A dozen or so gun-laden soldiers from China’s People’s Liberation Army (PLA) stood quietly among the customs agents at Lo Wu Station. The KCR East Rail, the commuter train that left Hong Kong at Tsim Sha Tsui 45 minutes prior, pulled in for its last stop. Shenzhen, once a remote Chinese fishing village nestled peacefully at the mouth of the infamous Pearl River Delta, towered in the distance.

My friends and I exited the train onto the long, cracked concrete platform. A drainage stream littered with rusty steel barrels trickled by. On the northern bank, a retaining wall backed by an even more daunting barbed wire fence served to support the numerous lookout posts dotting China’s most traversed southwestern border. This wasn’t the Rio Grande.

Lo Wu is called a “control point.” I imagine the Chinese authorities used the Korean DMZ as a suitable inspiration.

Consequently, I saw no need to draw the army’s attention. My friends, Western journalists from Hong Kong, certainly weren’t the red-carpet type. So we hung back, letting the hundreds of Chinese scurry by.

The rush for customs ensued. The soldiers, dressed in their long pea-green military topcoats, suspiciously surveyed the masses. And the masses nudged to and fro, like cattle in a stockyard, hoping to find the most expedient line to re-enter the mainland.

My fire engine red North Face duffel bag drew some stares, but Western garb doesn’t fascinate as much in Shenzhen as it would in the more remote, rural regions of northern China. After all, I should thank some among the Chinese hustling all around me for stitching it together. That’s probably also true for just about every item of pure Americana attached to my privileged self. And if the Chinese didn’t construct the authentic item, they could easily point me to an alley where I could haggle the repro.

Shenzhen, Deng Xiaoping’s first attempt at capitalism, Chinese-style, received the elevated status of China’s first Special Economic Zone (SEZ) in 1980. Seemingly overnight, factories popped up along the hot, humid delta like a nasty, uncontrollable case of Southern kudzu. Naturally, more factories required more transportation. Shenzhen became the world’s fourth busiest port by 2005.

Within 20 years, market reforms turned a relatively remote city the size of Green Bay, Wis., into an industrial and financial powerhouse on par with Chicago.

Wal-Mart shelves and Christmas mornings in the West have been built on a 90-hour, six-day workweek in the East. The last 20 years of growth have produced more than 90,000 export-oriented processing firms on the mainland, with nearly 70,000 based in Shenzhen’s Guangdong province alone.

It’s no wonder Chinese officials fear what a slowdown in the export economy may bring. Domestic growth and stability have risen with Chinese workshops. And make no mistake, the first three long-term domestic priorities on Beijing’s list are and will remain stability, stability and more stability.

The yuan-dollar peg has gone a long way in ensuring constancy. Chinese economic growth – we would argue, all economic growth – ensues under the auspice of a stable currency.

But ties to the greenback have recently come with a price. American policymakers have facilitated a weak dollar. The Fed, for its part, announced another $200 billion injection on March 11. Its most recent funding equals the $200 billion Bernanke set free on March 7. For its part, the dollar didn’t know what to think ($400 billion in four days). Or else, it’s in a rather cruel denial.

For the first time since Word War II, owning U.S. Treasuries is a riskier bet than owning German bonds.

On the basis of credit default swaps, which are used to speculate on a government’s ability to repay debt, the 10-year note reached a record high of 16 basis points on March 12. German bonds traded at 15 basis points, also a record. A decline in these spreads shows improving confidence in the government’s ability to pay…an increase shows the opposite.

“That’s certainly eye-opening,” writes our esteemed colleague Chris Mayer. “The market consensus is that you stand a greater chance of default investing in U.S. Treasuries than in German bonds.”

Officials in Beijing must keep shaking their heads. China holds more than $387 billion in Treasury securities.

For China, a weak dollar makes critical imports (wheat, corn, iron and soy) more expensive. Expensive imports mean higher prices. Higher prices mean more inflation. More inflation means less stability.

Chinese Premier Wen Jiabao addressed the equal and opposite reaction on the other side of the planet.

“The primary task for macroeconomic regulation this year,” he decreed, “is to prevent fast economic growth from becoming overheated growth and keep structural price increases from turning into significant inflation.”

In his annual policy speech to China’s legislators, Wen clearly labeled rising commodity prices and the subsequent food shortages as China’s No. 1 policy issue for 2008.

So Beijing finds itself in a bind.

Going forward, yuan appreciation would certainly help alleviate rising prices (commodity imports would be cheaper). Export dependence, however, has thwarted this policy. On the other hand, protecting the export industry by enforcing a close yuan-dollar peg only intensifies further inflation as the dollar continues to slide.

In the meantime, Beijing has turned to price controls. But price controls are nothing more than a short-term stopgap. Price controls disincentivize ample production. Shortages ensue. Prices, therefore, rise even higher.

Beijing may have hope. China’s appetite for consumption keeps growing. We see signs that China’s GDP growth is no longer so export dependent.

As the world scrambles for precious resources and solutions for its various ills — from energy to food shortages — attention, as always, turns to technology. Lately, we’re always hearing about hydrogen fuel cells, cars that run on switch grass, radiated corn, solar homes, indoor vertical farming, etc. How real are these things? I mean, concept is one thing, but practical application is quite another.

There is no doubt that throughout history, real needs and higher prices have spurred innovation. Many of the advances in technology we have today are direct results.

So what is fact and what is fantasy? Can our current problems simply be solved by new technology?

I remember my parents telling me of the time they went to the New York World’s Fair in 1965. My parents were in their early 30s in 1965, and I was still a future development. They told me it was such an exciting time with so much hope. The idea of landing a man on the moon, sidewalks that would move people, ovens that would cook food in only a few minutes, phones without cords…

Let your imagination take you to a world that was supposed to have been here by now! At the World’s Fair, many major industrial manufacturers had exhibits looking at — or at least trying to guess — what the future would hold. The most notable of these was General Motors Corp.’s Futurama II, a show in which visitors seated in moving armchairs glided past detailed scenery showing what life might be like in the “near future.”

My parents went on this ride a couple of times they said because it was just fascinating to think about and see what the future would be like. They were not alone. Futurama II proved to be the fair’s most popular exhibit. Nearly 26 million people rode into the future during the fair’s two-year run.

Many of the utopian or undersea city ideas seem a bit far-flung, even now. However, the ideas of sidewalks that move people, traveling to the moon and many other things that seemed just as impossible are now something we simply take for granted — even things that were not even dreamed of by Futurama II. Home computers, cell phones, fax machines, advanced medical treatment — the list goes on and on.

Take a minute today and look around at all the things you use. Imagine going back to the first New York World’s Fair, in 1939. If those people could have seen then how our world is today, they would have been astonished.

For all our technological advances, we are now faced with a crisis of epic proportions that technology may not be able to fix. However, that hasn’t stopped scientists from trying, innovating and inventing.

The Future Is Here, But The Resources May Not Be…

Food that cooks itself in two minutes and cars that drive themselves are one thing. But what happens if you don’t have the food in the first place or anything to run the car on? The problem becomes quite different, and the answers are not just for convenience, but for necessity — urgent necessity.

As the world’s population continues to explode and energy, food and raw materials continue to dwindle, the real need for solutions to these problems becomes more immediate. On my recent trip to Singapore, I spoke at and attended the Plantation Investment Asia conference, which focused on agriculture, biofuels and the future.

There was no Futurama ride at the conference, but there sure could have been. I met with and listened to individuals from all over the planet, with some of the most incredible ideas, investment schemes and outlooks I have ever heard. The question is how long will it take for the technology to actually be implemented? For many of the technologies I learned about in Singapore, the answer is at least 10 years, and even then, they will take years to assimilate.

I remember when microwaves first became common. We were one of the first families we knew to get one, and it was crude compared with today’s standards. It was also expensive, I am sure. Nowadays, of course, everyone has a microwave, and it’s as standard as a toaster. While it’s still more expensive than a toaster, prices have come down a lot since they first came out.

The point is once the heavy lifting of actually getting new technology to work is done, you still have to make it affordable. It can take a long time until the masses can afford to buy it. It’s a Catch-22, in a way.

Going Vertical

Some of the incredible concepts I learned about at the conference included vertical indoor farming. A 12-story building, say, in the middle of New York could be filled with various food crops — soybeans, wheat, corn, etc. — hydroponics, fully controlled climate, automated robotic spraying of water, etc. The concept is intriguing. The idea is to keep food close to where the people are, rather than trucking that food in from 150 miles away. It is an idea championed by our friend James Howard Kunstler, I believe.

The idea of the ability to have our masses in one location and all our food and resources in another means the use of a lot of energy to bring the two together. That must change, and fast.

The concept of a vertical farm is not that far-fetched, and in fact, when I was at NYU back in 1985, I was part of a similar (well kind of) vertical living trial. During my freshman and sophomore years, I was a member of Sigma Phi Epsilon fraternity. My father was a Sig Ep, as was his dad, too. So I guess you would call it a tradition. I called it a cheap place to live in New York.

Anyway, the fraternity was located at 3-5 Washington Place, a five-story building. In it were five fraternities. I can only tell you that Thursday-Saturday, it had to be the biggest party in all of Manhattan.

So while we weren’t growing anything in there (at least I wasn’t), I guess it would be possible to do so in New York. In my conversations in Singapore, though, I began to see the real problems something like an indoor farming setup would not solve. Now that we have all these indoor 12-story farms every 15 blocks, we will need a heck of a lot more water, electricity and many other things. This is on top of the loads many of these cities’ power and pipe grids can barely handle now. No, the concept is promising, just like biofuels are, but the solutions often raise more questions than answers.

In coming articles I will discuss some of the other New Age technologies that were discussed in Singapore, things like jatropha, algae power and others. Many of these ideas and technologies may sound far-out, but just take a look at what the Futurama II ride from the 1964/1965 World’s Fair told visitors and then look at where we are in 2008 :

“It is now Tomorrow. Now we can find our way along the dark, star-studded corridors of space, and make that long-dreamed voyage to our nearest neighbor in the great unknown. That silent satellite of Earth we call the moon.

“A new system of highways spans the continents, to transport men and goods swiftly and separately across the land.

“And for our deserts — a new technology — waters from the sea made fresh as rain to nourish crops planted in the sand. Produce from seed to shipment, programmed and processed by a new agriculture.

“All roads lead, as they have for centuries, to the great centers of commerce and communication. As the continental highway now leads us to the City of Tomorrow. Here the city first receives its goods and produce from the factories and the fields of the world. Plazas of urban living rise over freeways. Vehicles electronically paced, travel routes remarkably safe, swift and efficient. Towering terminals serve sections of the city, make public transportation more convenient, provide ample space for private cars. And from a lower level, covered moving walks radiate to shopping areas that are now truly marketplaces of the world.”

Kevin has plenty of views on the U.S. agriculture topic, so stay tuned for more from the commodities sector…

Until next time,

Byron

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Agricultural commodities have been stellar performers in recent months, while commodities soared as a whole. However, increased volatility has crept into the grain markets here too. But there’s good reason to believe that any downside in soft commodities will be limited by the fact that we are in the midst of a global food crisis.

Yesterday, rice prices jumped to fresh record highs, and corn traded near its highest level ever. Soybeans and wheat also advanced strongly. Bloomberg reports that “Indonesia, the world’s third-largest rice producer, may join China, India, Vietnam and Egypt in curbing exports to secure domestic supplies.”

What we’re seeing now is nothing short of a full-scale global power struggle to secure valuable food resources which are growing scarce. Rice for example is the staple food for about three billion of the world’s people, mostly in poorer, developing nations. Since 2005, the prices of food staples (including rice) have soared 80%.

This is triggering sharp inflation spikes throughout the developing world – which in turn has sparked troubling social unrest. Consumer prices in China rose 8.7% in February to an 11-year high. Inflation in India is at a 13-month peak.

The United Nations is warning that “36 countries, including China, face food emergencies this year, as stockpiles of grains such as rice drop to a 26-year low.” The World Bank points to social unrest in 33 countries around the world because of “the acute hike in food and energy prices.”

Of course population growth, along with rising living standards around the world, is one of the key “demand factors” most often cited for soaring food prices. Another factor to keep an eye on is soaring input costs – which is keeping upward pressure on prices from the supply side too.

U.S. farmers, for instance, are paying much higher prices for diesel fuel to power their combines, nitrogen fertilizers to nurture their crops, and livestock feed. In fact, while commodity prices received by farmers jumped 17% year over year in March – the costs incurred by farmers to grow grains and livestock soared 11% over the same period.

These higher “input costs” will inevitably get passed along over the next few months in the form of…you guessed it: Even higher agricultural commodity prices.

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. My colleague, Eric Roseman, will be hosting a special FREE teleconference next Thursday at 12 noon EDT to show you exactly how to pad your commodity portfolio as this global struggle for food continues. It’s absolutely FREE to join us. Simply click here to let us know you’ll be listening in next Thursday.

But apparently, “a farmers strike has emptied the shelves of meat, cereals and milk.” More than 400 roads are blocked. Much of the discontent followed a disastrous speech by the president of the country, Cristina Fernandez de Kirchner, which is said to have alienated the farmers even further.

At the heart of the matter is a new tax – up to 49% – on soy exports. Argentina is a farming nation. And soy prices are so high, the farmers planted every available acre, hoping to score big on international grain markets. And now the government has stepped in to take half their money; no wonder they have their bombachos in a twist.

This just goes to illustrate our point: no situation is ever so beneficent that politicians won’t find a way to make a hash of it. The oil exporters are getting a once-in-a-lifetime windfall from high energy prices. What are they doing? Building empty skyscrapers and adding social welfare promises faster than the pumps can put out oil. They’ve managed to squander most of their profit margins and then some. Just look at Hugo Chavez. He had so much oil he was able to throw his weight around all over Latin America. But the dumbell has so mismanaged his own economy that the place is said to be falling apart.

And look to at the US of A. What a bonanza it was to have the world’s biggest military… its richest economy… and its only reserve currency. The rest of the world seemed to want to give Americans valuable goods and services, expecting nothing in return but pieces of green paper. It was like manna falling from heaven. How did Americans manage to turn that into the biggest financial trap in history – actually growing poorer during the greatest boom the world had ever seen?

And now Argentina… with the world’s richest farmland… the world’s flattest, best watered fields, and some of its best weather… has found a way to turn the highest grain prices in history into a financial crisis.

Bravo! Bravo to us all!

Bill Bonner
The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

The report revealed that farmers expect to plant 18% more soybeans and 5.5% more wheat this year.

According to BusinessWeek, “soybeans for May delivery dropped 70 cents to $11.9725 a bushel on the Chicago Board of Trade, its lowest level in three months. Wheat fell to a two-month low, losing 60 cents to $9.29 a bushel on the CBOT.”

Corn prices rose, however, adding 9.25 cents to $5.6975 a bushel on the CBOT after the report revealed that farmers intend to to plant 8% less corn.

Another commodity set to rise is copper, at least according to top commodities fund manager Frank Holmes.

Frank expects copper – which has gained 400% in the past five years and now sells for $3.75 per pound – to hit $8 to $10 in the coming years.

To find out more, click here.

It’s hard to believe, but true. An environmental “dead zone” has killed off everything in a 7,000 square-mile radius.

Worse still, I’m not talking about some over-polluted region in Mongolia. This isn’t some far off Asian province packed with coal-fired power plants to meet China’s insatiable power demand. It’s right in America’s back yard.

That’s right. While the Greenpeace folks are out saving baby seals off the coast of Newfoundland, these environmental warriors seem to have completely overlooked a real problem.

So just where is this dead zone? It’s just off the southern coast of the United States, in the Gulf of Mexico. And it puts a $26 billion industry in harm’s way.

The Gulf of Mexico

This Gulf of Mexico dead zone is bad. Very bad. But I’m not here to blather on about how you and I accidentally created it and need to start driving hybrid cars. Not at all. My concern is there are companies that are going to pay the price for this dead zone. I want to show you how to avoid investing in those companies — and how to find others that will profit from it.

Dr. Nancy Rabalais, a marine scientist at Louisiana State University, has actually swum in the dead zone. As Dr. Rabalais says, “Anything that can’t move out eventually dies.”

Pretty bad, eh? And that’s just the environmental side. Jim Giattina, director of the Gulf of Mexico Program, says that “Fisherman in the Gulf of Mexico have an annual catch of 1.7 billion pounds of fish and shellfish, worth $26 billion. We’ve seen what can happen in other places in the world with ‘dead zones’… We don’t want to see a collapse of this fishery.”

As always, crisis breeds opportunity in some areas and poses long-term risks in others. Let’s take a look at how this happened.

Food, Fuel and Fertilizer

By now, you’ve probably heard of the pending global food crunch. Oil and energy grab the headlines, but surging demand for grain is fueling a shortage the likes of which the world has never seen.

As developing world consumers rise out of poverty, their top choice of spending is food. Think about it: After you’ve survived 50 years of rice and famines, it’s a big change to be able to afford chicken, beef, corn and bread to go with it all. That makes food the perfect luxury. This decision to upgrade the family diet is being made all over the world, and the agriculture markets are showing it.

Add to all that the fact that the world’s breadbasket, the United States, is starting to use more and more of its agriculture production for fuel. Subsidized ethanol and biodiesel plants are buying up corn and soybeans at record levels, with a blatant disregard for cost.

All this caused corn production in the United States to surge 25% last year. But corn can’t grow in the United States without lots of fertilizer.

After half a century of overfarming and record-high corn and agriculture prices, farmers are now fertilizing their fields in record amounts. Last year, farmers in the United States increased their fertilizer use by 9.9%, almost twice as much as anywhere else in the world.

All that fertilizer doesn’t go into the ground, though. A lot of it simply runs off into the local rivers and streams. From there it flows into the Ohio and Missouri Rivers, and eventually flows into the Mississippi River.

The Mississippi eventually deposits the fertilizer run-off into the Gulf of Mexico. All of that toxic run-off is creating the Gulf of Mexico dead zone.

Within the zone, there are no shrimp, crab, crabs, fish or any other meaningful signs of life. Last year, the dead zone continued its expansion. It’s now larger than the state of New Jersey.

Six Degrees of Superior Returns

Certainly there’s a big problem there. But with high agriculture prices and farmers continuing to fertilize, it’s going to get a lot worse before it gets better.

That’s where the profit opportunity comes in.

In the grains, soybean and wheat prices climbed as planting acreage was reduced to make room for corn and demand increased at a fairly average rate. This made feed for cattle and livestock more expensive, driving up meat prices.

Now we’re reaching the next inflection point — the rise of seafood prices. With growing demand around the world and high and rising meat prices, fish and seafood are the next alternative.

The problem is that the heavy fertilizing that helped produce more corn is killing the seafood supply from the Gulf of Mexico.

The global agriculture boom is starting to have downstream effects. Seafood is the final piece of the puzzle. The chain of events is a little complicated, but all the warning signs are there. We’re about to see seafood and fish prices surge, just like the cost of everything else at the grocery store.

The Year of the Fish

How do you play rising fish prices? I’d have to advise against loading up your freezer or trying to start your own fish farm. Fish farm operations are already traded all over the place — and they are expanding.

For instance, a company in Washington state offers exposure to this idea. HQ Sustainable Maritime Industries HQS just raised an additional $25 million to expand its fish farming operations in China.

And then there’s Neptune Industries NPDI, which is also an aquaculture company. However, with an $8 million market value, no sales, no profits and a recent press release touting the achievement (“Neptune Industries Featured in Local Newspaper”), this company just isn’t ready for prime time.

The big opportunity in fish will be in the Nordic countries. Sweden, Norway, Finland and Denmark are the leading fish farmers in the world, even though the aquaculture business is still in its infancy there. Little more than $50 million in new investment capital flowed into building fish farms last year.

I think it’s still very early for the aquaculture boom. But for the smart investor, there’s no better time to be paying attention. We’ll keep an eye on this trend — and the growing dead zone in the Gulf of Mexico — to determine the right time to buy.

After all, China may have labeled 2008 the Year of the Rat… but I’d bet it turns out to be the Year of the Fish.