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

This is how giants are born, one small advance at a time. It was just eleven days ago I last wrote about Rentech (AMEX:RTK) and its biofuel industry advances.

Shares of the company traded for just $0.62 on the day I wrote, “If done well, Fischer-Tropsch technology could be the transitive fuel source this country needs as it seeks its energy independence.”

Today those same shares traded as high as $2.24. That is a 260% gain in less than eight trading days.

The news keeps getting better for this company. Two weeks ago I was writing about its breakthrough in the aviation industry. A standards-creating board gave the go-ahead to use the company’s fuel in aviation-grade jet fuel.

It was a major step forward for a company that has been working to prove its fuel-source capabilities for several long years.

Selling what they don’t have

Today’s news comes from the aviation segment, but it involves vehicles that will hopefully never leave the tarmac.

Rentech just inked a deal with eight major airlines to provide its synthetic diesel, RenDiesel, in airport-based ground service equipment working out of Los Angeles International Airport.

Starting when its production facility is finally online in 2012, the company will begin supplying 1.5 million gallons of diesel each year to the various airlines.

The equipment will be the first of their kind to run the low-emission fuel source that boast a near-zero carbon footprint that meets California’s stringent fuel standards.

As I have always said (usually with a negative, political connotation), “It starts in California and heads east.”

This time, starting on the Left Coast is good news. It will set a precedent for the nation’s other large airports as they work to lower their emissions and qualify for tax credits and other incentives.

Of course, the news is not without risk. Any $350 million company that was a $150 million company two weeks ago is going to be filled with various levels of risk.

In Rentech’s case, it will come down to the company’s proposed Rialto, California production site.

Yes, the facility that is expected to make all of this diesel and jet fuel is not on line just yet. In fact, the ribbon cutting is still over two years away. Heck, ground breaking isn’t even scheduled for at least another fifteen months or so.

A lot could happen during that time to jeopardize those future revenue streams investors are betting on today. Getting rich off of Rentech’s success is far from a sure thing, but it is more possible today than it was yesterday.

Remember, no giant was ever born an oversized monstrosity. Even Exxon Mobil (NYSE:XOM) started as a mere notion of a business plan several evolutions ago.

Rentech appears to be taking the steps it needs to grow into a large, successful firm.

It is a company worth watching and, if you can afford some risk in your portfolio, is a company worth engaging in some due diligence. I’d start with Rentech’s latest earnings report.

That quarterly profit figure sure is intriguing.

Source: Airline Cutbacks? Not for Rentech

If you were at the Agora Financial Investment Symposium in Vancouver, you may have heard Juan Enriquez announce that Exxon Mobil (NYSE:XOM) had given Synthetic Genomics Inc. (SGI) $300 million to work on producing biofuels using algae. SGI is run by Craig Venter, the man who broke the human genome. Exxon is not a company known for wasting money on environmental gestures. The energy company wants and expects that Venter will find a way, using genomics and algae, to produce raw materials for its refineries.

The startup Solazyme, which I’ve written about before, just picked up an additional $57 million in its quest for algal oil. Solazyme is targeting not only fuels, but also oils for cosmetics and the food industry. Solazyme is concentrating on using sugars, instead of sunlight. The company uses biomass and industrial byproducts, including cellulosic materials and waste glycerol, to feed their algae. As a result, they can grow algae in dark tanks, which has obvious advantages.

Then there is the wild card, Joule Biotechnologies. Little is known about this company except that the photosynthetic microorganism it uses to produce energy is not algae. Some are reporting that they are harnessing bacteria, but that is not yet certain. Currently, however, the company claims it can produce fuels competitively when subsidies are factored in. I don’t believe you can or should count on subsidies, but the core technology may be improved to the point that it is honestly profitable…

Fortunes will be made in this space, and we intend to have a piece.

Source: Biofuels are Back

Look at it this way: there likely won’t be enough demand for that many gallons by 2022 at the current 10% blend, so the only way to reach the target is by increasing the blend to 15%, perhaps 20%.

If it were only that simple.

Already, there are numerous reports of engine failure due to ethanol blends that are higher than 10 percent. Simply put, existing engines are being destroyed at a 10 percent blend. A higher blend will accelerate the process. The other big problem: auto manufacturers’ warranties cover fuel blended with up to 10 percent ethanol. Increasing the blend to 15 percent will void all factory warranties, and rightly so.

But here’s the real rub: just a little over a week ago, the Obama Administration proposed raising mile-per-gallon requirements by 2016. This would raise the required fleet average from the existing 27.5 to 35.5 mpg. Cars would see the biggest increase in fuel economy, from the current requirement of 27.5 mpg standard to 39 mpg in 2016. Light trucks would see the requirement rise from the current 24 mpg to 30 mpg.

The problem with all of this is these requirements are to be met by 2016, in the middle of the timeframe to increase the use of ethanol in a gallon of gas (remember, 36 billion gallons by 2022).

The problem is that ethanol is less efficient that gasoline!

A gallon of E85 (85 percent ethanol currently used in “flex-fuel” vehicles) has approximately 27 percent less energy than a gallon a gasoline, according to drivingethanol.org. This translates into a 10-25 percent loss in fuel economy.

So on one hand, the government is requiring that more ethanol be blended with gasoline by 2022. This will undoubtedly lead to lower fuel economy. On the other hand, the President just proposed a major increase in fuel economy be in place by 2016.

Time will tell how this plays out. But I hope that the increased fuel standards take effect and we can finally end the ethanol fraud.

Source: The Ethanol Fraud

Other factors are at play in the volatile agricultural industry. According to Chris Mayer, “Fertile soil – good dirt – may become more important to land values than oil or minerals in the ground.”

Chris says fertile farmland has been in decline since the 1980s due to urban sprawl and soil erosion. This makes it a lucrative asset. And it makes companies like Cresud (NASDAQ:CRESY), which owns large swathes of farmland in Argentina, a great stock play.

More from Chris on MoneyWeek:

The mainstream press focuses on issues such as population, dietary shifts, and the impact of biofuels. One thing that doesn’t get talked about much may be the most important thing of all: a growing shortage of quality topsoil. Call it the topsoil crisis…

Quality soil is loose, clumpy, filled with air pockets, and teeming with life. It’s a complex microecosystem all its own. On average, the planet has little more than three feet of topsoil spread over its surface. The Seattle Post-Intelligencer calls it “the shallow skin of nutrient-rich matter that sustains most of our food.”

The problem is that we’re losing it faster than we can replace it. And replacing it isn’t easy. It grows back an inch or two over hundreds of years.

This is not lost on certain far-seeing investors. Jeremy Grantham, the curmudgeonly head of the money manager GMO, wrote about soil depletion in his last quarterly letter. “Our farmers are in the mining business! Yes, the soil is incredibly deep, but it is still finite.” For every bushel of wheat produced, we lose two bushels of topsoil.

[...] In any case, it seems safe to say that good dirt is in short supply. The obvious investment conclusion: Buy farmland. That’s hard to do as an individual investor, although there are at least a few options. One is Cresud (NASDAQ:CRESY), which owns a million acres of farmland in Argentina. It trades on the Nasdaq. Another way into the idea is to own farming assets in grain-exporting countries, like Canada.

This from the Seattle Post-Intelligencer on the topsoil crisis facing the planet:

The planet is getting skinned.

While many worry about the potential consequences of atmospheric warming, a few experts are trying to call attention to another global crisis quietly taking place under our feet.

Call it the thin brown line. Dirt. On average, the planet is covered with little more than 3 feet of topsoil — the shallow skin of nutrient-rich matter that sustains most of our food and appears to play a critical role in supporting life on Earth.

“We’re losing more and more of it every day,” said David Montgomery, a geologist at the University of Washington. “The estimate is that we are now losing about 1 percent of our topsoil every year to erosion, most of this caused by agriculture.”

“It’s just crazy,” fumed John Aeschliman, a fifth-generation farmer who grows wheat and other grains on the Palouse near the tiny town of Almota, just west of Pullman.

“We’re tearing up the soil and watching tons of it wash away every year,” Aeschliman said. He’s one of a growing number of farmers trying to persuade others to adopt “no-till” methods, which involve not tilling the land between plantings, leaving crop stubble to reduce erosion and planting new seeds between the stubble rows.

Source: Cash in on the Rush to Secure Quality Farmland

The same forces that hurt the U.S. economy wreak havoc on developing nations. Groceries go up, fuel goes up and discretionary spending goes down.

Now emerging markets are taking on the U.S and other Western nations to curb inflation. Their weapon is food.

China, India and a host of allies are blocking U.S. foods from coming into their markets. At the same time, they are cutting exports and continuing the subsidies that ultimately provide cheaper food to the indigenous marketplace. These moves are aimed at keeping affordable food within their borders as a means of controlling inflation.

Rice, corn and cooking oils are the staples of the poor. Unfortunately, inflation is literally taking food off the table of the people who need it most.

The food riots that made headlines in 2007 are still going on in places in frontier markets such as Africa, Mexico and Egypt — countries that supply the West with raw materials such as oil, natural gas and grains.

The consensus is that 10 years of economic progress are about to be erased by inflation-induced starvation.

Thanks to the Bush administration, ethanol production will devour 30% of the U.S. corn crop by 2010. Over 40% of the increase in global maize consumption from 2000 to 2007 was also attributed to U.S. biofuel production.

Between March 2006 and March 2008 the international food price index nearly doubled — surging 82%. The price of wheat has jumped 120% in the past year, he said — meaning that the price of a loaf of bread has jumped more than 100% in places where the people spend as much as 75% of their income on food.

However, a recent development at the World Trade Organization reveals that emerging markets have won a major food fight. After intense negotiations, China, India and a coalition of about 30 emerging nations that belong to WTO have opted to raise tariffs on imported food and reduce — or eliminate — food exports.

While this could result in higher food prices in the U.S., it also means that lower food prices in emerging markets can reduce inflation and create investment opportunities.

For investors, the longer term implications are that lower inflation in these resource-rich nations could open the door again to windfall profits.

China and India are both textbook cases of triumphant emerging economies, which have made investors quite wealthy. But the price of food has staunched a consumer spending spree in the very same ways that the U.S. retail sector has suffered from inflation.

Despite the slowdown, the fundamentals of emerging markets actually look much stronger than the U.S. The growth in East Asia’s emerging economies will slow to 7.6% in 2008 and 2009, down from an average growth of 9% in 2007, according to the Asian Development Bank.

By comparison, the University of Michigan said the U.S. economy will expand in 2007 and 2008, but at a pace well below the 3.2% increase in real GDP growth of this year and last year. So as you can see, even in sluggish times, Asia outperforms the U.S. by some 137% over a two-year period.

That’s certainly impressive, but it could be much better.

If emerging economies can rein in inflation through domestic agricultural policies, it’s quite possible that they can resume their economic progress and return to their wild and wooly moneymaking ways.

The U.S. Department of Agriculture (USDA) announced yesterday (Tuesday) that the U.S. corn crop could be the second largest in history, despite savage floods that decimated corn-producing regions in the Midwest.

The USDA increased its forecast for this year’s corn harvest to 12.3 billion bushels, up from last month’s estimate of 11.7 billion bushels as “perfect” weather and an aggressive planting schedules helped farmers to recover from June’s floods. If the crop comes in as estimated, it would be just 6% lower than last year’s all-time record crop of 13.1 billion bushels.

The increased forecast helped continue corn’s ease from an all-time high of almost $8 per bushel reached six weeks ago. Corn for December delivery gained 11 cents to settle at $5.28 per bushel in late afternoon trading on the Chicago Board of Trade. The USDA report projects that corn will average $5.40 a bushel for the marketing year that begins September 1.

But some analysts are skeptical of the sunny report and feel a bountiful harvest remains very much in doubt. The USDA estimate is 300 million bushels above average analysts estimates.

“The people I’ve spoken with, their views of the crop are certainly dramatically different than what these yields today say and what the conditions say … they’re much more cautious and much more conservative,” Rich Feltes, director of research for MF Global Ltd. (MF), told a panel discussion on the USDA report, Reuters reported.

Feltes isn’t the only one who feels the USDA report is overly optimistic after the worst flooding in 15 years ravaged Iowa and Illinois – two of the nation’s top corn-producing states.

“The thing that surprised me was the fact they increased harvested acres as a percentage of planted acres,” Tomm Pfitzenmaier, a partner at Summit Commodity Brokerage in Des Moines, Iowa told Bloomberg News. “I talk to people who tell me about how bad their drowned-out stalks are everyday.”

The Ethanol Effect

If supply cannot match the USDA forecast, corn prices will quickly be on the rise again. Those prices will also get a boost from the increased allocation for ethanol production.

The USDA report estimates that corn used for ethanol will increase to 4.1 million bushels this year, or about one-third of the total crop, from 3 billion bushels last year. The number of corn bushels diverted to produce ethanol will likely increase in the years ahead.

“It’s important to note that most of that unexpected production gain was offset by higher demand and the fact USDA pegged ethanol demand at 4.1 billion bushels this year infers to me there will be at least 4.5 billion bushels for the [2009 – 2010] campaign,” MF Global’s Feltes said.

U.S. regulators are also taking a closer look at commodities traders, causing some investors to sell for the time being, which is also putting downward pressure on current corn prices.

“Obviously the USDA has confirmed how nice the crop looks but in the final analysis we don’t think the net yields can be that high,” Gavin Maguire, analyst for E Hedger LLC, told Reuters.

“People are heading for the exits right now and asking questions later and when this ends, grain prices should begin rising,” Maguire said.

Source: Higher Corn Prices Ahead as Overly Optimistic USDA Report Misses the Mark

If prices causes ethanol plants in the Midwest to close, it could flood the market with unused corn, says Tom Dyson. Expect to see a big fall in corn prices in the near future…

Even without ethanol plants closing corn prices are already starting to fall…

A friend of mine owns a farm in Iowa. He first invited me to visit in November 2006. At the time, I was interested in grains. Corn was trading at $3.30 a bushel… and soybeans were at $6.50 per bushel. I knew they had to rise.My friend grew corn and soybeans on his farm. He explained to me how corn and soybean prices hadn’t gone anywhere for 10 years… And many of his neighbors and the locals in the town had long since given up on making any money growing crops.

He took me to see an ethanol plant a few miles from his farm. We stood and watched a bulldozer raking a huge pile of corn. Every few minutes, another semi would pull up and deliver another trailer load of corn.

This ethanol plant had just popped up. The year before, the government had banned MTBE – a poisonous chemical – from gasoline. Refiners had used MTBE in gasoline to prevent engine knocking. Ethanol also prevents engine knocking. So oil refiners started adding ethanol to gasoline instead.

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Then George Bush signed the Energy Policy Act of 2005. This new law required refiners to mix 4 billion gallons of ethanol into the gasoline supply in 2006… and 7.5 billion gallons by 2012. Energy security was the reason. Oil prices spiked in 2005 when Hurricane Katrina struck New Orleans. President Bush wanted to develop a new source of energy to protect America from future supply disruptions. He chose corn ethanol.

But the U.S. didn’t have enough ethanol. So in the first months of 2006, the ethanol price jumped, and dozens of new ethanol plants materialized to profit from the increase.

When I saw how much corn this ethanol plant was consuming and how many ethanol plants were under construction, I knew a major bull market was about to kick off in the grain markets.

Today, corn is at $7.20, and soybeans are at $16.20.

The sudden high grain prices are causing major shifts in the commodity markets. I wrote about hogs in my last column. Hog farmers can’t afford to feed their pigs. They’re selling their pigs for whatever money they can get for them. Piglets go on the farm dump.

Hog farmers aren’t the only ones hurt by these high grain prices. Expensive corn kills ethanol plants, too. I heard from my friend in Iowa recently. He told me there’s a rumor moving around the Midwest farming communities: 16 ethanol plants are about to go bankrupt. He says it will release 500 million bushels of corn onto the market.

The corn story is all over the media. There’s no one left to buy. And my friend says the corn on his farm is so green and healthy, it makes his “eyes hurt.” If all this corn floods the market at one time, the price of corn will plummet.

I’m not going to make any short bets on corn. The corn market is rising in a parabola, and there’s no telling how high it could go. But I am going to switch my attention to other sectors of the agriculture market. Like meat. Agriculture will be in a bull market for many years to come. There’s going to be a shortage of meat. Hogs and cattle are my favorite plays right now.

Good investing,

Tom

P.S. In the latest issue of International Strategist, I show readers the best way to invest in hogs… and profit from the fall in corn. I think we’ll double our money in the next 18 months. Click here to learn more.

Source: Why Corn Prices Are About to Fall… And How to Profit

Warning from My Energy Insider

By Byron King

I’ve been corresponding with an acquaintance who works at the National Science Foundation. This guy (“People call me Jim”) is one of the smartest people I’ve ever met. And he asked me to note that he is speaking from his own personal views, and not on behalf of the NSF or the U.S. government.

Jim has a background in applied mathematics, electrical engineering and neural networks. He’s been involved in energy research since the 1970s. In terms of long-term knowledge of U.S. energy policy, Jim is a national asset.

Jim is an acknowledged expert in the fields of electricity generation and transmission. This includes deep knowledge of new technology in the arenas of solar and wind power. One of Jim’s biggest concerns is the on-again, off-again pace in the field of U.S. energy research and development.

New Energy System Research

Here’s a short version of what Jim has to say about what is going on with the development of new kinds of energy systems in the U.S.:

“We keep encountering these delays in all the pioneering technology developments. If it’s not funding, it’s something like access to sites. If you get the funding and access, then you see these shortages of skilled people or some critical pieces of equipment.

“And it’s NOT just a matter of a two-year delay in being able to use solar to crank out electricity, or massively displace carbon dioxide — which has become the latest and greatest ‘selling point’ for a lot of projects. With some of these delays, we risk throwing key development companies into bankruptcy. And then these firms might never recover. If we don’t use it, we’re going to lose it. This happens more times than you might think.”

US Energy Politics and Policy

Here’s what Jim thinks about the politics and policy of energy in the U.S.:

“We need to depoliticize most of the energy debate. The energy reality out there is changing, and changing fast. If you have not thought about the ‘energy issue’ in, say, five years, then your thinking process is probably obsolete. If you are frozen in some past that you learned years ago, then you are part of the problem.

“At the same time, we need policy stability and long-term focus within the national energy evolution. Are we going to produce large amounts of energy in the future? If not, how do we plan to run the country? To run the economy? Or are we just going to blow down what we have in the installed base? If we want to just live off the past energy heritage, we should also ask the band to practice playing ‘Nearer, My God, to Thee.”

“Things are changing fast, but we still have to steer the ship. Otherwise, we’re going to just hit the rocks, and it’s going to kill us as a nation. Really, why should the future of the nation’s energy supply be subject to the same red versus blue state politics as, say, abortion, health care or the estate tax?

“For some parts of the energy equation, what is left of the so-called ‘free market’ can carry the load. Energy companies take a lot of bad-mouthing. But really, we’ve taxed and regulated the energy industry so much that it’s almost silly to talk about free markets anymore. Still, people and companies respond to incentives, despite the taxes and regulations. So let that work. Let it happen.

“And for other aspects of the energy equation, we have to move with the concept of ‘command technology.’ This is the combination of serious government policy and government users setting out the requirements. It’s like NASA saying that it wants a system to launch this or that into space and letting industry build it to that spec. It’s how the Navy developed its nuclear submarines over many decades. We know that command technology can work, because it has worked, and worked well, in the past.

“But the idea of ‘command technology’ requires the government to work with industry, as well. And both government and industry have to pick from the possibilities offered by basic science. You cannot do what you cannot do. But you can waste a lot of money trying.

“Will it take 20 or 30 years to develop the U.S. Outer Continental Shelf? Yes, 30 years and more. And we’ll be damn glad to have that oil when it shows up ashore. And will it take 20 or 30 years to develop better solar and wind systems? Or better biofuels? Of course it will. Really, if you want to change out the basic U.S. energy system from carbon to something else, 20 or 30 years is a ‘crash’ program. And we’ll be having this discussion well into the 2030s and beyond, if we’re still around.”

Rising Oil Prices and Trends

And here’s Jim discussing the rising impact of liquid fuel prices on consumption trends:

“Our studies over the years came to some conclusions about fuel prices and fuel demand. A sudden shock, like a 20% price rise, tends to lead to an immediate 4% decline in driving and gasoline use. That’s about what we are seeing today.

“But it’s not like some cosmic trend. Let’s say that gasoline prices stay at the same real level. Right now, most motorists think the price of gas and diesel is ‘high,’ but that’s all relative. Have you driven in Europe or Japan?

“And let’s say that the car fleet changes slowly. That’s because it takes many years to turn over the stock that’s already out on the road. Well then, you can expect gasoline use to trend back up, in line with general economic growth. So high prices don’t necessarily destroy long-term demand.

“And the short-term reaction to a 20% price spike should not be confused with a long-term demand trend. This is the case, even if the price rise is like a growth spurt that will recur again someday.

“Now consider something even worse. Are we only halfway through a growth spurt? Maybe.

“Let’s get really pessimistic. Let’s say that world oil supplies are constrained. It’s the Peak Oil thesis, which is pretty well proving itself out. But nothing is just plain simple. Some areas of the world have oil, or the means to get oil through imports. For those areas, Peak Oil doesn’t really matter. They have oil.

“But some areas of the world don’t have oil, or not nearly enough oil. And they can’t get access when and how they want it. That might include the U.S. in a few years.

“So in the ‘have’ parts of the world, you will see those economies returning to a growth path based on their own energy resources. And it may be that despite an economic decline in some major economies, overall world demand is still rising. This will pull prices upward, even for the ‘have-not’ buyers. And it will take a lot more than what we’ve seen so far in terms of price increases to clear the markets, and to keep demand within the limits of physical supply.

“We cannot afford to lose any more time.”

Source: Warning from My Energy Insider

Renewed Midwest rains has corn and soybean prices through the roof, reports AP. Corn prices and soybean prices hit all-time highs following more heavy rains in Midwestern states, which left replanted crops once again under water.

Widespread belief that the Fed has failed to keep inflation in check is further supporting high corn prices, reports Bloomberg.

Rising Food Costs

By Kevin Kerr

We’ve been hearing for some time now about the rising costs of food in this country. The reason for these high costs are not as simple as some people think. Not only are we seeing record prices for grains and other crops, but also the high cost of fuel is making the harvesting of the crops in particular, as well as the simple shipping of the food across the country very expensive. Some prices are already out of hand and could still have a ways to go.

Making Tough Choices

I know what is going on inside the heads of the farmers. This spring, I went to visit farms in the Midwest, as I do every year.

It was a Saturday in mid-April when I pulled up to the Miller Armstrong Building in the sleepy farm town of Waseca, Minn. Waseca is also home to a federal penitentiary and Jeff Skilling, former Enron CEO and allegedly one of the “smartest guys in the room.” Now he is a convicted felon, serving time.

I drove into town and watched the cattle grazing outside the prison. I wondered for a moment if those cows knew they had a famous neighbor. They didn’t seem to care. The cows seemed more concerned about where to find some food. It was certainly foreshadowing what I was about to hear from the farmers.

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The High Price of Ignorance

I was greeted by my friend and Outstanding Investments subscriber Geb Singlestad. Geb escorted me to a casual meeting at the Armstrong hall building. Charlie Nedoss of Peak Trading and about 15 other farmers accompanied me. One reporter showed up. Everyone introduced themselves, and we all grabbed some coffee. I spoke with the reporter for a few minutes, and the meeting began.

The thing about small-town America is everyone is friendly, but cautious. Geb invited all these farmers to the meeting. Later on, we learned that most of them thought we were there to sell them something… We were not.

Most of the farmers showed up out of respect for Geb, because he is a sort of patriarch in the community. He had just had knee surgery and was already getting around just fine. Amazing, don’t you think? The meeting was scheduled to last about 45 minutes, but once it got going, we covered so much ground and there were so many questions that we ended up being there for two and a half hours.

The questions came fast and furious. One farmer asked, “Do these people in Washington or in the cities know how much we are paying for our input costs? Do they have any clue how much the farmer is being squeezed?”

The best question of all, in my opinion, was asked a few times. “What will it take? How high will prices have to go to get people to change?”

I said that I think prices will have to go much, much higher before urbanites even consider switching off American Idol and protesting in the street. The farmers realize that most people in the country have no idea about either the process or the cost of what it takes to get their dinner from field to fork.

One farmer belted out, “As long as they have groceries on the shelves, lights on, the ATMs working and their jobs, then all is well. They don’t have a clue.”

Ethanol Rolls Along

There has always been a line between city and suburb dwellers and their rural counterparts. Most people in urban areas have little understanding of how much work goes into generating our food supply and then transporting it to each and every city.

Just the volume of diesel fuel usage to grow the crops is astounding. Agriculture is a very fuel-intensive undertaking. With diesel prices topping $5 and rising, the costs continue to climb at the grocery store.

After our meeting with the farmers, Geb took Charlie and me to see the newest ethanol plant being built in Janesville, Minn. This new structure is a 110-million-gallon ethanol plant. It has several rail lines being built to run directly into the plant. The outside of the building itself is huge. The towering cranes were working full tilt while we were there, and the parking lot was full of workers’ cars. The one thing that neither Charlie nor I saw was a water supply. An ethanol plant uses a huge amount of water, so where will it come from?

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It seems with ethanol, as with so many things, the answer from the government often comes after a major project is already well under way. For the last eight years, the Bush administration has seemed to be more likely to do first and fix later. What’s the old saying? “Better to ask for forgiveness than permission.”

Anyway, the ethanol plant has provided many good jobs in the area and is slated to produce a real boom for the local economy. That’s all well and good, but is it sustainable?

The High Price of Low Living

With egg prices surging 26 percent and milk prices near record levels, consumers are making very difficult choices. My own aunt leaned into me at dinner recently and said, “Ya know, I bought a container of whipping cream and it was $7. That’s crazy.” Yes, it is crazy, and the even more insane thing is that prices may well have much further to go.

The farmers I met with are struggling with some of the highest input costs they have ever faced, and for some, it means that with all the massive expenses of running a farm, their margins are shrinking fast. Most of the farmers wondered what I think would happen if food stopped showing up on shelves in the city and the power went out and the ATMs shut down. You know what would happen? Panic.

The divide between the food source and the end-users is wide. As costs continue to skyrocket, we better begin to appreciate and support our farmers, because the long emergency is here and time is running out.

As I said my goodbyes to the farmers, Scott walked with me on his farm and showed me all his new farm equipment. One tractor, a John Deere, looked brand-new. He told me that Deere (NYSE: DE) simply has no equipment in stock, because sales are so red-hot. He said it’s much the same for Caterpillar (NYSE: CAT) and others. So even as the farmers complain about higher input costs and consumers in the cities complain about higher food costs, the beat goes on.

The solutions are not at all clear, but it is obvious that we need to begin to think locally. Food sources will need to be closer to the final consumers. The old way is simply not sustainable anymore.

In the brave new world, we will all likely have to become “locavores.” A locavore is someone who eats food grown locally. That would be a major shift difficult for most of us to fathom. But like it or not, it’s a change that is not going to be a choice. It will happen regardless of how much we fight it. Really, the question is how high of prices are we willing to pay in the meantime.

Regards,
Kevin Kerr

P.S.: Of course, we wouldn’t all be forced to consume only locally grown food if the price for fuel wasn’t so astronomically high. Until we can figure out a way to produce more oil domestically, we’ll be forced to depend on imports from overseas. In most industries that isn’t such a big deal, but with oil it can be a tricky situation. We’re not really dealing with the most savory characters. Click here to read the full story of why the oil we’re importing is so expensive and how things will get worse before they get better…

Source: Rising Food Costs