Rising Prices, Falling Stockpiles

by Addison Wiggin

  • Governments in denial as grain prices rise, stockpiles fall

  • A data point about food supply that’s uncomfortably close to the crisis of 2008

  • Who says there’s no new farmland left? Chris Mayer’s on-the-scene report from Brazil

  • Gold Buffaloes sell out… plus, the next catalyst for gold stocks

  • “That idiot” and other reader comments on health savings accounts…continued hand-wringing over small business angst… and more!

On Friday, government agriculture ministers from around the world converged on Rome to discuss rising food prices. Afterward, they were all singing from the same songbook. The tune those mothers sung? “Denial.”

“While there were no grounds for complacency,” participants agreed, “there was no indication of an impending world food crisis,” said the formal statement from the UN’s Food and Agriculture Organization.

“We’re confident,” added U.S. Secretary of Agriculture Tom Vilsack, “there is sufficient storage and sufficient capacity in terms of what we think [world] yields would be to meet global food needs in the next year or two.”

The “next year or two” happens to be the most critical window we’ve faced for food production since 2008 — when riots swept rice-producing nations and U.S. retailers like Costco were rationing the stuff.

Russia imposed a ban on grain exports on Aug. 5, effective through the end of next year. That sent wheat prices above $8, a two-year high. Later in the month, Prime Minister Putin extended that ban through the end of next year.

The ban will mean a dearth of nearly 18 million metric tons of wheat each year until the next “normal” harvest of Russian winter wheat comes in 2012.

Nope. No crisis here.

Even as the ministers met in Rome, headlines around the world warned about rising food prices…

  • Wholesale food prices in India jumped 15.5% in the last year, according to the Ministry of Commerce and Industry… and the rate is accelerating

  • A similar figure comes from Vietnam, where the government reports a 14% increase over the last 12 months

  • In the U.S., the Alabama Farmers Federation reports a basket of 20 basic items is up 7.7% over a year ago.

Corn and soybean prices reached new two-year highs last Friday — driven by the news that six inches of rain had fallen on an already saturated southern Minnesota. December corn exploded 23 cents a bushel, to $5.22.

That was enough to trigger more corn profits for readers of Resource Trader Alert. It was a textbook trade…

  • July 26: Alan issues his recommendation

  • Aug. 2: Alan advises readers to sell half the position for a gain of 83% (in one week!)

  • Aug. 5: While sitting tight on the other half of the position, Alan recommends readers sell a covered call on corn. That lowers the cost base of the initial trade to zero

  • Sept. 20: Alan says it’s time to close out the position

  • Sept. 24: Readers report their orders are filled. $3,500 in pure profit.

Not bad for two months, eh?

In the last two months, readers have collected gains just like this… 100% on silver… 103% on Australian dollars… 114% on gold… and two sugar plays that bagged 187% and a stupendous 445%. To learn how Alan’s strategies can give you the key to unlock the “Millionaire’s Market,” check this out.

Another factor coming into play during “the next year or two” — a shrinking grain stockpile worldwide. If we are heading into a rerun of 2008, here’s why: This month, the U.S. Department of Agriculture reckons that global grain “carryover stocks” — the amount in the world’s silos and stockpiles when the next harvest begins — total 439 million tons.

That translates to 71 days of consumption — a figure uncomfortably close to the 64 days in 2007 that touched off the food crisis of 2008.

During a recent conference call, Alan and I discussed ways to play the trend — both short term and very long term – with Steve Belmont from the RMB Group brokerage in Chicago, and Stephen Johnston, manager of a Canadian-based fund that invests in farmland.

We’ll release the audio and transcript of that call next week to Reserve members and a handful of others. But if you’d like to listen in too, we’ve made special arrangements: Just call John Wilkinson at (866) 361-7662 for the details.

“This is the land that will help feed the growing global population,” our intrepid explorer Chris Mayer writes on location in Brazil. “We endured the heat and some long bus rides to see farmland properties in the cerrado, the vast grasslands of Brazil and the soil bank of the world.

“Seasonally, we’re at the end of what passes for winter in these parts. Yet temperatures hit 100 degrees while we were out and about. It was dry and dusty with strong winds.

“Water comes from nearby rivers and a huge underwater aquifer. There is also a healthy amount of rain for about half of the year. The land is also flat.

Check out the video Chris emailed to us this morning of this degraded pasture.

You get a sense of the scale — and the whipping wind. But don’t get the wrong idea.

“Professionally managed,” says Chris, “it becomes highly productive farmland “After remediating the soil — a process that takes three-four years using a proven process of applying lime and fertilizer and growing restorative crops — the value of the land more than doubles. Hence, the opportunity here.

“You can see a few of us checking out these termite mounds that were all over the place. The soil here is old and deep. Only here and in the plains of Africa do you find soil that has been undisturbed — in a geological sense — for so long. We’re talking millions of years.

“Brazil has become an agricultural power. It also has a lot of room to go, as it has more usable arable land than any other country in the world.”

Chris is still contemplating how to translate this potential into investment opportunities for North Americans. Stay tuned.

The major U.S. stock indexes are adding onto yesterday’s losses. For starters, traders were unimpressed with this data point…

The Case-Shiller home price index rose 0.6% from June to July. Year over year, the increase was 3.2%, about what the Street expected. As we’ve cautioned before, the index is a three-month rolling average, so the numbers are still skewed a bit by the homebuyer tax credit. Wait till next month for a “clean” reading

  • And then matters took a turn for the worse… the Conference Board’s consumer confidence index turned in its lowest number since February — 48.5. Oops, the Street was counting on 51.5. Doesn’t bode well for holiday retail, does it?

After several days wavering just below $1,300, gold has broken through that level, to $1,307, mostly on renewed dollar weakness. The dollar index just broke below the 79 level.

One of the U.S. Mint’s most popular gold products is sold out.

“The United States Mint has depleted its inventory of 2010 American Buffalo 1-Ounce Gold Bullion Coins,” reads a statement issued by the Mint.

The Buffaloes, first issued in 2006, are prized for their 24-karat purity. The 22-karat American Gold Eagles are still available.

[Editor’s Note: Because of our unique business relationship with First Federal Coin, they extended the discount on Gold Eagles for 5 Min. Forecast readers from today through Friday, but only if you follow this link. If you’re interested in these Gold Eagles, it’s a good deal, but remember, we have an ongoing advertising deal with them and will likely be compensated by this endorsement. Don’t you love lawyers?]

“A key driver for gold,” writes U.S. Global Investors chief and Vancouver favorite Frank Holmes, “has been diminishing supply from gold mines. This chart from JP Morgan shows the all-in cost to produce and replace an ounce of gold for a handful of miners.

“Despite $1,300 gold, margins are still relatively modest. The costs vary widely depending on the company, but the peer average is $880 an ounce. Gold miners will be looking for ways to expand these margins and cash in on higher gold prices.

“Another good sign for gold equities,” Frank says, “is the recent pickup in M&A activity we’ve seen in the sector. There are generally about 1,000 mining M&A deals a year, but we’re already above 1,300 deals so far this year, according to a PricewaterhouseCoopers report.

“Faced with diminishing production from existing mines, many of the seniors have looked to acquire additional reserves at a reasonable price, as many junior companies remain below their 52-week highs. In many cases, these are the small to midtier miners who’ve already put in the initial legwork in taking a discovery to production.”

These are real win-win stocks: If they get bought out, you collect a hefty premium. If they remain independent, you wait… and collect even bigger profits. Byron King has a basket of seven “small to midtier miners” in his Energy & Scarcity Investor portfolio. And Chris Mayer has three more in Mayer’s Special Situations.

They’re all terrific, and one makes the cut for our special report coming out in a little over 24 hours, called 8 Stocks for RIGHT NOW. It comes with membership to the Agora Financial Equity Reserve — giving you lifetime access to all eight of our stock-picking services for one fee that’s actually lower than a year’s membership in Energy & Scarcity Investor and Mayer’s Special Situations.

We’ve never offered value like this before… and after 5:00 p.m. EST tomorrow, we never will again. Learn about all the benefits and privileges of membership here.

If it’s gold bullion you want, the “Gold to Go” vending machines we’ve seen popping up in places like Abu Dhabi are making their way into strategic spots in the U.S.: Florida comes first, then Las Vegas, says Thomas Geissler, founder of GOLD to Go.

Heh. We love the concept. We’re not so sure about the 30% premium over spot that the machine typically charges. And no one’s explained to us what happens if the coin or bar you want gets stuck after you’ve already paid.

“Good for the reader in California,” writes a reader responding to yesterday’s issue, “who pays only $5,500 per year and uses an HSA. I pay over $1,000 per month to insure just myself and my wife with as high a deductible plan and matching HSA as is offered.”

“But we live in Massachusetts, the blueprint state for the Obamacare mandatory insurance plan. Get ready, folks!”

“As a financial planner living in California, contrary to one of your readers’ claims, it is entirely possible that someone pays $1,000 or more a month for health insurance in California. Premiums are based on the coverage selected — age, etc. — not where you live.

“But, as a stage 4 cancer survivor who received 17 chemo treatments, 10 full-body radiations and a complete bone marrow transplant at the bargain price of $1.2 million, it will take the insurance company 171 years of me paying the $7,000 a year premium for my wife and I to break even.

“There is no better value than health insurance. Transferring the cost of health treatments to an insurer for a risk premium is one of the best deals going. You may not think so now, but wait until you need a million-dollar liver transplant like my 14-year-old niece or cancer treatment like myself. Then you will be happy you paid the premium.

“The only thing broken in the health care system is the government meddling in the industry and their horrendous management of Medicare. I had fantastic care and coverage with my private insurance.”

“That idiot that commented on his health care cost being cheap is the fool! I am a small-business owner in Georgia and therefore must self-insure. If you are over 60 years old with high blood pressure, you cannot find a policy for less than $950 per month.”

“For $950, you get to pay a $3,000 deductible for routine visits, hospital, pharmacy and lab before they will even begin to pay 60-80% of a contracted price. That is $11,400 every year for ONE person!

“Tell that idiot from California to go kiss a tree!”

The 5: We’ll let you have the honors.

“Not everyone agrees that health savings accounts and the high-deductible health plans with which they are requisitely linked are always the best idea for everybody. Studies have shown that even many people who participate in HSAs and HDHPs would not recommend them for everyone else.

“From what I’ve read, I think the situation is far more complex than the simplistic, dismissive, one-size-fits-all view asserted by a reader comment in Monday’s 5 (which The 5 gave an ideological amen of encouragement). Too complex to glibly suss out in limited space, I would caution anyone to carefully review HDHPs and HSAs for personal suitability. I think you’ll see what I mean. HDHPs and HSAs are an interesting idea and people should investigate them, but compared to a traditional health plan, they may or may not be your personal cup of tea.”

“When you say that a small-business owner must provide a product or service,” writes a reader on another topic, “you forgot to add ‘at a price someone is willing to pay.’ You can provide a product everyone wants, but if they can’t afford it or think it is overpriced, they won’t buy it. How many hamburgers would McDonald’s sell at $20 each? Yet some restaurants can charge that much.

“What is also left out of the debate about additional taxes on small businesses is the problem with receivables. If my business makes money but has receivables, I pay taxes on money I haven’t received. If my cash flow dies, so does my business, no matter how profitable.”

The 5: Amen. The point being, there are many more ways to spend your time while running a business than sitting back counting your gold ingots and laughing at the poor schlubs who happen to work for you.

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S.: Just over 24 hours remain in which you can secure membership in the Agora Financial Equity Reserve. It’s a service we designed in response to popular demand — delivering all the stock plays without the distraction of options, if that’s not your style.

If you’re an investor and not a trader, there’s no better value… and we’re making it easy to get started with a special report identifying our editors’ very best picks — 8 Stocks for RIGHT NOW. We issue it tomorrow at 5:00 p.m. EST… which is when this offer closes.

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