The Story of the Impatient Cow
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It’s said that the way to a man’s heart is through his stomach. Less well known but perhaps more useful these days is the knowledge that the way to his fear is through brain.
The amygdala is a tiny part of the brain that, under stressful conditions, helps produce your sense of fear. Hunger produces stress. But often, the amygdala kicks into action before you have any conscious knowledge of a threat.
This can come in pretty handy when a tiger is on your tail. But fear is triggered by more mundane circumstances too. Empty stomachs produce more than just bellyaches. They produce anxiety about where the next meal is going to come from. Or, if you’re sitting in the comfort of you’re air conditioned office in a well-fed Western country like we are, you might wonder how a planet with less arable land than 50 years ago can feed 2 billion more people.
But then, we’re not telling you anything you can’t read on the front page of the newspaper these days. Rising food prices are all over the front of the papers now. Today’s Age had a graphic showing corn up 31%, rice up 74%, soya up 87%, and wheat up 130%.
No one is mentioning cows, though. Cows eat grain. Grain is more expensive. Dairy prices are rising as a result. Dairy Australia reports that East Coast dairy farmers are trucking milk all the way across the Nullarbor to Western Australia. Western Australia exports 20 million litres of milk a year to Singapore and Malaysia. But with local demand growing so fast, the cows in WA just aren’t working hard enough to meet demand.
What do you think the embedded energy cost is in a litre of Australia milk that ends up in Singapore? You have the petrol to power the tractor that harvests the grain that feeds the cow who’s milk must be refrigerated as its trucked across the continent via internal combustion engine to be transported on a coal or oil powered ship in containers made of plastic (oil) to Singapore where a lorry driver with a refrigerated truck that runs on petrol takes it to a store whose lights and freezers are kept bright and cool by coal-fired power. All so you can have some milk with your cake in Singapore’s fabulous Changi airport as your carbon foot print grows to the size of Godzilla’s paws.
While we’re on the subject of cows, how about a joke? Things have been pretty serious here lately. A little levity is in order.
“Knock knock.”
“Who’s there?”
“Interrupting cow.”
“Interrupting cow w-”
“MOO!”
By the way, speaking of Perth, is the bloom off the rose, the boom of the rise? Earlier this week the AFR reported that median Perth house prices fell by 2.7% in the first quarter ended March. Property prices are still up 70% in the last three years in Perth, so it’s hardly a crash. But if Perth is the San Diego of Australia, then it could be the leading edge of a national trend where the resource boom alone is not enough to propel property prices higher.
BHP may already be taking advantage of that massive increase in coking coal it scored last week. Remember BHP secured a 240% increase in contract prices for coking coal last week? Turning coal into cash, that gives BHP anywhere from US$5.5 to US$7 billion in 2008 revenues it didn’t have before.
By contrast, Rio’s exposure to rising iron ore prices may “only” deliver an extra US$1.5 billion to 2008 earnings. BHP could use the coal cash to sweeten its share offer for Rio. The current ratio between the shares is 3.32, slightly below the 3.4 share offer that BHP put on the table.
Our technician Gabriel Andre has been tracking the ratio recently to see if there is a premium or discount in either company. The red line on the chart marks the 3.4 level of the formal offer. You can see that since the offer was made in November of last year, the ratio hasn’t deviated much. This current dip doesn’t put any pressure on Rio’s management to accept the offer. But more weakness-where it takes fewer BHP shares to buy one Rio share-could.
The BHP Billiton/ Rio Tinto Share Ratio
Did you see the small story in the Australian last Friday that the China Development Bank floated a proposal that China and Australia develop a long-term plan for, “Chinese investment in Australian mineral resources?” There wasn’t a lot of detail about the plan, like how it would work and whether it would replace the current system.
The current system, of course, is the share market, where if you want mineral resources you pay the market price for them. The market price for coal, iron ore, and copper is going up, of course. It would be much nicer, if you’re a customer of those things, to NOT pay the market price and pay, say, a contract price, or have some other kind of joint venture deal.
Australia and China are already joint venture partners in the commodity boom. But if China is suggesting a government-to-government relationship over resources and not a market-to-market relationship, well that’s different kettle of fish altogether isn’t it? Is it a proposal? A suggestion? Or an indication of how China would like things to be in the future, in order to remain a reliable customer for Aussie resources?
The Australian article says China would like to reach a “consensus” over Chinese investment in Australia for the next five to ten years. Finance Minister Lindsay Tanner did not agree saying, “We are committed to the long-established foreign investment review framework, which operates on a case-by-case basis governed by national interest considerations…The proposal floated by the China Development Bank would involve a dramatic deviation from those principles.”
Just something to think about. In an integrated global market for commodities where there are plenty of buyers and sellers, the market price prevails. But with the bear market in credit and the “Triple F” crises we mentioned yesterday, there may be fewer cashed up buyers of key global commodities.
Sellers in possession of key strategic tangible resources will have an interesting option to consider. With scarcity, the market price of most resources will go up. But if you want price certainty (or to use your resources to your national advantage), you might choose to sell only to certain clients and not others. If that were the case, you might move to contract pricing and not market pricing.
Take oil. The crude futures contract began trading in 1983. In early trading the futures price was lower that the price OPEC had set with its pricing mechanism. As the world’s largest supplier of oil at the time (it sill is, but less so as a percentage of total crude production thanks to the North Sea, the North Slope, and Russia), OPEC had all the pricing power in the oil market.
The futures contract changed the pricing mechanism for oil because it established a market price. And as it turns out, that pricing mechanism has worked better for OPEC in the last five years than any arbitrary ability to fix prices could. You get a bidding war for what you produce.
The only risk to the market price today is that bidding wars precede shooting wars. There is, after all, already a war in the Middle East that began in 2003. At what point does possession of a valuable strategic go resource change from having a prime position in the marketplace to having a big fat target on your back from larger, resource hungry neighbours?
One day your neighbours ask for more formal arrangements in your amicable trading relationship. The next day they stop asking. And the day after that?
[Editor’s Note: If you’d like to read more from Dan Denning you can visit the website or sign up for a 3 month trial of Australia’s premiere small cap investing publication, the Australian Small-Cap Investigator.]
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Tags: BHP, china, energy, food crisis, Food Prices, International, oil, Opec, SoyaAbout the Author
Dan Denning is a contributing editor to Diggers & Drillers and a regular columnist for Money Weekly, a Taiwanese financial publication. From 2000 to 2006, Dan was the editor of Strategic Investment of Agora Publishing. His reporting and analysis for The Daily Reckoning is read by more than 500,000 people regularly.
Pingback by Riots in Haiti… Unrest in Egypt… and now, Food Rationing in New England and California? : Contrarian Profits on 21 April 2008:
[…] Dan Denning says to keep an eye on dairy prices, “No one is mentioning cows, though. Cows eat grain. Grain is more expensive. Dairy prices are rising as a result. Dairy Australia reports that East Coast dairy farmers are trucking milk all the way across the Nullarbor to Western Australia. Western Australia exports 20 million litres of milk a year to Singapore and Malaysia. But with local demand growing so fast, the cows in WA just aren’t working hard enough to meet demand. […]