The Global Food Crisis, Part II

by Addison Wiggin & Ian Mathias

  • Global food crisis, Part II… the grain that has jumped 80% in a month… and the price kicker it’s about to get…

  • The oil spill almost no one’s talking about… even though it could have BP-scale impact… plus, our “innovative” way of letting you know about the upside…

  • Why the dollar is perking interest to carry traders… and what you can do about it

  • Readers outraged in the “Detroit of the West” taking issue with our trite observations

 

  We did a double take this morning. We know it’s not 2008. And yet a look at this chart of the wheat price over the last month…

…and you might think the food crisis of ’08 was just a practice run.

  A bushel of wheat fetches $7.85 this morning in Chicago.

It was “lock limit up,” rising the exchange-set maximum of 60 cents thanks to a decision from Moscow to cease exports of grain. Wheat prices have now risen 80% in a month, fueled mostly by news about a severe Russian drought and heavy rain in Canada.

“Prices have eclipsed the June 2009 highs and may be on the way to $8.50 or $9.00 a bushel,” observes our commodities guru Alan Knuckman, “which is only halfway back to the extreme highs of 2008 at near $14.00.

 

“The winter wheat harvest in America went well. The June 9 USDA report increased its estimate of 2010-2011 U.S. ending stocks from .991 to 1.093 billion bushels. Worldwide, however, the year-end projections fell from 193 to 187 million tons, putting global pressure on wheat stocks.

“As a result,” Knuckman forecasts, “demand for U.S. wheat has increased and will increase. A weaker dollar is also contributing to increase exports: 34% this year so far, versus the projected 16%. The dollar has dropped 10% from recent highs to make commodities more attractive to foreign buyers who will also benefit from strengthening in their currency.”

  Demand for U.S. wheat is about to get a kick in the pants, too.

“I think it would be expedient to introduce a temporary ban on export grains and other agricultural goods,” Russian Prime Minister Vladimir Putin told members of his cabinet this morning.

The ban will take effect in 10 days.

Russia is in the grip of the worst drought in over a century of record keeping. A grain harvest of 110 million metric tons last year could shrink to as little as 63 million this year.

Likewise, the United Nations just revised its forecast for global wheat production. The previous forecast: 676 million metric tons. Now? 651 million. That’s the biggest downward revision the U.N. has made in 20 years.

  In 2008, the last time Russia banned grain exports, it set off a wave of panic buying among importers in the Middle East and North Africa.

Forecasters are going out of their way to say they don’t foresee a repeat of the 2008 food crisis. But they acknowledge the longer the Russian drought drags on, the worse that is for the next round of wheat planting — with “potentially serious implications” for 2011-12.

Still, if we’re truly looking at the “drought of the century,” then the year we should be analyzing is 1972. That was the “Great Grain Robbery,” in which the Soviets snapped up almost all available U.S. surpluses.

During the crisis of ’72, soybeans went up 390% in 10 months… food prices on average worldwide rose 50% in the first half of '73.

“Farmers in the United States have held back crop sales, anticipating higher prices,” says Knuckman. “It has become a self-fulfilling prophecy that has added another level of volatility to an oversold wheat market.”

In the last 10 days, Alan’s readers have had a chance to grab gains of 83% on corn… 103% on the Australian dollar… and 187% on sugar. You can start building your own string of winning trades with this wheat trend and a subscription to Resource Trader Alert.

  Major U.S. stock indexes gave up most of yesterday’s gains on the open today… and for the same reason — jobs. Well, mediocre sales numbers from the major retail chains are a factor, too… but the real hurt comes from the most recent week’s first-time jobless claims. They’re up to a three-month high. The Street guessed they’d be down.

Yesterday, the payroll firm ADP estimated the private sector added 42,000 jobs in July. As anemic as that number is (the U.S. needs 100,000 new jobs every month just to keep up with new shuckers and cleaners looking for work), the market rallied because the number was higher than expected.

Tomorrow is “Jobs Jamboree Friday,” as Chuck Butler calls it — the Labor Department’s July employment report is sure to be skewed by the return of temporary Census workers to the ranks of the unemployed. We’ll do what we can to unskew it.

  With the BP oil spill retreating from the headlines, here’s another one that has escaped the notice of most Americans. Even if it has huge implications for the world’s only two oil sources that aren’t depleting rapidly.

 

A pipeline break last week spilled a million gallons of oil into the Kalamazoo River in Michigan.

Here’s where the story takes a turn for the dramatic.

You know the Chinese have been eyeing the Canadian oil sands. Canadian firms have been eager, up to this point, to build two pipelines from the sands of Alberta to the Pacific coast where the oil could easily be loaded onto Chinese-bound tankers.

The Michigan spill is giving Canadians the heebie-jeebies about all that. Here’s why: The pipeline in Michigan is owned and operated by the Canadian firm Enbridge. Enbridge is slated to build one of the pipelines in Alberta.

“Watching cleanup crews scrambling to contain the spill in Michigan,” says former CIBC World Markets chief economist Jeff Rubin, putting it lightly, “probably doesn’t endear Enbridge to British Columbia residents, who are being asked to accept the proposed pipeline in their own backyards.

“Enbridge’s only consolation,” Rubin continues, “is that its spill is likely to be equally damaging to the chances of its competitor TransCanada’s getting approval from U.S. regulators to build its contentious Keystone XL pipeline, which would bring tar sands crude to U.S. markets.”

If environmentalists are going clamp down on the oil sands too, that sounds like good news for deep-water production — outside U.S. jurisdiction. As you’ll see in today’s reader mail, folks are still buzzing about Byron’s presentation on the Canadian penny stock he think will win big on the tail end of the BP disaster and now Kalamazoo and their repercussions. If you’re just now rousting from a summer slumber, here’s about what all the hubbub is.

  Spot gold is down, ever so slightly — sitting just below $1,200 as we write. The dollar index, too, is down ever so slightly — resting at 80.8, close to a three-month low.

  Historically low interest rates are perking up interest in “dollar carry trade”… the way the yen did for carry traders for a decade in the’90s and early 2000s.

“The carry trade,” explains our currency specialist Abe Cofnas, “is borrowing low-interest currencies and investing that borrowed capital in higher-yielding currencies. In recent years, Japanese interest rates were near zero, so a popular strategy was to sell yen and buy the higher-yields in the Australian or New Zealand dollar. The result was getting very high interest rates (over 6%) as well as growth.

“But during the global financial collapse in 2008, the central banks cut rates to rock-bottom yields, and the carry trade became much less attractive. As time went on, it was even seen as risky.

 

“However, even though global growth and recovery is far from certain, the environment for a carry trade resurgence is now becoming much more favorable. Some central banks are increasing their interest rates, and it looks like the policies of further cuts have stopped.

“Since July 12, expectations of U.S. economic recovery have declined, providing an incentive for using the U.S. dollar as the carry trade instrument, similar to how the yen was used in the past.”

Abe told his readers on July 12 how to take advantage. It’s looking like an even better buy now than it was then. Don’t feel left out: We’re on the verge of re-opening Abe’s strategic forex options service to new readers. Watch this space for updates.

  “I have to disagree,” a reader writes, “with your writer’s assertion about Vegas being the first to stabilize. Vegas is, in my opinion, the future ‘Detroit of the West.’ Foreclosures will still come fast and hard. Banks presently sit on inventory to not deluge the markets with supply.

“When I looked into purchasing a house, all I heard from every realtor and person involved was how investors were buying everything they could get their hands on (sight unseen in some cases). Get ready for 25K houses in east Vegas.”

  “Well, I guess if having the highest unemployment rate in the USA is doing well, then we have it down pat in Nevada,” adds another. “Just because the casino/resort attended has a lot of people there does not transfer to a lot of income for the state, or at least that is what our elected officials tell us.

“Revenue is down so bad we will have to suck it up and get a state income tax and or tax the business in the state to survive. They want to put a higher tax on the casinos, but many are going bankrupt and they claim they are not making enough money to pay their bills. I guess it is a matter of going through for a day or two or finding out what is really happening behind the glitz on the strip.”

  “You must forget to read your own writing,” adds another. “What you see happening in Las Vegas is due to tens of thousands of folks in Las Vegas, and millions of folks nationwide, NOT paying mortgage payments on their underwater homes and spending all this money for ‘fun’ — restaurants, movies, casinos… Las Vegas!

”The people we know in Las Vegas are very aware of this phenomenon. But also, the average spending per visitor is still way down, especially on luxury goods/rooms/etc. To imagine the housing bust in Las Vegas is ‘finished’ badly misinterprets your observations.”

  After we posed the small question yesterday, “If so many people hate this new video format, why is it grabbing so much attention?” we got this reply and many more like it: “For the same reason that Chelsea Clinton's wedding garners much attention: It appeals to the masses.

“But you had a hunch it would; that's why you're trying it. The masses average out, and in our society, the average person expects an easy road to riches. I have a suspicion that the people who are ‘investors’ prefer to read the marketing material and cut through the crap, whereas the ‘speculators’ would rather lazily watch it and dream about how many multiples of rich they will become overnight.

“I have no evidence other than my personal interaction with people and understanding of the way they behave, so this is only a guess and is as likely wrong as it is right. But I further my guess by predicting that the people who enjoy your new format also are going to be your most disgruntled customers when they're not millionaires a year from now or they're worse off because they put all their money into just one of your investment ideas that they were convinced was the next fad and it didn't pan out.

“I understand these comments may come across as snarky and I'd like you to know that, even so, I think Agora is a class act. Keep up the good work and props for being innovative.”

The 5: We have a fair degree of confidence our readers know better than to put “all their money into just one” of our investment ideas. The services we provide offer a plethora of them. You won’t be disappointed. That’s our pledge. If you are disappointed, we’ll give you your money back. Straight up and simple. We succeed when you do.

You make a good point, too. We strive to make sure readers understand the distinction between “investing” and “speculating.” Too often, the latter gets confused for the former. We publish advice that will help you do both.

If you haven’t examined the evidence for yourself, or if you bailed out on account of impatience, well… here it is once again.

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S. Program note: Today’s your last chance to take advantage of EverBank’s MarketSafe Diversified Metals CD. If you want the upside of gold, silver and platinum… and none of the downside… this is one good way to get it.

We have an ongoing business relationship with EverBank because they offer some of the most unique savings vehicles in the market and are most often in line with our view of the economy and markets. Likewise, we’re likely to be compensated if you open an account with them.

We’ve managed to have them extend the deadline once for the Diversified Metals CD. But after today, the CD will be fully funded and won’t be offered again. Click here for complete details.

 

rspertzel

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