 | | The Daily Reckoning | Tuesday, October 26, 2010 |
- Investing on the right side of the current and future food crisis,
- A brief and enlightening look at the "econo-caloric" history of the United States,
- Plus, Bill Bonner on Zombie Central, USA, schemes and scams from the G-20 and plenty more...
|  | | The End of Cheap Food
| Why the American “right” to inexpensive food could soon disappear
| |  | | Eric Fry |
Reporting from Laguna Beach, California...
Food is the ultimate regressive tax, which is why it might offer some of the most compelling investment opportunities of the next ten years.
The prince dispenses the same number of tuppence for his crumpet as the pauper. But as a percentage of their respective incomes, the crumpet is much more costly for the pauper. This contrast is obvious, but the implications of this contrast for global food prices may be less obvious.
The poor spend as much as they possibly can to nourish themselves. The wealthy spend as much as they wish. In fact, because the cost of food does not rise commensurately with incomes, the cost of food becomes so trivial to the wealthy that they end up tossing the stuff into trashcans.
For perspective, consider the econo-caloric history of the United States, as it progressed from "Emerging Market" to Superpower. According to the Federal Reserve Bank of Dallas, the average American in 1919 had to work two hours and 38 minutes to buy a 3-pound chicken. Nowadays, it takes just 15 minutes.
In statistical terms, Addison Wiggin observes in the latest edition of Apogee Advisory, "Americans spent 23.4% of their disposable income on food in 1929. By 1950 this number had dropped to 20.6%. By 1975, 13.8%. The number finally cracked single digits in 2000. And that figure includes meals eaten both at home and away from home.
"Compare that to Germans," Addison continues. "They spend 11.4% of disposable income just on meals eaten at home. The French, Japanese and South Koreans spend about 14-15%. Brazilians? 24.6%. And the Chinese spend 39.4% of their disposable income on meals eaten at home.
"Even Canadians, with a much smaller population and their vast productive prairies, aren't as lucky as we are. They spend 9.2% of their disposable income on meals at home. That's nearly as much as Americans spend both home and away."
Therefore, imagine a world in which the global population is rapidly increasing, and in which a growing percentage of that growing population is progressing from mere sustenance levels of existence to conditions of relatively greater prosperity.
You don't need to imagine such a world; it has arrived.
As the major Emerging Markets of the world like Brazil, India and China continue their progression from chronic underachievers to periodic overachievers, their national wealth will increase. And as this wealth increases, the recipients of it will certainly increase the quantity and/or quality of their diets.
Even if the quantity does not increase much, improving the quality of diet would be sufficient to drive food prices much higher. Replacing one meal of beans and rice, for example, with a meal of chicken and rice may not seem very significant. But it requires 6 pounds of grain to produce one pound of chicken meat, according to the USDA. Therefore, if hundreds of millions of individuals begin opting for chicken over beans, the global grain markets would certainly feel the effects...and these effects would not be limited to the grain markets.
As the organic food website, www.opes.biz points out, "It requires 700 gallons of water to produce one pound of chicken. Instead, farmers could produce 16 pounds of broccoli, or up to 20 pounds of other grains and vegetables... Also, it takes 8 times the amount of gasoline/fossil fuel for production of one pound of chicken as compared to one pound of protein from tofu."
Therefore, forward-looking investors cannot afford to avert their gaze from global dietary trends. As the Emerging Markets continue to emerge, demand for the world's finite supplies of grain, water and energy will increased commensurately...and that means much higher prices.
"Americans have become accustomed to cheap and abundant food," Addison winds up. "Probe the psyche of the average American and he'd probably tell you it's a birthright. Amber waves of grain and all that. They're about to get a rude surprise. After a century in which Americans have spent less and less of their incomes on food, the trend is about to reverse."
In the column below, Addison probes deeper into the global dynamics of food production and consumption. And he also suggests ways that investors might benefit from the trends he anticipates...
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| The Daily Reckoning Presents
| The Food Shock of 2011
| |  | | AddisonWiggin |
Every month, JP Morgan Chase dispatches a researcher to several supermarkets in Virginia. The task - to comparison shop for 31 items.
In July, the firm's personal shopper came back with a stunning report: Wal-Mart had raised its prices 5.8% during the previous month. More significantly, its prices were approaching the levels of competing stores run by Kroger and Safeway. The "low-price leader" still holds its title, but by a noticeably slimmer margin.
Within this tale lie several lessons you can put to work to make money. And it's best to get started soon...because if you think your grocery bill is already high, you ain't seen nothing yet. In fact, we could be just one supply shock away from a full-blown food crisis that would make the price spikes of 2008 look like a happy memory.
Fact is; the food crisis of 2008 never really went away.
True, food riots didn't break out in poor countries during 2009 and warehouse stores like Costco didn't ration 20-pound bags of rice...but supply remained tight.
Prices for basic foodstuffs like corn and wheat remain below their 2008 highs. But they're a lot higher than they were before "the food crisis of 2008" took hold. Here's what's happened to some key farm commodities so far in 2010...
- Corn: Up 63%
- Wheat: Up 84%
- Soybeans: Up 24%
- Sugar: Up 55%.
What was a slow and steady increase much of the year has gone into overdrive since late summer. Blame it on two factors...
- Aug. 5: A failed wheat harvest prompted Russia to ban grain exports through the end of the year. Later in August, the ban was extended through the end of 2011. Drought has wrecked the harvest in Russia, Ukraine and Kazakhstan - home to a quarter of world production
- Oct. 8: For a second month running, the Agriculture Department cut its forecast for US corn production. The USDA predicts a 3.4% decline from last year. Damage done by Midwestern floods in June was made worse by hot, dry weather in August.
America's been blessed with year after year of "record harvests," depending on how you measure it. So when crisis hits elsewhere in the world, the burden of keeping the world fed falls on America's shoulders.
According to Soren Schroder, CEO of the food conglomerate Bunge North America, US grain production has filled critical gaps in world supply three times in the last five years, including this summer...
- In 2010, when drought hit Russian wheat
- In 2009, when drought hit Argentine soybeans
- In 2007-08, when drought hit Australian wheat.
So what happens when those "record harvests" no longer materialize?
In September, the US Department of Agriculture estimated that global grain "carryover stocks" - the amount in the world's silos and stockpiles when the next harvest begins - totaled 432 million tons.
That translates to 70 days of consumption. A month earlier, it was 71 days. The month before that, 72. At this rate, come next spring, we'll be down to just 64 days - the figure reached in 2007 that touched off the food crisis of 2008.
But what happens if the US scenario is worse than a "nonrecord" harvest? What if there's a Russia-scale crop failure here at home?
"When we have the first serious crop failure, which will happen," says farm commodity expert Don Coxe, "we will then have a full-blown food crisis" - one far worse than 2008.
Coxe has studied the sector for more than 35 years as a strategist for BMO Financial Group. He says it didn't have to come to this. "We've got a situation where there has been no incentive to allocate significant new capital to agriculture or to develop new technologies to dramatically expand crop output."
"We've got complacency," he sums up. "So for those reasons, I believe the next food crisis - when it comes - will be a bigger shock than $150 oil."
A recent report from HSBC isn't quite so alarming...unless you read between the lines. "World agricultural markets," it says, "have become so finely balanced between supply and demand that local disruptions can have a major impact on the global prices of the affected commodities and then reverberate throughout the entire food chain."
That was the story in 2008. It's becoming the story again now. It may go away in a few weeks or a few months. But it won't go away for good. It'll keep coming back...for decades.
There's nothing you or I can do to change it. So we might as well "hedge" our rising food costs by investing in the very commodities whose prices are rising now...and will keep rising for years to come.
"While investor eyes are focused on the gold price as it touches new highs," reads a report from Japan's Nomura Securities, "the acceleration in global food price is unrestrained. We continue to believe that soft commodities will outperform base and precious metals in the future."
So how do you do it? As recently as 2006, the only way Main Street investors could play the trend was to buy commodity futures. It was complicated. It involved swimming in the same pool with the trading desks of the big commercial banks. And it usually involved buying on margin - that is, borrowing money from the brokerage. If the market went against you, you'd lose even more than your initial investment.
Nowadays, an exchange-traded fund can do the heavy lifting for you, no margin required. The name of the fund is the PowerShares DB Agriculture ETF (DBA).
There are at least a half-dozen ETFs that aim to profit when grain prices rise. We like DBA the best because it's easy to understand. It's based on the performance of the Deutsche Bank Agriculture Index, which is composed of the following:
- Corn 12.5%
- Soybeans 12.5%
- Wheat 12.5%
- Cocoa 11.1%
- Coffee 11.1%
- Cotton 2.8%
- Live Cattle 12.5%
- Feeder Cattle 4.2%
- Lean Hogs 8.3%
So you have a mix here of 50% America's staple crops of corn, beans, wheat and sugar...25% beef and pork...and 25% cocoa, coffee and cotton. It might not be a balanced diet (especially the cotton), but it makes for a good balance of assets within your first foray into "ag" investing.
The meat weighting in here looks especially attractive compared to some of DBA's competitors, which are more geared to the grains. It takes about six months for higher grain prices to translate to higher cattle and hog prices.
You can capture that potential upside right now...and you'll be glad you did when you sit down to a good steak dinner a few months down the line. After all, it's going to cost you more.
Regards,
Addison Wiggin,
for The Daily Reckoning
Joel's Note: If you're looking to capture faster moving gains from the commodity markets, may we suggest taking a look at Alan Knuckman's Resource Trader Alert...
Alan has a few open positions looking to trade into profit territory in the agricultural sector and, for the metal hounds, a silver play that's up about 190% as we write. As Alan likes to say, "It all comes back to commodities."
Volatility makes for fast profit action in the "Millionaire's Market" - check it out here.
| | | | | | Bill Bonner
| When Gamblers Drive the Markets
| |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
At least someone is making money from this foreclosure racket. Bloomberg has the report, below.
But let's not get distracted by envy. We need to keep our eyes on the ball. And right now, the ball is bouncing around in a room full of spikes. There's the prickly point of China; it could puncture the US stock market any day. There are huge banks and whole foreign governments sticking out like nails. Anyone of them could flatten this ball in a matter of hours. And what about that cactus thorn...the dollar itself? What if investors finally got tired of worrying about the greenback going down? What if they decided to get out en masse? Or, imagine what would happen if Bernanke decided to defend the dollar!
But investors aren't worried. They anticipate more loose money...and more bouncy prices in stocks and commodities.
So, when the G-20 meeting ended without an agreement, they took it as an "all clear" for further gambling.
Bloomberg's headline: "US Stocks Gain as G-20 Fuels Fed Easing Speculation."
In other words, this market is not driven by real economic growth. It's driven by the hope of fast, easy money. Pure gambling, in other words.
Not that we have anything against gambling. But when you gamble you have to realize that you're going to lose sooner or later. A coin only comes up heads so often...there are only so many aces in the deck...and the "fool" in the game is sooner or later going to be you.
Investors believe the Fed will provide the fast, easy money. And they believe they will be able to get some of it by staying with stocks and commodities. Maybe they're right. But don't bet your life savings on it.
The promise of the stock market is fundamentally as fraudulent as the promise of the welfare state. The welfare state pretends to give citizens back more, in services and benefits, than they pay in taxes. Wall Street offers gain with no pain.
But the stock market - in total, over time - cannot really grow any faster than the economy itself. "Stocks for the long run" is a scam. Because you can only get from the stock market what you would have gotten from just about any other investment. As the economy grows, so does the value of the productive assets in it. Companies don't grow faster - unless they are selling to other markets in other economies...or taking market share from companies. Overall, on average, you're only going to get from stocks what the economy allows you to get - about what you would have gotten from having your money in real estate, collectibles, or other investments.
Sometimes you'll get a bit more from stocks - even a lot more - as the stock market booms. Then, you MUST expect to get a lot less...so that the long-term performance of the stock market comes back in line with the underlying economy.
We can see this just by looking at the US stock market over the last three decades. It grew some 14 times from '82 to '07 - far outstripping the economy. But then, it needed to slow down...and even reverse. Over the last ten years, stock prices have gone nowhere. It wouldn't be surprising if they dropped 30% to 50% from here... And it wouldn't be surprising if they went nowhere over the next 10 years too.
Remember... Japan is the cutting edge market model. Japanese stocks hit a high in '90. They've been going down ever since. Twenty years of correction...in order to bring it back into line with the economy.
The US stock market will do the same thing. More or less.
That ball is going to hit a spike...it's just a matter of time.
And more thoughts...
Here's Bloomberg with a happy report.
For Americans, the foreclosure crisis has wiped out fortunes, bringing destitution and homelessness. For Florida attorney David J. Stern, it has brought mansions, a Bugatti sports car and a luxury yacht.
Florida has the third-highest residential foreclosure rate in the US, and Stern, 50, has made a fortune off the bust. His foreclosure- processing business has generated hundreds of millions of dollars in revenue preparing documents for the cases that his law firm brings on behalf of lenders seeking to reclaim homes from borrowers who can't pay their mortgages.
Stern owns a $15 million mansion on an island in Fort Lauderdale, a $6 million beachfront condominium in the city, and a $6 million home in nearby Hillsboro Beach, according to property records. The mansion includes an adjoining property he bought in 2009 to make room for a tennis court and parking spaces, according to building records.
Cars registered under Stern's name in Florida include three Ferraris, four Porsches, a Rolls-Royce, a Cadillac and the Bugatti, according to the state Department of Highway Safety and Motor Vehicles. He also owns a yacht, [Stern's attorney, Jeffrey] Tew said.
"He started from scratch and has built a wonderful legal practice and has made a lot of money," Tew said. "That's the American dream isn't it?"
One in 34 housing units in Florida was in the foreclosure process or bank-owned as of Oct. 1, the third-highest rate in the country, according to Irvine, California-based RealtyTrac Inc., which monitors foreclosure data. State courts have hired additional judges to hear foreclosure cases and clear the backlog.
Foreclosures processed by Stern's law firm more than quadrupled to 70,328 in 2008 from 15,332 in 2006, according to the regulatory filing. Revenue from non-law-firm operations jumped to $199.2 million in 2008 from $40.4 million over the same period, the filing said. DJSP depends on the firm for case referrals, according to the regulatory filing.
Stern's law firm received more than 6,000 new foreclosure cases a month and managed 100,000 at any given time, according to the filing, which is dated Dec. 28, 2009.
"David and foreclosure lawyers are foreclosing legitimate mortgages that are in default," Tew said. "And yet, they have been successfully villainized." Poor Mr. Stern. Villainized! Just because he is making a buck on other folks' suffering.
But thank God for him. Without him, what would those restaurants in Ft. Lauderdale do?
*** Meanwhile, the zombies continue to take over.
First, the latest from Baltimore. One out of every four people in the city lives on food stamps. Among children, the rate is even higher - 42%.
What a place! Half the population are zombies...
Remember, there are those who produce wealth. And there are those who live on the wealth produced by others - the zombies. As the zombie ratio increases, the quality of life and life expectancy of a community go down.
But at least Baltimore is not St. Louis. That hellhole has more than a third of its population on food stamps and nearly two-thirds of its children.
These zombies should learn how to process foreclosure documents.
Regards,
Bill Bonner
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | Tiny Tim’s Big Fantasy
Oh that Tim Geithner! What a clever guy. Put a cap on savings and you force people to spend dollars...driving down the value of the dollar and thereby simultaneously decreasing the real value of US external debt...and making US products and services more attractive to foreign buyers.
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| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
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