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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Buy What China Buys, Part II

In fact, water shortages are erupting around the world, from San Diego to Riyadh.

Hundreds of farm workers and locals from all parts of California took to the streets last Thursday as part of a four-day march to protest federal cutbacks in water supplies.

“This is ground zero,” Mario Santoyo, an adviser to the California Latino Water Coalition, told the New York Times. “There’s a human tragedy going on here, and we need water.”

The state of California projected in March that, because of a drought in the state’s Central Valley, as many as 23,700 full-time workers would lose their jobs, and farmers would lose up to $477 million in revenue, The Times reported.

California Governor Arnold Schwarzenegger has declared the drought a state of emergency and – not for the first time – threatened statewide water rationing.

Yet, the scene in California is just a small glimpse of the kind of dissatisfaction and unrest that many experts believe will become frequent occurrences if the world’s evolving thirst isn’t quenched.

Today, 2.8 billion people, or 44% of the world’s population, live in areas of high water stress, according to the Organization for Economic Co-operation and Development. This will rise to almost four billion by 2030 based on present trends. The livelihoods of one in three people on the planet will be threatened by water scarcity within 15 years.

And the situation is showing signs of spiraling out of control as populations around the world continue to grow.

The world’s population has more than doubled in the past 50 years, soaring to about 6.5 billion from 3 billion (The combined population of China and India is about 2.5 billion). In that time the use of water has tripled, according a recent article in The Economist. Analysts anticipate that the world’s population will increase by about 2 billion by 2025 and 3 billion by 2050.

And it’s not just the volume of people that has analysts worried. It’s where those people will be living and what they’ll be eating. The vast majority of masses joining the world’s population in the coming decades will be city-dwellers, who consume more water than their rural counterparts.

That’s largely because urban populations, particularly populations with higher standards of living – such as those blossoming in developing countries like China and India – consume more meat, and therefore more water.

According to The Economist’s article, it takes about 1,000 liters (264 gallons) of water to produce one kilogram (2.2lbs) of wheat. But it takes as much as 15,000 liters (3,963 gallons) to produce a kilo of beef.  The meatier diets of Americans and Europeans requires about 5,000 liters (1,321 gallons) of water a day versus the 2,000 liters (528 gallons) of water needed to sustain the vegetarian diets of Africa and Asia.

The world will need as much as 60% more water just for agriculture for the 2 billion people expected to join the urbanite ranks over the next decade and a half, according to the Food and Agriculture Organization.
And it’s not just developing countries that need to worry. A report by the World Wildlife Federation, entitled “Rich Countries, Poor Water,” pointed out that water crises are increasingly affecting many wealthy nations, due to climate change, drought and water resource “mismanagement.”

“In Europe, countries on the Atlantic are suffering recurring droughts,” the report notes, “While water-intensive tourism and irrigated agriculture are endangering water resources in the Mediterranean.”

The Murray-Darling basin, an area of southeast Australia as large as France and Spain combined, recorded its lowest level of inflows in 117 years during the first three months of 2009.  Farmers have been restricted to as little as 16% of their annual water allocation. Authorities warn that water supplies for the two million Australians who live in the basin cannot be guaranteed beyond next year.

United Nations Secretary-General Ban Ki-Moon has warned that “time is running out,” as estimates suggest that almost a third of the world’s population will be living in regions facing severe water scarcity by 2025.

Money Down the Drain

The United States and other countries around the world are already being forced to confront their water supply shortages. And they’re having to do it with cash.

California will receive $260 million in federal economic stimulus funds to fix dams, restore fisheries and habitat and help the state cope with drought conditions, Interior Secretary Ken Salazar said last week. In addition to that, the state is likely to qualify for much of the $135 million in federal grants set aside for water reuse and recycling projects.

“I think a new reality is forming here … that water is scarce and we are going to have to change the way we use water,” Frank Royer, general manager of the Camrosa Water District in Camarillo, told the Ventura County Star.

Saudi Arabia – a desert country that is swimming in oil but desperately lacking fresh water – is putting $800 million into a new public company that will invest in overseas agricultural products, the Financial Times reported.

The reason: The Saudi government is discontinuing domestic wheat production to conserve its water resources. The country has been producing about 2.5 million tons of wheat each year since it began its wheat program in the late 1970s.

China is another country hoping it can spend its way out of a water dilemma.

About 15.3 million hectares, or 13%, of Chinese farmland are lost to droughts every year, according to a recent article in BusinessWeek. Roughly 300 million people living in rural areas still don’t have access to drinking water. And of China’s 600 cities 400 are facing water shortages.

That’s because, on top of water scarcity, China has horrible pollution, which has rendered much of the nation’s fresh water undrinkable.

More than 200,000 people in Yancheng, Jiangsu were recently cut off from clean water for three days when a chemical factory dumped carbolic acid into a river, BusinessWeek reported. A similar incident occurred in November 2005 when a chemical plant in Jilin spilled massive amounts of toxic benzene into the Yangtze and Songhua rivers.

About 1 billion tons of untreated sewage is dumped into the Yangtze River each year. And half of China’s population – 600 million to 700 million people – drinks water contaminated by human and animal waste.

As of September 2008, China had poured $7.46 billion into 2,712 water treatment projects, according to the nation’s Ministry of Environmental Protection. Beijing also has launched a multibillion-dollar effort to transport water from southern regions. But that project has been delayed because of environmental concerns and resistance from the estimated 300,000 farmers who would have to be relocated to accommodate water pumping and cleaning stations as well a canal., BusinessWeek reported.

The Asia Society argues that water – not oil – will evolve into the key regional security in the 21st century, and Asia in particular is desperately lacking.

“This is a fundamental resource that we need to survive,” Suzanne DiMaggio, director of the Asia Society’s Social Issues Program told TIME magazine. “The emerging picture is very worrisome.”

Source: Developed and Emerging Nations Forced to Ante Up to Stem a Worldwide Water Shortage

This from Martin:

I’m drinking on the job again.

No, not that kind of drinking. I’m swigging away from a one liter bottle of fresh water. Like most folks, I thought nothing of it when I bought it. I took its availability for granted, even though it’s that cool Voss stuff all the way from Norway.

But sadly, that’s not the case for approximately 40% of the world’s population, which lacks adequate fresh water supplies. What’s more, the United Nations says that two out of three people will be living in areas under “water-stressed” conditions by 2025.

Water shortages currently affect 80 countries and within 50 years, more than half the global population will be living with water shortages.

But hang on a minute… isn’t 71% of the Earth’s surface made up of water?

Yes, that’s true. But 97.5% of it is seawater, leaving just 2.5% that is drinkable. And only about 0.1% of all water is readily available. Most of it is locked up in glaciers, groundwater, and soil.

And water supply problems are only going to get worse… which opens up some very good investment opportunities.

Here’s the deal…

More People = More Pollution = Less Water

In 1900, there were about 1.6 billion people on Earth. Today, there are 6.5 billion. By 2025, the world population is expected to rise to 9 billion.

But here’s the problem: During the 20th century, human water consumption swelled six-fold and global water demand already exceeds supplies by 17%, according to the Population Institute.
And World Bank figures show that demand is doubling every 21 years. By 2020, the two billion extra people will require 20% more water than is currently available, according to the International Food Policy Research Institute.

And speaking of food, global population growth leads to increased industrialization and pollution. U.S. energy production requires about 40% of fresh water withdrawals. And the fact that people are also living longer means not only less drinking water, but also less water available for food production.

Crop production already claims 65% of fresh water, compared to 25% for industry and 10% for households. There is 7,000 liters (1,900 gallons) of water used for one kilogram of grain-fed beef… 5,000 liters (1,300 gallons) for one kilo of rice… and 1,500 liters (400 gallons) for one kilo of corn, according to the U.S. Geological Survey.

The point is… when it comes to water needs, it doesn’t matter one iota what the economy or stock market is doing. Every single person on the planet needs water… period. And with H2O in shorter supply, the world is set to invest approximately $800 billion over the next decade in order to improve the situation. This is the time for smart investors to run with this opportunity…

The China Problem

For all the talk of federal budget plans, economic bailouts, stimulus packages and all the other dizzying (and often demoralizing numbers), money is no object when it comes to satisfying the world’s water needs.

Put bluntly, no water = no people. Certainly no need to worry about the economy, unemployment, the real estate and auto industry debacles, or anything else if you’re not actually alive!

Of that $800 billion number I just mentioned, China has set aside $200 billion for its water infrastructure over the next decade. It makes the U.S. government’s $8.4 billion look like small potatoes in comparison – and woefully inadequate. The Environmental Protection Agency forecasts that the U.S. will have to spend $277 billion on water infrastructure by 2019. Nevertheless, China has some serious problems…

Two-thirds of the country already faces water shortages. Its annual water shortage is 40 billion cubic meters and it uses 30 more cubic kilometers of water than is replaced by rain.

Of its 1.3 billion people, 300 million don’t have access to clean drinking water.

According to Summit Global Management, “75% of China’s drinking water is unsuitable for drinking and cooking, and 80% of China’s seven major river systems no longer support fish.”

What’s worse is that at the current growth rate, China’s population is doubling every 12 years. More people = more food/drink needs = more agriculture development and industrialization = more pressure on water supply and demand.

So what’s the solution?

Thirsty For Profits? Try These Water Stocks…

Let’s kick off with a broad investment option. Because of their increased flexibility, lower costs, and the fact that they trade like stocks, I like ETFs (exchange-traded funds). With water, you can go for…

~ PowerShares Water Resources (NYSE: PHO), which tracks the price and yield performance of the Palisades Water Index. The fund includes big water companies like Veolia Environnement (NYSE: VE) and Ameron International Corp. (NYSE: AMN)

~ Claymore S&P Global Water Index Fund (NYSE: CGW), whose results aim to replicate the performance of the S&P Global Water Index. Like PHO, it holds Veolia and Aqua America Inc. (NYSE: WTR), plus Danaher Corp. (NYSE: DHR) and Severn Trent in England.

Breaking it down, Paris-based Veolia is one of the biggest water infrastructure stocks and is split into four groups: Water, Environmental Services, Energy Services, and Transportation. Click this link for a more detailed company profile and rundown of its water management operations – it has a very broad reach in the industry. With a P/E ratio of just 9, it’s trading at a hefty discount and coughs up a fat 15.8% dividend yield ($3.12 per share annually), too.

Aqua America’s fourth quarter revenues rose 7%, resulting in 3% earnings growth. With an aggressive acquisition policy that has seen the firm tie up more than 100 buyout deals over the past few years, it has boosted its customer base from 245,000 in 1992 to 950,000 today. It applied for $80 million worth of price increases last year, with $61 million approved. This resulted in a 10% revenue increase in 2008 and a 15.7% profit margin. It pays a 2.8% dividend.

There’s another option, too…

Salty Solutions

The National Academy of Sciences recently stated, “Desalination is a realistic option for increasing water supplies.”

In fact, global spending on desalination is set to more than double in four years in an attempt to boost the 11 billion gallons of drinking water that the process currently creates every day. That’s because even that hefty-sounding number still only represents 1% of water usage.

But desalination capacity is about to surge by 45% over the next seven years, producing an extra five billion gallons of water per day. And with 1,200 desalination plants worldwide, the cities of Las Vegas and San Diego (based in two states suffering some of the most severe water shortages in the U.S.) are discussing plans to build new plants themselves.

Yes, desalination is an expensive, energy-intensive process. But there’s one company that is attempting to solve it by not only producing clean water, but also recovering and recycling as much energy and waste as possible. It just signed a deal with China’s largest plant, too.

My colleague Marc Lichtenfeld, who’s as bullish as I am on the water industry and water stocks, added this small-cap, fast-growing company to the Xcelerated Profits Report portfolio last month. And just this week, he added another water-based company, whose shares are up around 230% over the past 18 months. Sales are continuing to rise – and demand for its products is red hot. It’s also active in China.

Boy, after all that, I’m really thirsty now. So while I find some more water, here’s what I’d like you to do. While I can’t reveal the names of those two water stocks that Marc recently added to our portfolio, what you can do is check out how you can become a member yourself. Go here for full details on the Xcelerated Profits Report. And if you like what you see, click this link to start profiting right away.

Water is critical. We can’t live without it. But with population growth, pollution, industrial expansion, and climate change resulting in shorter supplies as demand continues to rise, it’s no wonder governments around the world are pumping billions into the industry for infrastructure improvements. And water stocks could be one few areas that could truly benefit in this wretched global economy.

Source: Water Is The World’s Most Critical Commodity… Here’s How You Can Profit From It

Courtomer, France Friday, June 13, 2008

First, a quick look at what happened in the markets yesterday.

The Dow rose 57 points. Oil held steady – but at a near record price of $136 a barrel. The dollar rose…and gold dropped $10.

The big news this morning is that retail sales actually went up last month – at 1%, twice what economists expected.

What? How can consumers continue to spend? They’re supposed to be cutting back. Maybe they’re spending those rebate checks.

Meanwhile, we find import prices up 2.3% in May, mostly because of higher oil prices. And the NY Times tells us that commodity price increases show “no let up.” Floods in the Midwest are aggravating the situation – driving up corn prices to new record highs.

“Inflation expectations rise sharply,” says the Financial Times.

The Fed’s ‘Beige Book’ tells us that the economy is “generally weak.”

We spent the week with a group of Internet marketers. The financial publishing business has gone electronic in a big way. In this business, you either learn how to publish on the Internet…or you fail.

Your editor, who grew up without air-conditioning, let alone without the Internet, finds it hard to keep up.

“You’ve got to understand the semantic dynamic of the bot-driven crawlers,” said one of the speakers. We had no idea of what he was talking about, but the others present nodded their heads in approval.

That is just one of the problems with growing older; you grow wiser…but wiser about things that no longer exist. When the car is slow to start, for example, we naturally think we need to clean the carburetor or check the points. Then we realize that there isn’t a carburetor and there aren’t any points. The cars have gone electronic too.

The other thing that has gone electronic is money.

In our decaying wisdom, we’re suspicious of the new electronic money. The old paper money was bad enough. Given the opportunity, central banks would print it up…far more of it than they should. Soon, there would be a lot more pieces of paper than there were things that it would buy. Now, the authorities who control money don’t even have to get ink on their hands. They can create money electronically. In fact, there is no limit on how much they can create – theoretically. Just add zeros. Add them electronically. The sky’s the limit.

But real wealth is not created so easily…

Real wealth is not electronic. It’s not just 1s and 0s – not just digital…not just phantoms that disappear when the power goes out. Real wealth is physical…things you can touch, eat, drive around in, and live in.

Real wealth and “money” are connected. But this new electronic money has plenty of stretch in it. Houses, for example, are real wealth. But in money terms, their value varies. In the ten years – 1996-2006 – for example, the price of America’s houses almost doubled. Of course, they were essentially the same houses…a little bigger perhaps…with a few more marble countertops, but otherwise not much different. What had happened that made them more valuable? Well, they weren’t really more valuable…just more expensive. America’s elastic money had stretched out to make them more expensive.

But now the elastic is snapping back. Houses are down 13% – according to Case/Shiller – from a year ago. And now an analyst at JP Morgan says they’ll probably go down about 30% before the snapback is finished in 2010.

This, he says, will cost Wall Street about $1 trillion in losses on mortgage-backed securities. It will cost the nation $4 trillion in “lost access to capital.”

Whoa! That’s the trouble with stretchable money – when the elastic snaps, it can hurt.

*** The other trouble with these new electronic systems is that they are hard to fix. When your car wouldn’t start in the ’60s, you lifted the hood…took off the distributor cap and checked for sparks. Or, you removed the carburetor and made sure it was working properly. Even when you didn’t know what you were doing, skinning your knuckles once or twice seemed to cure most minor mechanical problems.

But when an electronic system breaks down, it’s hard to figure out what is wrong…and almost impossible to fix. When money is in paper form, it is pretty easy to understand how it works. Simply count up the bills in circulation. If the supply is going up…prices are likely to follow. But this new electronic money has most people stumped. The Fed sends an electronic credit to the Bank of America, which in turn gives an electronic credit to its credit card holders. Now, they can go out and buy things. Do they have “money?” How much “money” is in circulation?

Then, the American shopper buys something made in China – where else? – so that the Chinese producer ends up with a credit in his account in dollars…which he trades with the Bank of China for yuan. The BoC doesn’t want the yuan to go up…so it creates more yuan, electronically, to trade for the electronic dollars it has received.

This was the ‘great money machine’ – an electronic machine – that was responsible for creating so much of the world’s liquidity…and the world’s bubbles.

But as we said yesterday, this machine seems to be slowing down…maybe even breaking down. America’s trade deficit is shrinking. In fact, it seems to us that the elastic currency is snapping back in America’s face. Its import prices go up…while its major asset – housing – goes down.

The import that people care most about is oil. It’s causing the highest gasoline prices Americans have ever had to pay. And it’s calling into question the whole ‘car culture’ society. In America, much more than in Europe, people live in individual, standalone houses – which are much more expensive to heat and maintain than row houses or apartments. They also live far from their work…their schools…their restaurants…and their shops.

Here in Europe, big shopping malls have become common. The small shops couldn’t compete with them on price or choice. Still, now that the price of oil has gone up so dramatically, the latest reports tell us that shoppers are turning their backs on the big malls; they prefer to walk out to neighborhood stores.

But in the United States, there are few neighborhood stores left…in fact, there are few neighborhoods. Instead, in many areas, houses were flung out like confetti from a parade float. They may have fallen a mile from a major shopping mall…or the wind might have carried them 50 miles away.

“Oklahoma’s painful car culture,” is changing the way people live, says an article on CNN Money. Out on panhandle, it is not unusual to drive 70 miles to get to work. In their big SUV and pickups, commuters might have to spend $50 a day – just to get to work. It’s not surprising that they are looking for alternatives – bikes, carpools, and buses.

In this week’s Outside the Box we continue with what I mentioned a few weeks ago: agricultural needs are going to be a new and important force in the world and when coupled with energy may shift the balance of power in the world in strange a different ways.

When, as Niels points out, Afghanistan poppy farmers are shifting to wheat farming, the world is truly a different place. I think you will find the research he has done to be truly worth a few minutes of your thinking time.

And as a preface, I was reminded a little while ago that a Financial Times headline story last Friday mentioned that China is buying African farmland and building massive amounts of railroads and infrastructure to get grains to the market. I have long been bullish on African farmland. This week’s OTB will tell you why.

“There is nothing so disastrous as a rational investment policy in an irrational world,” John Maynard Keynes. You just know that something is astray when Afghan poppy growers begin to switch from opium to wheat.

According to the Independent newspaper here in the UK, that’s exactly what is now happening. I have no desire to enter into a pound for pound risk/reward analysis of producing wheat versus opium. However, the consequences of the rapid rise in energy and agricultural commodity prices are far reaching and perhaps not as well understood as they should be. That is the content of this month’s letter.

The Silent Tsunami

My story begins with Al Gore. While most of us lulled ourselves into the belief that he was onto something when he tried to convince us that global warming (or climate change, as I prefer to call it) was the most formidable challenge facing this planet, a silent tsunami¹, also known as the global food crisis, began to develop and is now threatening to undermine global political and economic stability, the latter of which has been key to the benign financial markets we have all benefited from in recent years.

According to the World Bank, just over 1 billion people live on one dollar or less per day. People in the poorest countries in the world spend 80% of their income on food. So when you and I have hardly noticed that the bread we pick up from the local bakery has doubled in price over the past year, it is because only 10-15% of our budget is spent on food items². In many emerging economies the number is much higher. Chinese consumers spend 28% of their income on food. In India it is 33%. If you want to know how much it is in your country, go to:

http://www.ers.usda.gov/briefing/cpifoodandexpenditures/data/2006table97.htm.

There are three food staples in the world today which dwarf all other food ingredients in terms of importance. They are (in alphabetical order) corn, rice and wheat. As you can see from chart 1 below, they have all experienced rapid price appreciation since last summer. What is it that has driven this price explosion and what does it mean to financial markets? As with most things in life, there is no simple explanation; a number of factors have conspired to create a situation which is exceptional but also destabilising and hence dangerous.

It Is The Bio-Fuel Policy Stupid!

The explanation given by most commentators is the bio-fuel policy currently being pursued by the Bush administration in Washington. The policy is driven by a desire to unlock the United States from its rising dependence on imported crude oil. The problem, as Bush and his government have been slow to recognise, is the stupidity of the policy in its current form. Let’s back that claim up with some hard facts.

In the United States, corn (better known as maize over there) is the primary ingredient in ethanol production although wheat and soybeans are also used. According to a recent UN report, it takes 232 kg of corn to fill an average 50 litre car tank with ethanol – enough corn to feed a child for an entire year. It is estimated that almost 20% of total US corn production will go towards ethanol this year and the number is set to rise to 45% by 2015³.

The problem with corn is that it is low on carbon hydrates, which is where the energy comes from. Instead, American ethanol producers rely heavily on fertilisers with the energy being extracted from the nitrogen in the fertiliser. This is an inefficient and very costly approach – in particular in an environment of rising energy prices because crude oil and/or natural gas are major ingredients in fertiliser production. 33,000 cubic feet of natural gas are required to produce just 1 ton of ammonia!

So what does all this mean? According to estimates from Goldman Sachs, the cost of ethanol from corn is now over $80 per barrel, it is about $145 from wheat and over $230 from soybeans. Other countries recognised this problem a long time ago and use crops with higher carbon hydrate content. In the Philippines they use coconut oil and the Brazilians use sugar cane. Goldman reckons that the cost of one barrel of ethanol based on sugar cane is about $35. So why not import sugar cane from Brazil instead of using corn? One simple answer: Brazilian farmers do not vote at American elections. Idaho farmers do.

Are Investors To Blame?

There is no question that the US bio-fuel policy which, by the way, is now being copied in other parts of the world including the EU, has to take its share of the blame. But it is by no means the only reason for the food crisis. The next culprit on my list is our very own industry – investors of all kinds. In recent years there has been rising demand for commodity-linked investment products from investors all over the world. Pension funds, hedge funds, mutual funds and private investors have all allocated more and more to commodities and, in recent months, demand growth has been explosive, as is evident from chart 2 below. It is estimated that the aggregate value of commodity-linked index funds now exceeds $200 billion, a very significant number in a not very large market.