Alternative energy is hot stuff. Sure energy demand is waning during the economic downturn and crude prices have dropped to a third of their all-time highs, but we all know the bears will eventually fill their stomachs and move on.

At least that is what the folks investing in solar, wind, biofuels and geothermal technology are betting on.

There is a report out this week stirring their ambition. According to research released yesterday by Clean Edge, worldwide alternative energy revenues soared by 53% in 2008 to $116 billion. Not bad, but it pales in comparison to the $477 billion in revenues Exxon Mobil (NYSE:XOM) recorded during the same period.

Fortunately, the industry is expected to grow, but we will have to wait at least a year or so. The current recession has created a nasty speed bump for the “green” economy. Even with Obama’s massive spending efforts, it will be at least a decade until alternative-energy revenues double. Clean Edge estimates the industry’s revenues at about $325 billion by 2018.

Lots of risk, little reward

That is steady growth, but does not come anywhere close to matching the ambition held by so many investors that are planning to get rich overnight thanks to “green” growth.

Looking forward, we cannot be fooled into hoping for too much change. Five years ago investors (or was it politicians?) were claiming clean coal technology was going to power the nation in the near future. We all see how that industry is still lacking its formal introduction to the world.

Read the full article here: In-and-out strategies for alternative investment profits

But what might the new administration mean for more traditional – and more reliable –energy sources?

Oil is always the first energy source to spring to mind. But it’s hardly a solo act – coal and nuclear make up the other two-thirds of the top fuel trio. Coal delivers 50% of U.S. electricity needs, and nuclear power brings another 20% to the table.

The cold truth is that demand for energy of all types – and especially electricity – is going to keep advancing, domestically and worldwide. And developing alternatives to coal and nuclear will take time. For instance, tying wind and solar into the existing power grid will be enormously expensive and is likely to pose massive technical and engineering problems.

In fact, according to the International Energy Agency, renewable energy isn’t likely to make a meaningful dent in meeting the world’s energy needs before 2030, if then.

And regardless where the power comes from, our appetite for electricity will continue to skyrocket. Across the planet, overall electricity consumption is expected to double by 2030, increasing by 17 trillion kilowatt hours. While electricity demand will “only” increase by 50% in the U.S. market by 2030, demand will increase 400% in China and six-fold in India.

Our research indicates that President Obama will have very little flexibility in solving our short-term energy problems once he’s sworn into office next month. While he may prefer the environmentally friendly alternatives, most of those replacements are far from fully developed.

The bottom line: Obama’s apparent preference for renewable energy aside, coal and nuclear power are fully deployed, and in widespread use, meaning they’ll remain the backbone of our energy sector in the New Year – and for years to come.

Even so, it’s well worth factoring in all the possible players as we examine energy-sector outlook – and the accompanying potential profit plays – for the next 12 months.

King Coal Reigns Supreme

When it comes to future energy profits for investors, coal and nuclear will continue to be the “dream team” for years to come. Coal will provide the answer to our short-term and intermediate energy needs.  It’s plentiful, it’s cheaper than other available alternatives, and a big percentage of the world’s power plants burn it.

Nuclear power offers a long-term solution to energy shortages and a clean solution to global warming, as well. Uranium-fueled nuclear plants are cheap to operate, can run for long periods without refueling, and cause little pollution.

While there is widespread distaste for coal-fired power plants that spew billions of tons of carbon dioxide and other pollutants into the air, there’s no doubt coal will continue to be the dominant player in the electricity game for some time to come.

A full 50% of the electricity U.S. consumers use is generated by coal, and coal is king in the rest of the world, as well. According to the IEA, coal accounted for 42% of all worldwide electricity consumption in 2005.
But get this – the agency predicts coal use will explode by 73% over the next 20 years. That’s the largest projected percentage increase of all energy sources.
As you might suspect, China and India use 45% of world’s coal and will be responsible for 80% of that increase. China, alone, uses more coal than the United States, Japan and Europe combined.  China is utterly dependent on coal to run its factories and assembly plants, with coal supplying 80% of its electricity. The Red Dragon also is the world’s top producer of steel, a process that’s also a big burner of coal.

But while China is coal’s largest consumer and producer, the United States controls 27% of the world’s proven reserves, the biggest-single percentage on the planet.  That puts this country front and center on the worldwide coal stage, and President-elect Obama’s energy policy in the spotlight.

The president plays a pivotal role in shaping the nation’s energy policy, naming top officials at the U.S. Environmental Protection Agency (EPA), the Office of Surface Mining Reclamation and Enforcement and the U.S. Army Corps of Engineers.

Obama has proposed an economy-wide cap-and-trade system to reduce carbon emissions by 80% by 2050.  His system – which would set an overall emissions limit, then require polluters to buy allowances at public auction – would increase electricity rates and discourage coal consumption in the U.S. market. President-elect Obama even has stated that any utilities building coal-fired plants could go bankrupt buying pollution allowances.

And on Capitol Hill, newly emboldened Democrats recently tackled global warming and other environmental problems by choosing Sen. Henry Waxman, D-Calif., to head the House of Representative’s Energy and Commerce panel.  Waxman has already signed onto legislation that would ban any new coal-fired power plants that aren’t built using new technologies that capture carbon dioxide and store it underground, a key part of the Obama energy plan.

Luke Popovich, a spokesman for the National Mining Association, said he believes Obama will be pragmatic about the need to keep coal in the nation’s energy mix.

“He presumably would be sensitive to the impacts of energy policies given the perilous state of the economy,” Popovich said.

But while U.S. utilities may eventually be forced to tighten emissions rules and increase rates, Obama’s renewable energy plans will have very little impact on U.S. coal producers in the near future.

The world needs coal. We have it. And we’re going to sell it.

In the first half of 2008, U.S. coal exports increased by 13 million short tons, or 50%, over first-half 2007 shipments, according to the IEA.  Strong global demand for coal, combined with supply disruptions in several key coal exporting countries (Australia, South Africa and China), were the primary factors behind the increase.

But lately, coal prices, along with the prices of other fossil fuels, have suffered from the global economic crisis, and from a resurgent U.S. dollar. An 80% decline in global shipping rates has also fostered competition from other exporters, like Australia, which can now ship farther and compete with U.S. exporters.

As a result, the price of Appalachian Coal on the New York Mercantile Exchange (CME) has fallen to less than $80 a ton from $143 in July.

This will have a negative impact on coal producers until the world economy is able to gather itself back up and build up a new head of steam.

But don’t expect the slump to last long.  China’s economy is getting a shot in the arm from a gigantic $586 billion stimulus package, cementing growth expectations for 2009.  Expect U.S.exports to accelerate when that kicks in, probably in the second half of 2009.

Since the stock market usually leads economic indicators by six-to-nine months, right now is a good time to be looking at candidates for your investing dollar. But you should be cautious about pulling the trigger.  Watch construction activity in China – especially steel demand in the late spring – for the first signs of a rebound in coal prices.

When you think things are ready to take off, Peabody Energy Corp. (BTU) and Arch Coal Inc. (ACI) – the largest U.S. producers – are worth a look. For those who like to play a basket of shares, the Market Vectors Coal exchange traded fund (KOL), or ETF, provides the desired diversification. All three securities are trading at discounts of at least 80% from their July highs, and currently trade at bargain basement multiples.

If you want a coal play that bets directly on China, Money Morning Investment Director Keith Fitz-Gerald likes Yanzhou Coal Mining Co. Ltd. (ADR: YZC), one of China’s biggest coal suppliers. It produces lots of high-grade, low-sulfur coal, which burns cleaner and therefore fetches a premium price. The company boasts profit margins of 22%, when the industry averages half that.  The company profits are up a blistering 364% in the year’s first three quarters, compared with a year ago.  The stock trades at only three times earnings and has a dividend yield of 4.3%.

Nuclear Power: It Struggles in the U.S., but Thrives Abroad

Nuclear power is attractive to the energy industry because it produces electricity on a predictable, 24-hour basis – earning it the industry sobriquet of “base load” power. Coal and hydroelectric plants are the only other power sources that also rate that label. Such alternatives as wind, solar or biofuels do not.

During its term, the Bush administration tried to spark a “renaissance” in the construction of nuclear power plants.  And during his presidential campaign, Sen. John McCain stood firmly behind the industry’s hopes of building 45 new reactors by 2030.

Interest in new types of reactors seemed to hint at least at the beginnings of a new start. But President-elect Obama has been lukewarm on nuclear.  He acknowledges that nuclear is one of several viable components of the nation’s energy portfolio – the current 104-plant fleet provides 20% of America’s electricity – but has questioned its safety while emphasizing a need to diversify the nation’s energy mix with more wind, solar and other renewable sources.

“That’s sort of like my wife saying she’d support divorce under certain situations,” says William Kovacs, the U.S. Chamber of Commerce’s vice president of environment, technology, and public affairs.

In fact, the Barack Obama/Joe Biden New Energy for America Plan, while recognizing that nukes provide 70% of our non-carbon-generated electricity, says that “before an expansion of nuclear power is considered, key issues must be addressed including: security of nuclear fuel and waste, waste storage and proliferation.”  It goes on to say that the team of President-elect Obama and incoming Vice President Joe Biden “do not believe that Yucca Mountain is a suitable site as a long-term repository for spent nuclear designed for long-term storage.  In any case, the earliest the storage site could open would be 2017, and that was before Republicans lost control of the Senate.

With Senate Majority Leader Harry Reid, D-Nev., firmly opposed to nuclear waste storage in his home state – and with the Obama administration ready to hold the industry’s feet to the regulatory fire – any plans to expand the nuclear industry in the United States now face a high hurdle.

But nuclear proponents are hardly impotent.  The Nuclear Energy Institute, the industry’s most powerful lobbying group, helped craft the Energy Policy Act of 2005 with more than $12 billion in subsidies for nukes.

Maintaining nuclear energy’s current 20% share of generation would require building three reactors every two years starting in 2016, based on U.S. Department of Energy forecasts.  Right now, some 17 companies and consortia are pursuing licenses for more than 30 nuclear power plants with the Nuclear Regulatory Commission.

But the last operating license for a nuclear plant in the United States was issued in 1978, and the approval process takes a minimum of 24 months after site approval, which can take years.  Expect lots of public comment and infighting in Washington, as applications wind their way through the approval process at the NRC.

Meanwhile, the rest of the world is racing ahead with plans to up the ante in the nuclear power game. There are currently 440 nuclear reactors in 31 countries that generate about 16% of the world’s electricity.

Uranium-fueled nuclear energy is rapidly gaining global acceptance as a clean, reliable alternative to such dirty-burning fossil fuels as coal and oil. In a twin bid to combat global warming and keep up with soaring demand for electricity, countries are rushing to build nuclear power plants. Under current projections, 630 reactors will be operating in 55 countries by 2030.

It’s the new technologies those reactors are designed around that are aimed at allaying the public’s perception about the safety of nuclear power.  Toshiba Plant & System Services, which has built 112 plants in the past 12 years (more than any other company), is working on a “mininuke,” according to Forbes magazine. Called the “4S” (short for Super-Safe, Small and Simple), it uses a bath of molten sodium to produce steam twice as hot as steam from water-cooled reactors.  The 4S can crank out as much as 50 megawatts of power, easily enough to fire up a small factory, or to service an entire town that’s located off the main power grid.

On top of that, the mininuke can go 30 years without refueling, as opposed to typical reactors, which must be fed every 18 months. And the 4S will be safer, because the reactor core is deep underground, well protected against a terrorist attack or earthquakes.

China and South Africa are working on so-called “pebble-bed reactors,” one version of which is filled with 100,000 billiard-ball-sized spheres of coated uranium that are cooled by helium. That eliminates the need for enormous pressurized water-cooling systems and million-dollar containment domes, making them virtually meltdown-proof.

U.S. firms are also on the trail of smaller and safer designs. A Santa Fe, NM company called Hyperion Power Generation Inc., is working on a hot-tub sized design, which eliminates the need for the notoriously unstable uranium control rods. U.S. giant General Electric Co. (GE) is working on new, more efficient designs, as well.

No matter how you slice it, the fuel for the reactors in those plants all depend on a scarce commodity – uranium.  Flat out, there’s just not enough “yellow cake” to go around.  It takes seven to 10 years to transform a uranium discovery into a fully operational mine. With that kind of lag time, it’s clearly almost impossible for supply to keep up with demand.

Until recently, the market reflected the scarcity, rising as high as $137 a pound in 2007. But lately, despite the global shortages, uranium prices – in sympathy with other commodity prices – have nosedived.

Prices have fallen 40% this year, leading to a sharp decline in the share prices of mining companies, and eviscerating the financing for extraction projects. In the last month alone, six uranium mines in western Colorado and Utah were either put on hold or closed.

Some experts lay the blame for this current credit squeeze squarely at the feet of hedge funds – who they blame for buying up uranium – and banks no longer willing to lend money.

“Hedge funds were selling off their uranium to raise cash, and the prices just plunged,” said George E.L. Glasier, chief executive officer of Energy Fuels Inc., a Canadian junior miner that recently put a Colorado mine project on hold as part of a “capital preservation” strategy brought on by the credit crunch.

Uranium prices fell to $75 early this year, and fell as low as $44 this fall.  The spot price now is $55.

With the worldwide growth in the industry – and a classic supply/demand imbalance in the making – someone is eventually going to have to pay the price.  History shows when uranium prices move higher, uranium stocks almost always hitch a ride North. So when uranium prices advance – most likely to new highs – expect mining stocks to rise in virtual lock step.

But notwithstanding global growth – for now, at least – Obama’s energy plan and the mothballing of mines makes any uranium play a long-term proposition.

Besides Toshiba (PINK:TOSBF), the stocks to consider include Cameco Corp. (CCJ), the largest U.S. producer; and General Electric, which has a presence in the commercial nuclear power market here and overseas. Also, take a look at Rio Tinto PLC (RTP) and BHP Billiton Ltd. (BHP), huge international mining firms with large uranium deposits.  Each of these firms would stand to reap substantial profits from a resurgent price in yellow cake.

Outlook 2009 – and Beyond

However, regardless of what uranium does, coal is still the 800-pound gorilla in the energy world. In the United States, no matter how lofty our environmental intentions may be, it’s unlikely coal will be regulated out of existence anytime soon. That’s especially true overseas, where coal is playing a crucial role, fueling the transformation of such countries as China and India from “emerging markets” into first-order powerhouse economies. Given that, the world market simply can’t replace coal anytime soon, either.

As for nuclear power, safety improvements and other technological solutions make nuclear energy a viable energy source for the long term, eventually grabbing a bigger piece of the energy pie – especially overseas.

The bottom line: The economic outlook for both coal and nuclear power is upbeat.  Investors might look at both energy plays when considering how to allocate their portfolio – for the New Year and beyond.

Source: Surprise! Coal & Nuclear Power are Keys to Obama’s Energy Plan

While the details of the conference were in danger of being overlooked in the hubbub surrounding the unwelcome and unexpected attendance of Zimbabwe’s President Robert Mugabe, some aid groups called for an African ‘green revolution’, while UN Secretary-General Ban Ki-moon argued that food production would have to grow by 50% by 2030 to stave off starvation. Hungry people, he warned, are angry people – a redundant observation, perhaps, given the doubling in food prices this past year has already seen riots from Buenos Aires to Manila.

There are some forces driving the current food crisis that this week’s UN food summit can’t tackle, says The Guardian, be it terrible harvests or rising demand from China and India. However, “there is one measure ministers might take that could have a real and rapid impact: call a go-slow on biofuels”. According to the International Monetary Fund, biofuels have been responsible for 20%-30% of the rise in food prices.

And the Secretary General of the UN’s Food and Agriculture Organisation, Jacques Diouf, pulled no punches in denouncing America’s policy of diverting 100 million tonnes of cereals from human consumption “to satisfy a thirst for fuel for vehicles.”

Be that as it may, biofuels “have got too much attention”, says Bronwen Maddox in The Times, and the World Bank’s Robert Zoellick “rightly called for the issue not to dominate the summit”. Indeed, “a cocktail of factors – low stocks and a weak dollar, soaring energy prices, and “a hunger for richer foods” have also contributed to the current crisis, says the BBC’s Stephanie Holmes.

Even so, “politicians in Europe and America should recognise that the subsidised growing of bio-fuels has been an error”, says The Daily Telegraph. “Yet the EU refuses to accept this is mistaken and has decided that 10% of all transport fuel should come from biofuels by 2020. The subsidies should be repealed.”

Source: Biofuels Power Global Food Crisis Talks

Fitch raised Brazil’s foreign-currency debt rating to BBB-, the lowest investment-grade level, from BB+, matching a move made by S&P on April 30. The increase will give the South American country better access to capital markets because some institutional investors can only buy securities issued by countries with at least two investment-grade ratings. [...]

The yield on the government’s zero-coupon bonds due January 2010 fell 19 basis points, or 0.19 percentage point, today to 14.31 percent, according to Banco Bradesco SA. The extra yield investors demand to own Brazil’s dollar bonds rather than Treasuries shrank 16 basis points to 1.91 percentage points, the narrowest since Nov. 7, according to JPMorgan Chase & Co.’s EMBI Plus index.

The Fitch move “is potentially the door opening to some investors who now can buy Brazil in the fixed-income market,” said Geoffrey Pazzanese, who helps manage $44 billion in global stocks at Federated Investors Inc. in New York.

The risk of owning Brazilian bonds fell to the lowest since May 19, according to Bloomberg data. Five-year credit default swaps based on the country’s debt dropped 6 basis points to 0.895 percentage point. That means it costs $89,500 to protect $10 million of the country’s debt from default.

“Brazilian companies have become global leaders in key industries,” says Manraaj Singh in Profit Watch.

“Companhia Vale do Rio Doce is now the world’s biggest iron-ore producer. State-owned oil company, Petrobras, overtook Mircrosoft to become the world’s sixth-biggest company by market capitalisation last week. Petrobras is sitting on the Western Hemisphere’s largest oil discovery in three decades. Possibly even the third-biggest oil field in the world!

“These are names that are going to become much more familiar to us in the decades ahead.

“Brazil isn’t just an emerging oil giant… it’s also the biggest producer of the only truly commercially viable alternative to oil – sugar-based ethanol.”

As the world’s lowest cost ethanol producer, Brazil has a big advantage over other countries, says Mike Burnick in The Offshore A-Letter:

“Neither U.S. corn-based ethanol, nor wheat-based ethanol from Europe, can come close to matching the Brazilians on a production cost basis.

“The sugarcane plant, which flourishes in Brazil’s tropical climate, produces a ‘yield’ of 6,000 liters of ethanol per hectare of land. That’s about twice the yield of corn-based ethanol!

In fact, Brazilian ethanol is about 40% cheaper to make than in the US – and costs less than half the price of European ethanol.”

Washington will be asked this week to answer allegations that subsidies amounting to 11p a litre on B99 [biodiesel with up to 1% petroleum added] exports from the US, plus “splash-and-dash” operations being conducted through the US, represent unfair competition.

The European Biodiesel Board lodged a formal complaint against the US with [the European commissioner] at the end of last month after a disastrous period for British, German and other biodiesel producers.

D1, one of the leading UK firms, announced in April that it would be closing its newly built refineries and laying off all its staff there because it could not compete against cheap US imports. Elliott Mannis, D1’s chief executive, said it was an “unbelievable situation” that Europe had sat on its hands so long and let B99 cause turmoil in a market that has opened up to huge new demand.

The case against the US will not be one-sided. Manning Feraci, of the US National Biodiesel Board, has said: “It is hypocritical for the EBB to cry foul while they benefit from a blatant trade barrier.”

Byron King in Energy and Oil is bullish on another alternative energy source: coal to liquid or CTL.

“The US will adopt CTL, because it has to do so,” says Byron. “There are few other large-scale industrial alternatives. Windmills, biofuels, conservation and every other energy-saving and energy-extending idea will help. But the world we live in is built to run on oil, and nothing else will cut it for some things when it comes to running a fast-transforming economy. So stand by for CTL.

“It is not a question of if the US will adopt CTL. It is a question of when. And looking ahead, every month is precious. As I said above, we are running out of time. So it will matter greatly how much will we as a nation fool around with our national obsession of navel-gazing over ancillary issues before we get around to making a decision to bend steel.”

“The biofuels debate is interesting from a number of angles,” says Merryn Somerset Webb in Money Week. “Firstly, it is not absolutely true to say that the commitment of land to the production of biofuels automatically reduces food production everywhere (although that hardly makes the European Union’s full-on encouragement of plant-derived fuel right).

“Supporters of biofuels tend to use the Brazilian experience as justification for the dash to plant-derived fuel alternatives, not that that country’s success should detract from the fact that there are a lot of other places where land which would otherwise have been used to grow food for human consumption has now been given over to the production of biofuel to feed machinery!

“The EU could, for example, call a halt to its pre-announced intention to derive 5.75% of petrol and diesel to be manufactured from plants, although we understand the EU’s difficulties given growing stresses in the oil market too.”

How does one control the inflationary trends that are happening worldwide? Surely, this is not a simple question to answer, even for specialists. Every time my colleagues and I meet, we cannot reach an agreement regarding how to control inflation, particularly in a context where international energy and food prices keep increasing.

One of the conclusions we can reach without much discussion is that strong food and energy price increases are striking all world economies, and that net commodities exporters are benefiting from these price spikes.

The second conclusion that we are able to gather from this situation is that countries having great natural resources, that are not yet net commodities exporters, now have a great opportunity to gain from the current economic situation.

This is exactly the circumstance that Brazil finds itself in currently. For two decades now they have had an effective policy regarding oil (fossil fuels), but now they are looking to expand their interests in biofuels and in developing policies to promote the cultivation of grains. In this way, Brazil is demonstrating a way not only to limit dependence on imported commodities, but also how to benefit from the current high international prices of commodities.

Thinking now of Mexico, the first thing I ask myself is: to which extent are these high energy and food prices affecting the Mexican economy?

Due to inflationary concerns, on the 16th of May, the Bank of Mexico decided not to modify interest rates. Inflationary pressures keep mounting along with concerns regarding a potential recession in the US: “Inflationary pressures in the world and in Mexico keep increasing and it is a growing concern.”

The Bank of Mexico’s governor, Guillermo Ortiz Martínez, noted a few days later: “There are still inflationary pressures because processed food prices could still go up, even though there is a more stable grain price.”

Inflation is worrying Mexico and there are concerns about a potential economic slowdown there as well… But there is also another situation that worries Mexico and this one is related to the development of energy reform there.

Reform within Pemex, the nation’s oil company, is at the center of this debate. Pemex plays a vital role in Mexico’s economy due to the huge profits that it generates. These profits, in turn, are used to fund areas within the infrastructure of Mexico such as education, security and other social programs.

For the first quarter of the year, 45% of the country’s income came from Pemex. This contribution by Pemex to the state treasury is particularly significant because oil production is decreasing and the known reserves have diminished significantly in recent years.

Pemex’s production peaked back in 2004, but ever since then it has consistently declined. Its oil production has fallen 1.3% in 2006, another 5.3% in 2007, and during the first quarter of this year it fell 7.8% below production levels during the same period last year.

However, it is most worrisome that between 2000 and 2007 the proven oil reserves in Mexico fell 54%, according to data from Pemex’s own annual stock report.

And while oil prices keep on skyrocketing (breaking the $130 barrier) Mexico is losing a great opportunity. With these high prices, now is the time for Mexico to begin looking towards investing in its future. However, the bad economic policies of the Mexican government are leading to a lack of any such investments at the current time.

But there is still time to change history by changing these policies; and to accomplish this Mexico needs massive amounts of capital for investing in its future. Thus the key issue for Mexico to resolve, and quickly, is how to find this necessary funding.

And one cannot forget that Mexico is not the only country in the region that is squandering its future growth opportunities. Argentina is as well and I will talk to you more in depth about this matter tomorrow. Today I have an opportunity to hear several renowned Argentine economists speak at an interesting conference at the Sheraton Hotel. Tomorrow I will specify their ideas and forecasts regarding Argentina, for you, our Latinforme readers.

We will meet again tomorrow,

Horacio Pozzo

Editor’s note: With oil prices climbing to higher than $133, to what extent does Mexico benefit from this? Is it taking advantage of this special time? Enjoy the following article and send your comments to: paola@latinforme.com or on our website at www.latinforme.com

Food prices have undergone a paradigm shift and will not drop back to pre-crisis levels for at least the next 10 years, putting long-term pressure on governments facing the food crisis, according to a forthcoming report.

The report, by the Organisation for Economic Co-operation and Development and the UN’s Food and Agriculture Organisation, will say food prices have moved to a “higher plateau” because of rising demand from the biofuels industry and developing countries such as China.

Bill Bonner in The Daily Reckoning says, “Capitalism had already pronounced its verdict on corn-based fuel: it was a bad idea. Later, environmentalists came to the same conclusion; it actually caused more damage than petroleum. But the US Congress, in its majestic wisdom, saw something in ethanol that capitalists and environmentalists had missed – campaign contributions and votes!

“And so it came to be that a large portion of the US corn crop is diverted into fuel tanks. And so it comes to be that a large number of the world’s people – including Americans themselves – find their food much more expensive than it used to be.”

Rising raw material prices, in particular rising food prices, are now causing real hardship and what represents a cause for shoppers in developed economies to grumble is a matter nothing short of life and death for the millions less fortunate around the world. This note considers what many emerging countries are doing and why their actions, far from alleviating the problem, are actually making matters worse.

Lord Mark Malloch Brown is a junior minister in the current Labour administration. He has a reputation for being forthright and often puts his colleagues’ hackles up. He is also the former deputy secretary general at the United Nations and an acknowledged authority on global issues of critical concern. His recent comments regarding the growing food crisis are significant both because he has identified some of the root causes and because he has taken steps to raise the matter where some of his more craven colleagues dare not.

Lord Malloch Brown describes, somewhat unoriginally, the confluence of factors he sees as serving to cause food prices to rise as a “perfect storm”. These factors are: a series of poor harvests in Australia, the incremental demand for improved diet caused by the newly prosperous parts of China and India, coupled with the now wide-spread process of biofuel “flag planting” on land previously devoted to the production of food stuffs. We would add a few additional factors, on which more below.

Bang on cue, the United Nations secretary general Mr Ban Ki-moon has warned that, if allowed to escalate, permanently higher food prices could not only damage global growth but also, possibly, global security too.

Rightly, the secretary general has stuck to the UN’s remit by indicating that an environment that has seen wheat prices double and the price of rice explode higher could seriously put back the process of global poverty elimination. “If not handled properly, this crisis could result in a cascade of others (including the imposition of quotas and the banning of exports) and become a multi-dimensional problem affecting economic growth, social progress and even political security around the world”.

The biofuels debate is interesting from a number of angles. Firstly, it is not absolutely true to say that the commitment of land to the production of biofuels automatically reduces food production everywhere (although that hardly makes the European Union’s full-on encouragement of plant-derived fuel right).

Supporters of biofuels tend to use the Brazilian experience as justification for the dash to plant-derived fuel alternatives, not that that country’s success should detract from the fact that there are a lot of other places where land which would otherwise have been used to grow food for human consumption has now been given over to the production of biofuel to feed machinery!

The EU could, for example, call a halt to its pre-announced intention to derive 5.75% of petrol and diesel to be manufactured from plants, although we understand the EU’s difficulties given growing stresses in the oil market too.

The developed world has hardly covered itself in glory on this matter either. In particular legitimate questions might be asked of Western countries’ commitment to what has become known as the “Washington Consensus”. Part of the reason why a number of African countries are now back on the verge of starvation is that developed nations, through their International Monetary Fund (IMF) conduit, actively encouraged many African governments to cut farming subsidies and focus instead on producing cash crops for export and by so doing, open up their previously closed economies.

That the plan has backfired is made obvious by the fact that many countries are now struggling to grow sufficient to meet basic levels of domestic demand. Whilst the UN falls back on its World Food Programme to raise sufficient funds to feed starvation zones, what is really required is greater research and development, improved credit facilities and ultimately a “green revolution” similar to that which took place in parts of Asia, not that the Asian experience is without its own pressure right now.

From the point of view of global economics there has always been a gulf between the “haves” and the “have-nots”. Generally speaking, the larger a country is, the greater the likelihood that it will be richly endowed with natural resources. The fact that not even the largest countries are so well endowed in every scarce resource is reflected in the fact that imported inflationary pressure has become a global issue. Indeed, some of the world’s largest and most populous countries are those with the greatest dependency on imported raw materials.

Estimated top global countries by resource production

The chart shows resource wealth, calculated using the most recent production data for energy, basic resources and agricultural products using average prices achieved over the previous quarter. Against this is plotted a countries’ wealth on a per capita basis, to show that some countries are likely to benefit significantly more than others. On this basis, Saudi Arabia, Canada, Australia and Russia stand out. The second chart (below) compares the global share of a country’s estimated resource wealth against its share of global population.

The consumer price index rose 0.2% in April after edging up 0.3% the month prior, the Labor Department said yesterday (Wednesday). Core prices, which exclude food and energy, rose 0.1%.

Energy prices stagnated after soaring 1.9% in March, but that’s expected to change as both oil and gas have notched a series of record highs this month.

Food prices were perhaps the report’s biggest eye-catcher, climbing 0.9% for the month, the biggest upsurge since January 1990. Fruit and vegetable prices rose 2% and bread prices increased 1.5%, CNNMoney reported. The cost of bread was 14.1% higher than the year-ago period. Milk prices rose 0.9% and are up 13.5% from a year ago.

The Bush administration is currently disputing the International Monetary Fund’s claim that increased production of biofuels is the biggest factor in rising food prices. The IMF estimates that the shift of crops such as corn and soybeans out of the food supply to produce biofuels accounts for almost half of the recent increases in the global food prices.

“Those who are arguing that the president’s increase in the (renewable fuels standard) is contributing to high food prices are incorrect,” Keith Hennessey, director of the National Economic Council, told Reuters.

Instead, the White House is pointing its finger at emerging nations and their growing appetites.

“There are 350 million people in India classified as middle class. That’s bigger than America – and when you start getting wealth, you start demanding better nutrition and better food,” President Bush at a May 2 press conference according to the Economic Times.

Many economists support that position, but Indian authorities took offense.

Food prices have not been rising continually as developing nations grew, Ramgopal Agarwala, a former World Bank economist and senior adviser at RIS, a research institute in New Delhi, told the New York Times.

“They were static until 2006, then in 2007 and 2008 there was a sudden spark,” he said. But India has been growing for the last decade. This is “not last year’s phenomena,” he said.

“I don’t know who advised the president” on his recent comments, Mr. Agarwala added, but his analysis is “subprime.”

The administration – and many agricultural lobbies – have embraced biofuels as an alternative to foreign oil, and contend that ethanol use accounts for only up to 3% of the overall increase in global food prices.

Others, including the American Farm Bureau Federation, believe that it accounts for up to 30% of the surge.

On average, food prices increase about 2.5% each year. This year, according to federal data, the overall cost of food is predicted to jump 3% to 4%.

Source: Consumer Prices Moderate in April but Soaring Food Prices Steal the Show 

And being rich is no guarantee of insulation from the food crisis. The Times reports that Japan has become the first industrialized nation to run out of butter.

“Why are food prices high?” asks Bill Bonner in The Daily Reckoning.”Normal agricultural cycles, is one reason we gave yesterday.

“Another is the increasing worldwide demand.

“Here’s a third reason – biofuels. On Monday, Britain passed a law requiring that 2% of fuel come from plants (actually, all of it is believed to come from plants…but oil, gas and coal have had millions of years to compress and ferment.) Since Britain doesn’t produce enough biofuel to meet the quota…she actually has to import the stuff on ships from America. Not only does it take more energy to produce the fuel than it generates…the Brits add the cost of shipping it across the Atlantic. But as we keep saying, there’s no problem so awful that politicians can find a way to make worse.”