Global wheat production will likely be 4.4% less next year, Dan Basse, president of AgResource Co. in Chicago, told Bloomberg News. Basse believes the world’s corn and soybean crops will also see declines.

“The credit situation is worrying even the biggest and best farmers,” Brian Willot, a former University of Missouri commodity analyst who now grows soybeans in Brazil, told Bloomberg. “For the financially weak, credit has dried up completely. For the strong, credit has been delayed and interest rates are higher.”

The risk-aversion of Wall Street is spreading out into other industries, as the main sources of lending for farmers – rural independent banks and crop processors such as Cargill Inc. and Archer Daniels Midland Co. (ADM) – tighten credit requirements by charging higher interest, demanding more collateral or in some cases, discontinue lending completely.

“We certainly could see tight credit having an effect on agricultural production,” U.S. Agriculture Secretary Ed Schafer said earlier this month. “The costs of farming operations today are huge, and that backs up to the banks that have balance sheets that are tight, it backs up to elevators that have credit stretched out.”

Worse, drops in agriculture yields could be devastating to more than just the agriculture industry.

“Stockpiles are going to be extremely tight,” AgResource’s Basse told Bloomberg. “The world cannot afford any dislocation in production next year, or there will be a real shortage.”

The United Nation’s World Food Programme says the world is already gripped in a “silent tsunami” of hunger. And every drop in production pushes more of the world’s hungry towards the brink of starvation.

“It is estimated that more than 100 million people in the world have been forced into poverty and hunger because of the dramatic increase in food prices,” said Benjamin Senauer, a professor of applied economics at the University of Minnesota, author and researcher, MarketWatch reported. “Millions of American families’ food budgets have been stretched to the limit and beyond. Food stamp enrollment is up and food banks are seeing unprecedented demand.”

Smaller crops could mean higher prices at a time when consumers were just starting to see some slight signs of relief in the grocery store checkout line.

The change in food and beverage prices, as tracked by the U.S. Department of Labor, had moderated slightly in August and September after the record-highs of the summer. But even off the summertime highs, the overall Consumer Price Index increased 4.9% for the 12 months ended September 2008. In the food and beverage category, the increase was 6.0% year-over-year.

Agriculture futures for corn, wheat and soybeans are trading lower from earlier 2008 highs, but a steep decline in crop yields could cause future prices to reverse course.

Source: Tight Credit for Farmers Leads to Smaller Crops, Higher Prices and More Hunger

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

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

On the second day of a three-day summit hosted by the U.N.’s Food and Agriculture Organization in Rome, leaders from 40 nations and representatives from 183 countries met to address the growing world food shortage.

“We must focus on the underlying causes: years of neglect of the agricultural sector and the lack of investment in increasing productivity,” U.N. President Ban Ki-Moon told reporters, Bloomberg News reported. “The price of oil has contributed significantly in the price rise of food. There is no doubt about that it affected the cost of transportation.”

The summit has been contentious, as leading biofuel producers such as the United States and Brazil have tried to deflect criticism that ethanol derived from corn and sugar is also driving up food prices, The Wall Street Journal reported.

“We don’t have clear evidence on the trade-off between agriculture products and biofuels,” Ban said, but there is an “urgent need to establish an international consensus and agreed policy guidelines.”

Meanwhile, less-developed countries that have set limits on exports such as rice, in order to feed their own populations, were fighting off calls for more free trade.

“We shall renew our efforts to further improve the environment and establish a fair and equitable order for international agricultural trade and protect the initiatives of farmers for production in developing countries,” Sun Zhengcai, China’s agricultural minister told state-run news agency Xinhua.

Ban laid the blame squarely on the rising cost of grains, which have increased dramatically over the past two years. The U.N. estimates that if countries do not act to stem growing global hunger, more than 800 million people could soon not have enough to eat.

The Global Ag Boom

When asked about the causes for the massive run-up in food prices, “experts” listed many of the same catalysts that have been discussed at the U.N. summit:

• Rising fuel costs.
• The use of certain foods – such as corn – for the creation of biofuels that are being developed to combat global warming.
• Rising populations.
• Growing demand from emerging economies – particularly China and India.
• Floods and droughts that are being blamed on ongoing climate changes.

But two causes aren’t on that list and they should be. The first is subprime mortgage crisis, which caused the U.S. Federal Reserve to go on one of the most aggressive rate-slashing campaigns in its history. The second is a greenback that’s been made weaker with each cut of the Federal Funds rate. Both are part and parcel of inflation.

Unfortunately for all the starving folks abroad, these rate reductions are highly inflationary. They continue to force the greenback ever lower, while at the same time boosting the price of dollar-denominated commodities such as oil.

The answer is a growing global interest in agriculture, both planting more crops and devising heartier, disease-resistant crops through the use of biotechnology.

Long-term, that global “Ag Boom” is the answer to the current food crisis. It’s also how you can offset the rising costs on the consumer side of your personal ledger by ramping up profits from this very same trend on the investment side of your own ledger.

To invest in the commodities boom, look at these two exchange-traded funds (ETFs):

• Van Eck recently launched its Market Vectors Agribusiness ETF (MOO), a fund that really reflects the breadth of the agriculture sector, apportioning its holdings across such sectors as chemicals (34%), agri-product operations (33%), equipment (24%), livestock operations (6%), and ethanol/bio-diesel (2%).

• The Deutsche Bank AG (DB) managed Power Shares Agricultural Fund (DBA) is intended to reflect the performance of commodities in the agricultural sector – soybeans (31%), wheat (28%), corn (23%), and sugar (16%).

Or if you believe that biofuels – and other forms of alternative energy sources – will be an inevitable part of the global future, consider the following “green” ETF: The PowerShares WilderHill Clean Energy (PBW), one of the better-quality funds that focus on “clean” technology as determined by the WilderHill Clean Energy Index.

Source: U.N. Calls for Increased Cooperation to Fight Growing Global Food Crisis

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 

They’ve watched as oil prices continued to set new records, understanding that global turmoil and rising demand from China means that “black gold” won’t be getting cheaper anytime soon.

They’ve stared as global food prices continued to soar, touching off riots overseas and bringing U.S. lawmakers to the brink of fisticuffs because of debates over whether corn now earmarked for ethanol should be used to fill empty gas tanks, or empty stomachs.

And they’ve waited expectantly as the good old U.S. greenback – whose historic swoon against key global currencies has been exacerbated by an epic rate-cutting campaign by the U.S. Federal Reserve – suddenly reversed course and mounted a two-week rally (despite last Wednesday’s rate reduction, the central bank’s seventh since September).

When they occur separately, each of these developments – increasing oil prices, soaring food and commodity prices, and a plummeting greenback – are highly inflationary. But when they happen in tandem, the ascent in prices can be almost vertical. In such an environment, investors scramble to find a so-called “safe haven” for their money. And the best safe haven has generally been gold.

Until now, that is.

Gold dropped below $850 an ounce last week – representing a decline of more than $182 an ounce, or nearly 17%, from the yellow metal’s March 17 record of $1,032.

The main culprit: The resurgent U.S. dollar. Since mid-to-late April, the U.S. greenback has gained ground against several major currencies, such as the European euro, the Japanese yen, the British pound, the Swiss franc and the Canadian dollar. And that rally could continue, especially now that the U.S. Federal Reserve has all-but-promised to end the ambitious rate-cutting campaign that it’s been operating since mid-September.

But Money Morning contributing editor Martin Hutchinson thinks other forces are at play, too.

“Credit conditions have eased since March because of the Bear Stearns (BSC) bailout and so investors’ fear level is less. [The] stock market is up too, which suggests the same,” Hutchinson said.

Moreover, gold’s meteoric rise from $654 to $1,032 an ounce in a year (a 57.8% gain) attracted a lot of bulls and speculators whose demand helped push prices further skyward. When gold started to slip, gold bulls sold off their holdings, nudging the yellow metal into its current tailspin.

Such a slippery slope is unusual for gold, but those very conditions could be strong drivers of gold’s next rally.

“The gold market is quite illiquid, which is why I think a real speculator panic about inflation could send it zooming,” Hutchinson said.

And inflation could be the catalyst for such a speculative panic.

Inflation, Interest Rates and Gold

Gold may be down from its high, but it’s not out.

“It still looks heavy at this point. The downtrend that we are seeing at the moment is probably going to start slowing down soon,” Taso Anastasiou, technical strategist at UBS Investment Bank (UBS), told Reuters.

In fact, gold’s current price could be seen as a “discounted” entry considering three catalysts – worldwide monetary policy, global supply-and-demand, and past performance – have already ignited a powerful rally that’s virtually certain to carry gold past $1,500 this year.

And, as Money Morning has chronicled, some experts have even predicted that gold prices would reach the $2,000-an-ounce level within the next year or so.

Global inflation will be a key -if not the key – factor. Interest rates have been significantly reduced around the world, with many countries following the Fed’s lead.

To fight inflation, central banks will have to raise rates. But central bankers – including the U.S. Fed – won’t make those moves without a great deal of thought beforehand, Hutchinson said.

“And during that period, expect speculative demand for gold to intensify and its price to increase steeply. The longer the period before the Fed is forced to increase interest rates, the higher gold will go,” he said.

How to Play and Profit from $1,500 Gold

Until the Fed reverses its monetary policy strategy and increases interest rates, gold is one of the best investment bets available in an uncertain economic climate.

Money Morning suggests six gold plays to consider while gold is priced down:

• The simplest way to play gold is through the StreetTracks Gold ETF (GLD), which tracks the gold price directly. And with a $17 billion-plus market cap, it has ample liquidity.

• Barrick Gold Corp. (ABX) is a Toronto-based company with mostly North American production, as well as properties in South America and Africa, and some copper and zinc add-ons. It has a $38 billion market capitalization, so there’s plenty of liquidity. It has a trailing Price/Earnings ratio of 29.65, but a forward P/E of 13.69. By gold-mining standards, this company has a substantial presence, is reasonably valued, and has little political risk. The company also recently sent some very bullish signals to the market and recently reasserted its confidence in meeting its 2008 output target of up to 8.1 million ounces of gold. [For more details, read a related story about Barrick Gold]. Barrick is scheduled to report its first-quarter earnings results tomorrow (Tuesday).

• Yamana Gold Inc. (AUY) is another U.S.-listed Canada-based company, but this one does its mining in Brazil, Argentina, Chile, Honduras and Nicaragua. It has a market cap of $9.7 billion and a trailing P/E of 40, but its forward P/E is only 14. Despite its geographic reach, it faces only a medium geopolitical risk. Expect the company to double production to 2.2 million ounces per year by 2012, primarily in Brazil and Argentina. 

• Gold Fields Ltd. (GFI) is a South African company that mines in South Africa, Ghana, Australia and Venezuela (where it just sold control to a local company, reducing its exposure to an arguably risky market). The company’s market cap is $9 billion, its trailing P/E is 20.98, and its forward P/E is 10.41. It faces a somewhat upper-medium political risk, depending on what you think of South Africa, where the electricity supply to the gold mines is currently unreliable and there’s a good chance of Jacob Zuma winning the presidency in April 2009. Given his record as an anti-Western leftist, and the corruption charges he faces, his potential return can only be viewed as a major negative.

• Kinross Gold Corp. (KGC), another U.S.-listed Canadian company, engages in gold and silver mining, with primary operations in Canada, the United States, Brazil, Chile and Russia. In February, Kinross issued shares to buy a large Brazilian/Russian company. Political risk is low-medium. It has a market cap of $14 billion, a trailing P/E of 32.32, and a forward P/E of 16.03. It looks somewhat expensive. 

• Royal Gold Inc. (RGLD) is a U.S.-based company with mines in Nevada, Mexico and Argentina. It faces low political risk. But with a market cap of $905 million, a trailing P/E of 40.56, and a forward P/E of 22.38, the stock looks expensive.

With staple foods racing to record high prices, the world’s poor are feeling the pinch of the global food crisis. But the effects are not limited to the third world. Costco stores in northern California are imposing limits on buying of oil, flour, and rice reported a recent article in the NY Sun.

Dan Denning says to keep an eye on dairy prices, “No one is mentioning cows, though. Cows eat grain. Grain is more expensive. Dairy prices are rising as a result. Dairy Australia reports that East Coast dairy farmers are trucking milk all the way across the Nullarbor to Western Australia. Western Australia exports 20 million litres of milk a year to Singapore and Malaysia. But with local demand growing so fast, the cows in WA just aren’t working hard enough to meet demand.

What do you think the embedded energy cost is in a litre of Australia milk that ends up in Singapore? You have the petrol to power the tractor that harvests the grain that feeds the cow who’s milk must be refrigerated as its trucked across the continent via internal combustion engine to be transported on a coal or oil powered ship in containers made of plastic (oil) to Singapore where a lorry driver with a refrigerated truck that runs on petrol takes it to a store whose lights and freezers are kept bright and cool by coal-fired power. All so you can have some milk with your cake in Singapore’s fabulous Changi airport as your carbon foot print grows to the size of Godzilla’s paws.”

In a Chart of the Day installment back on December 28, 2007, I noted the price of rice at 20-year highs. (You can view that Chart of the Day here.) The reasoning was given as follows:

The relentless rise in agricultural prices shows how all markets are connected. The high cost of oil has encouraged a politically subsidized ethanol boom; this in turn has led to record corn acreage in the United States. But more acreage for corn means less acreage available for other crops. When acreage goes down, supply goes down. When supply goes down and demand stays strong, prices go up. The United States is the fourth-largest exporter of rice in the world, so that makes a difference.

Big economic strides in the developing world are also taking their toll on food prices. As hundreds of millions of new laborers aspire to a middle-class lifestyle, meat consumption rapidly rises. Meat is very grain-intensive — you have to feed the cows and pigs — and that puts an even bigger demand on crop acreage. As rice shows, the unfortunate reality is that the world’s poor may be the hardest hit by energy and food inflation.

That was all a mere 14 weeks ago. The price of rice has gone up 60% since then.

That is alarming news when you are talking about the main food staple for 3 billion people. The credit crunch is no small thing, but house-poor Americans are not starving. With the price of rice where it is, starvation is a real concern. Not just tens of millions, but hundreds of millions of families are at risk.

The headlines are getting worse as desperation turns to anger. “Food Riots Rock Yemen” is a recent example. The World Bank has declared 33 nations at risk for “social unrest” due to the high cost of getting something to eat.

So why the deadly acceleration of this long-running trend? Is it all down to biofuels and increased meat consumption in China? Unfortunately, no. Things have entered a much more disturbing phase.

Credit Crunch Redux

What we have here is a looming market failure with no small resemblance to the credit crunch. The global grain markets are caught up in a vicious cycle, not unlike the one that gripped global financial markets.

As the subprime crisis unfolded, and news of toxic balance sheets spread, it became clearer that lending to one’s fellow bankers was a dangerous proposition. And so the banks began to hoard their capital, keeping it to themselves for fear of getting burned.

The banks’ refusal to lend touched off a self-fulfilling prophecy of downward-spiraling credit conditions, to the point where leveraged financial institutions began to fail. As the financial system “seized up” like an engine in vapor lock, it took massive cash injections from a lender of last resort, the Federal Reserve, to get things going again.

In this new and deadly “food crunch,” grain exporting countries play the role of frightened banks.

With the price of grains going through the roof, government officials in grain-exporting countries have become alarmed by rising food costs at home. Their natural response has been to artificially limit grain exports, through the use of expensive tarriffs and outright quotas.

With normal supply lines cut short — or in some cases, cut off completely — the global grain markets have been tipped into a panic. Suddenly, the marginal suppliers are no longer there. If you think of grain availability like financial liquidity in a time of crisis, the picture becomes clear.

No Luck for Farmers

Farmers everywhere (except, perhaps, in Europe and the United States) are furious at these export restrictions. The seizing up of the global grain trade has denied them an ability to profit.

After many years of struggle, when it looked like their hard work would finally be rewarded, many developing world farmers have discovered that they still can’t win. The export profits that would have come their way in a free market system have been diverted or destroyed instead, thanks to emergency measures from the local government.

The global food crunch is a “market failure” in the truest sense of the term. No one is really benefiting from this turn of events. The restrictive actions of grain-exporting governments are reminiscent of the Smoot-Hawley Tariff Act of 1930. Instead of a “beggar thy neighbor” policy, we are seeing the results of a “starve thy neighbor” policy. These tragic results are not intentional — but then, Reed Smoot and Willis Hawley probably didn’t intend to kick off the Great Depression, either.

Do countries have the right to punish their farmers in the name of national food security? A good question, but not one we are interested in here. Export restrictions are a driving factor in the global food crunch, whether anyone likes it or not. And so it becomes more vital to understand the effects than to debate the merits of the cause.

Hoarding Mentality

The anger of the farmers and the shutting down of grain supply lines has fueled a “hoarding mentality” that only intensifies as grain prices rise. Vertical price trends and scary headlines only reinforce the hoarding instinct.

As a result of all this, there is no simply no telling how high the price of rice and other food staples could go. In economist terms, food is the ultimate “inelastic good”; people have to eat, or they will die. Countries that are net importers of grain have to pay up, no matter the price.

So what can you and I do about all this? Unfortunately, not much.

It wouldn’t hurt for America to lay off the insanity of biofuel subsidies… burning up corn and taxpayer dollars in our gas tanks as the world wrestles with mass hunger. But that’s a problem of political will, a gigantic aircraft carrier that could take many years to turn around.

One thing we can do is recognize the importance of the agricultural supercycle. We will ultimately get through this global food crunch, one way or another. Somehow a long-run solution will be found.