Guaranty Bank in Texas became the 81st U.S. bank to fail this year. It was the 11th largest bank failure in U.S. history. This kind of thing is becoming so regular it is hardly news when it happens.

But what’s interesting to point out about this one is that the FDIC sold Guaranty to Banco Bilbao Vizcaya Argentaria of Spain. This is the first time regulators have sold a failed bank to a foreign lender. Such a turn of events would have been unthinkable only a decade ago.

So the world turns. When it comes to the question of who has the money, it’s often a non-U.S. buyer these days.

Speaking of foreign buyers, there is probably no group of buyers more watched and coveted than Chinese consumers. Recently, the Financial Times had a piece that highlights things the Chinese like to buy.

This is important because the Chinese are becoming increasingly affluent in large numbers. Total consumer spending was $1.7 trillion in 2007, compared to $12 trillion in the U.S. But that number is growing rapidly. The FT focused on the new rich. China now boasts more millionaires than the U.K. The rapid growth of this group has companies all over the world spending more money and time figuring out ways to get in their pockets.

So what do the affluent Chinese like? Outside of ordinary things like flashy cars and booze and quirky things like ivory and dried seahorses, one thing was mentioned in the FT piece that caught my eye: The Chinese love gold.

“China loves gold in all its forms,” the FT reports, “as a reserve currency, jewelry, an investment.” I’ve mentioned in the past about how the Chinese central bank doubled its holdings of gold this year, but it’s more widespread than that.

The rising middle class in China also buys a lot of gold. Since 2007, Chinese consumers have been the second largest purchasers of gold jewelry in the world, behind only India. The FT points out those gold sales were up 28% year over year in May. Total gold demand for the year was up 21%, to 400 million tonnes. There are not too many sales of any kind going up that much in this financial crisis, but there it is.

The financial crisis and weak stock market have helped gold as people look for a place to park some money. I think gold will remain a good place to be for some time yet. And gold stocks have the stars lined up for them. Many are reporting falling cash costs, yet the price of gold is staying up here in the $900s — and is likely headed much higher. That means gold stocks are reporting good increases in cash flow, among the few sectors to do so.

The Growth Is Overseas

As to the larger picture, I think trends in overseas markets should continue to be a focus, and I will keep on an eye on them. The U.S consumer is pretty well tapped out, finally. The growth is overseas.

Over the weekend, Barron’s featured a worthwhile interview with Chris Wood, the Hong Kong-based strategist for CLSA’s Asia-Pacific group. He’s been on top of some of the bigger-picture developments in Asia for years — sniffing out trouble in Thailand before the Asian crisis in 1997, for instance, and, more recently, giving early warning calls on the global troubles that would emerge after the U.S. mortgage market imploded.

What’s Wood’s take today? “The financial crisis in the Western world will lead to a long period of anemic growth,” he says. “From a global investor’s standpoint, Asia and the emerging markets stand out as a place to invest.”

When you look at some of the data rolling in, it is hard not to see it. For instance, earlier this year, oil consumption in the developing countries passed the top 30 (OECD) countries for the first time. There are now more cars sold on a monthly basis in the top 16 emerging markets than there are in the U.S., Japan and the EU combined.

More opportunities will emerge, as many of these markets are only in the early innings of the most commodity-intensive part of their development. As a result, we’ll see a lot more power plants, water treatment plants and the like built over time. Then there are the agricultural needs, not only to support population growth, but to support the boost in biofuels.

Biofuel Boom

Steven Johnston at AgCapita, a firm dedicated to investing in agriculture, put together a worthwhile newsletter. In the latest update, the group shows how biofuel production is on the rise:

This trend will surely continue, as most of the oil-producing countries have in place biofuel targets whereby they mandate that a certain amount of fuel must be biofuel. AgCapita’s own research indicated that the biofuel targets in the U.S., the EU, Canada, Japan, Brazil, India and China alone could require the use of over 400 million acres of arable land, or over 10% of the world’s total. This is in direct competition with food production and should have a significant effect on crop prices.

What a lot of people overlook is just how fertilizer-, water- and energy-intensive these biofuels are. So agriculture remains another attractive market to invest in right now in what otherwise looks like a time of tepid growth. That means opportunities in fertilizer stocks, grain handlers, farm equipment and farmland.

Have a good week, and I’ll write you again soon.

Regards,
Chris Mayer

Source: What Chinese Money Buys: Gold Goes Green

That’s because wealthy populations tend to eat more meat than poor ones, while also eating more fresh fruits and veggies. The diet becomes more diverse, less centered on consuming base grains.

The demand for grains doesn’t diminish, though, because the need to produce meat increases the demand for grains exponentially. Depending on who’s doing the math, five to ten pounds of grain goes into every pound of beef that lands on a dinner plate.

China’s population is also increasing, of course, which is further boosting demand for grains. There are some special issues with China, too. It holds only 10% of the world’s arable land, but 20% of the population. And its arable land resource is in decline. There were about 121 million hectares in service at the end of 2008. That’s down from 133 million hectares as recently as 1988. Increasingly, because of water shortages, desertification, development, urban migration, pollution and a host of other reasons, China is growing less of its own food and relying more on foreign suppliers.

The Chinese government is not happy about that trend and has made food production a priority. In fact, recently, the Chinese premier laid out a number of goals for China:

• Boost Chinese grain production by 50 million tonnes by focusing on increasing the yield per acre
• Subsidize agriculture – which the government does by giving farmers subsidies for irrigation equipment and new seeds and for improving crop yields and crop quality
• Invest in the infrastructure of agriculture – for water supplies, roads and the like.

So it would seem a good idea to be around Chinese agriculture in some way.

Let’s back up a bit and look again at how the dietary pattern has changed. I’ve written about how China consumes a lot more grains before. China is now also one of the largest consumers of fruits and vegetables.

That China is now a consumer of size in the world of fruits and veggies is a relatively new development. China is also a big producer of fruits and veggies. According to the FAO, China produces nearly half of the world’s vegetables and 16% of the world’s fruit. China is today a major exporter of these goods to other Asian countries, supplanting U.S. suppliers.

Well, fruits and veggies have an interesting angle when it comes to fertilizers…

You know if you’ve been reading this letter that the three main nutrients are nitrogen, phosphate and potash. Farmers use fertilizers to boost yields and improve crop quality. Perhaps not surprisingly, China is the largest consumer of fertilizers in the world, with about 25% of global demand.

China is self-sufficient in nitrogen and phosphate. As a result, its application rates are on par with those of farmers in Europe and America. But China is not self-sufficient in potash. The country has few developed potash mines. As a result, it consumes around 12-15 million tonnes per year, but produces only 3 million tones.

Therefore, China relies on imports of potash to obtain most of its supply. But Chinese farmers could use a lot more of this unique fertilizer. In fact, China’s potash “application rates” are half what they are in the West. Quite simply, the Chinese need to use more potash to boost their crop yields to where the U.S. and Europe are.

Potash is an important nutrient because it controls the plants’ water intake, reduces water loss, increases root growth and improves drought resistance. Clearly, crop yields are higher and crop quality is better with the application of potash.

Yet last year, China’s consumption of potash fell. It will probably decline slightly again this year. That’s incompatible with the goals – and the need – of increasing crop yields and quality.

Potash prices soared in 2008 and Chinese farmers pushed back by buying less. The price of potash is cheaper now, but not by all that much. In any event, the Chinese farmers can afford it, as the economic return from using potash is compelling. This two-year decline in potash consumption is unprecedented. And its effects on crop yields and production will not be good.

Most of the potash suppliers that deal in the Chinese markets believe that Chinese demand will pick up later this year as the Chinese burn through their existing inventories of potash and look forward to the 2010 planting season. The Chinese will be hard-pressed to match the record production of 2008 without potash. The quirky thing about potash is that it tends to stay in the soil and you can skip a year, maybe even two, but no more than that.

So potash is also going to be a good way to invest in China’s food story. But there is another layer here.

You see, you can’t use potash directly to grow fruits and veggies. These crops – tomatoes, avocados, melons, etc. – are sensitive to chloride and salt. So you have to modify the potash and remove the chlorine. These potash-based fertilizers, potassium sulphate (SOP) and potassium nitrate (NOP), are ideal for fruits and veggies.

As it turns out, you also need SOP and NOP to grow tobacco. Tobacco is fussy about what fertilizer it will take without messing up its taste or combustibility. It also needs a lot of potash. Yet again, chlorine is a detriment. Chlorine makes the leaves taste sour and can destroy the commercial value of a crop. As with fruits and veggies, you need SOP and NOP.

Selling SOP and NOP to China’s tobacco farmers is also a good business. For one thing, China has the largest population of smokers on the planet, some 350 million. Since potash represents less than 1% of the cost of making cigarettes, the tobacco growers are less price sensitive. What they really want is a quality product consistently delivered.

One of the companies I’m following is the largest producer of SOP and NOP in China and serves both the fruit and veggie market and the tobacco growers. But there are really many ways to get a hand in the Chinese agricultural story. Watch this space.

Source: Buy What China Buys, Part II

This from Investment U:

What do a Wall Street analyst and a corn farmer have in common?  They both know that fertilizer prices have fallen off of a cliff.

Last year, a big increase in the demand for nitrogen-based fertilizers led the price of fertilizer and the value of the companies that make it, to triple-digit gains.

But when the commodities market cooled, fertilizers were no exception. Since then, the prices of fertilizer – and the companies that produce them – have dropped straight back to Earth.

Take a look…

That’s why CF Industries’ (NYSE:CF) recent announcement made such big news. Amid collapsing share prices and notoriously tight credit for mergers and acquisitions, CF Industries announced Friday an offer to buy out smaller-player Terra Industries (NYSE: TRA).

Terra Industries popped 27% on the news, and CF Industries rose 2.73%.  Normally, a buyer taking on a pile of debt to finance a deal that may or may not work out will see a little bit of a decline.

But two things are at play here:

1) The market thinks this is a good fit.

CF Industries expects to save $100 million over two years by combining forces. That’s nothing to sneeze at for a company that would have combined revenues just over $6 billion. This puts CF in position to maintain a much more competitive position over bigger players like Potash Corp. (NYSE: POT) and Terra Nitrogen (NYSE: TNH).

2) The future for fertilizer will be like the past.

Unfortunately, food production is going to be a major global problem for the next few decades. It will quite possibly be the biggest problem our species will ever face. And one of the only ways currently available to increase production is to load up on powerful nitrogen fertilizers. And since supply is finite, long-term prices have only one way to go.

Fortunately for CF Industries and other fertilizer companies, this spells profits. And for CF, the purchase of Terra Industries has likely improved their position to compete in that niche.

Source:  Stock of the Day: CF Industries (NYSE: CF)

House of Cards

Economic theory tries to deal with a limited number of factors and the mechanisms by which they interact. The main factors are population, food, energy, property, and manufactures, all of which are physical realities capable of being counted. They are the beans that bean counters count with. There are four mechanisms of exchange: money, barter, markets, and allocation. These are the mechanisms by which the beans are exchanged.

Different economists have put emphasis on different factors. David Ricardo, the classical economist of the 19th century, was a banker who gave special attention to money; Thomas Malthus, another founder of 19th-century theoretical economics, paid particular attention to population. Indeed, he is the founder of population studies.

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Karl Marx, the founder of socialist theory, paid attention to manufactures, and to population, seen particularly as labor. The leading 20th-century economists, such as Maynard Keynes, Irving Fisher and Milton Friedman, have been derivatives of the Ricardian or monetarist school, though Keynes was a rebel against classical Ricardian orthodoxy.

Unfortunately, it is impossible to think of all these factors simultaneously. Perhaps there will be a time in the future when some supercomputer will be able to calculate the interreaction of the global economy holistically. We are still far away from that day.

At present, the limitation of the human intelligence means that we can concentrate effectively on only one of these factors at a time. The selection of any one of these factors or interreactions for study draws attention away from other, equally important factors. One can be both a Ricardian or a Malthusian, but one cannot concentrate on both aspects of economic analysis simultaneously without a loss of focus.

However, one can simplify economics by using the different physical factors as a checklist to detect signs of difficulty. That does make economics the gloomy science. At present, the world is suffering from a crisis of overpopulation, with the human population stretching the food supply beyond its limits. Population is continuing to grow, although there is already an inadequate food supply for 6 billion people and famine is growing in Africa. It is possible that the 21st century will replace the 19th as the century of famine.

Food is very closely linked to energy. Food production is dependent on the oil industry, in cultivation, in transport, and in protection against pests. The food price has followed the oil price, to the point at which millions of people cannot afford a minimum food supply. That is already a catastrophe, and the trends are unfavorable. There is also a significant shortage of water.

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Markets have flagged food and energy as danger areas for the world economy, by raising their prices. Property and manufactures are secondary to food and energy, in that their prices can change without immediately affecting the price of food and energy. In fact, there has been a worldwide fall in housing prices, particularly notable in Britain and the United States, at a time of steep increases in food and oil prices. The price of manufactures has been held down by the growth of low-cost Asian manufactures.

There is much discussion of the scale of the global economic crisis. Some people expect it to cause a crisis comparable to the Great Depression, a wiping out of capital values, a liquidation of global debt. We cannot yet be sure, but we can see that the main factors of global economic development are all in difficulty. On the one hand, there is oil at $130 per barrel — on the other, there are banks writing off billions of dollars of assets.

I do not see any basis for economic analysis that would not throw up really alarming signals. These adjustments of the fundamental factors in any analysis put huge pressures on every government. In the 1930s, most governments were destroyed by the slump. In Britain, Labor lost office in 1931; in Germany, Hitler came to power in 1933, as did Franklin Roosevelt in the U.S. I fear that process will be repeated, even if only by democratic defeats. The storm of the world is still rising.

Regards,
Lord William Rees-Mogg

Source: Economic Alarms

World leaders have gathered in Rome this week to try and sort out the global food crisis amid claims of an imminent Malthusian catastrophe. But is this just another old chestnut or are these claims right this time?

When the pessimistic clergyman published “An Essay on the Principle of Population” in 1798, he argued that populations would continue to grow and grow – but land itself was finite. He predicted starvation, death and societal breakdown as the amount of mouths exceed the supply of food.

It turns out he was wrong…

The industrial revolution allowed greater efficiency in food production and a catastrophe was averted. Then in the 1940s and 1950s there was the so-called “green revolution,” where new farming methods significantly boosted food production.

The green revolution allowed food production to keep pace with worldwide population growth… but even this was not enough. As food prices shot up in the 1970s, the work of Thomas Robert Malthus became popular once again.

The worries about overpopulation proved mistaken… history repeated itself. The green revolution continued and agricultural yields improved… but population growth continued and continued. Today we are faced with accelerating food prices yet again. The good Reverend Dr’s name is once again being seen in newspaper leader columns.

Biofuels changed the equation

The main complication this time is the fact that we are burning food for fuel. This implied to me that there is a way back from the brink of starvation – and that involved convincing the Americans to cut their (immoral) subsidies to produce ethanol.

This policy is responsible for taking food off the plates of the poorest people in the world. I do not think a Malthusian catastrophe is imminent in food… but there might be one area where Malthus’ predictions can be applied… and it relates to the most vital commodity of them all.

I have always argued that water is more precious than oil or gold – and this will be proven in the coming decades. Yesterday, Governator Arnold Schwarzenegger declared a drought in California. The Middle East is in real trouble and central Asia is suffering from acute shortages.

Speaking at a Goldman Sachs conference on the top risks facing the world, Lord Stern (author of the Stern Review on the economics of climate change) said that we should be applying the theories of the good Reverend Dr, to water.

The Goldman panel concluded that a catastrophic water shortage could prove an even bigger threat to mankind this century than soaring food prices and the relentless exhaustion of energy reserves. Stern warned that underground aquifers could run dry at the same time as melting glaciers play havoc with fresh supplies of usable water.

“The glaciers on the Himalayas are retreating, and they are the sponge that holds the water back in the rainy season. We’re facing the risk of extreme run-off, with water running straight into the Bay of Bengal and taking a lot of topsoil with it.”

“A few hundred square miles of the Himalayas are the source for all the major rivers of Asia – the Ganges, the Yellow River, the Yangtze – where 3bn people live. That’s almost half the world’s population,” he said.

Goldman’s said it thought the best way to play the sector was to buy a basket of small “potential takeout candidates” such as Badger Meter, Calgon Carbon, Clarcor, Pentair, Pall, Instituform, Hyflux, Tetra Tech, Acqua America and Watts Water.

Population growth fuels commodity demand

The problem is not the growth in population per se, but the fact the population is getting more affluent. As standards of living rise across the Earth and human footprints grow, the number of people the planet can support will diminish.

According to UN research, the world population is expected to increase from around 6.5bn today to 9.1bn in 2050. Almost all of this growth is expected to occur in the less developed regions, whilst the population of the more developed regions will remain mostly unchanged, at 1.2bn.

All of this new demand will have to be supplied with “stuff”. That means food, materials and energy. Demand is soaring for all finite resource and that’s why the commodities supercycle will run for years.

Commodities are sliding at the moment as the rising US dollar takes centre stage. I do not expect that this will continue for long. The long-term argument for investing in commodities is still intact.

As the dollar rises buying opportunities will be created all across the sector… discover what I think the pick of the bunch are right now…

Regards,

Garry White
Editor
Smart Commodities UK

Source: Malthusian Catastrophe Coming Soon