one major upcoming Department of Defense program,” Byron King wrote to us this morning, after rubbing elbows with DoD and Energy Department officials this week in Washington. “An upcoming U.S. Air Force-industry partnership will aim to convert large amounts of U.S. coal into synthetic liquid fuel.
“In essence, the Air Force is offering a pilot site for a coal-to-liquid (CTL) project at a base in Montana. This will be the first of many such CTL facilities around the nation. Funding will come from the private sector, not the Air Force or any other government source.
“The Air Force will sweeten the pot, however, by guaranteeing that it will purchase the fuel that comes out of the CTL plants. Eventually, much of the Air Force fleet will fly on a mixture of CTL fuel and traditional petroleum-based fuel. The idea is to jump-start a large U.S. military-industrial CTL program that will eventually serve the rest of the economy.
“Some of the synthetic fuels information has made it into various trade press publications. But the major media have pretty much ignored the synthetic fuels development.
“The wagon train is forming up on the trail to synthetic fuels. Things are going to start happening, and soon. This ambitious CTL project will have major implications for the future of the coal-mining industry, as well as many companies in the engineering, construction and capital equipment sectors.” Byron’s prepared the Outstanding Investments portfolio accordingly, and promises to add a few investment opportunities in this sector soon. If you haven’t already, subscribe here.
We almost felt sorry for Ben Bernanke yesterday. He looked tired in his testimony before the Joint Economic Committee of Congress. Every congressman who had the floor made effectively the same statement: “There’s panic among my constituents. They’re facing bankruptcy and foreclosure. This is real. They are in real pain. You’re the expert, what are we supposed to do?”
This guy could use a nap…
Bernanke’s responsibility at the Fed is first and foremost to the Fed… a private entity set up to run the nation’s money. He paid lip service to price stability and maximum employment. He recommended Congress focus on education and energy policy. But of late, the Fed’s been hamstrung keeping global banks solvent in a liquidity crisis. The dollar and Main Street be damned. Monetary policy, our good friend Kurt Richebacher tried to prove ad nauseam, is effective only up to a point. Bernanke, for what it’s worth, appears to be willing to admit that fact publicly for the first time.
Congress’ duty in this case is to get its own fiscal house in order — rein in deficit spending and quit wagging fingers at everyone else for mucking up. But the hard choices it’s faced with make it impossible for any in Congress to take a stand on government revenues, social programs, the endless war or pork spending without fear of losing their jobs.
None of the congressional members brought up Fannie Mae or Freddie Mac, the mortgage enablers established by that august body for the purpose of greenlighting mortgages at the local and regional level in effort to meet their political mandate that every citizen be entitled to their shot at the American Dream.
Through these government-sponsored agencies, the U.S. mortgage market has effectively been nationalized by Congress. The Financial Times reported this morning, Fannie, Freddie and the FHLB network provided 90% of the financing for new mortgages at the end of 2007.
“If I’m reading the chart correctly,” writes a reader, “just over a paltry third of us here in the U.S. believe we are having a positive influence on the world.
“This is good! I’d have thought we were much more arrogant than that, and I’m relieved to see there’s some humility here in my homeland. It would be truly disturbing if the vast majority of us believed we were having a positive influence on the world, while the rest of the world disagreed. Maybe we aren’t the ugly Americans we’re often reputed to be. And if we really are ugly Americans, it’s comforting to see that at least we realize our own shortcomings.”
The 5 responds:
Unfortunately, that was a BBC poll. While they did include Americans in the sample, it was a predominantly international look at the perception of the U.S. and other countries’ impact on the world. It may yet be as disturbing as you think. But then, “Markets make opinions” the old-timers say. We’ll have to see how this financial crisis plays out. Humility on a massive scale may yet be in store for Americans.
“The sweeping financial ‘reform’ announced by Hank Paulson is quite worrisome,” writes another.
“If allowed to go into effect as announced, we are basically giving control of our financial system to the agency that created the mess to begin with. This is a private company with no answerability to the people, or even the Congress, if truth be told. It is also extremely opaque in its operations. With these new powers, it could put all the pieces in place for any type of action behind the scenes and spring it on the populace, full-blown at a moment’s notice.
“What I am specifically concerned about at first glance is the ability of the Fed to implement price and capital controls. Could you give some insight into how such measures would affect the common working man/woman and what a person with moderate means can do to protect against the most pernicious effects of such action?”
The 5 responds: History shows price controls… or any centralized control of the economy… would be a disaster. For a good look at centralized versus free markets in the 20th century, we recommend Daniel Yergin’s book and PBS documentary Commanding Heights. We still believe Bernanke, the Fed and even Paulson want to avoid price controls and let the market sort these problems out as much as possible.
But history also shows that the more egregious the economic situation, the more the people want their government to “do something” about it, including price and capital controls. As we pointed out earlier this week, we just passed the 75th anniversary of the day FDR declared it a crime for citizens hold gold. Crazier things have happened.
What can you do about it? Raise your voice or get the hell out of the way.
“Risk, scarcity and what you can do about them”… today’s themes in a nutshell. Judging by pre-enrollment at our investment symposium in Vancouver this year, readers of The 5 are as keenly interested in these themes as we are. Come join us as we host some of the most engaging speakers in the independent investment world and nearly 1,000 of your fellow travelers:
The 5 Min. Forecast
P.S. Our bulletin board aficionado Gunner Guenthner announced his latest “jumper” from the Pink Sheets to the Amex this morning. He’s hammering away an update as we speak… stay tuned. Nanocaps “jumping” to an exchange generally indicates something great is happening with the company… institutional and pricing support are likely follow.
But they remain cheap.
For a deeper look at how these small caps “jump” and how you can make money from them… and a chance to grab a $1,000 discount on Gunner’s Bulletin Board Elite, don’t miss tonight’s deadline. You have only 10 hours left. Read the following.