2/9/2011 11:43 AM ET|
Is this the end of cheap food?
Surging food prices are nipping wallets here and driving serious upheaval around the globe. Here’s why prices will keep rising -- and how to invest for this trend.
Just as people have started to feel a little bit better about the economy, a new threat now looms. The specter of inflation can be seen most clearly in the rise of food prices to record highs -- fueling, among other things, the political tumult that's ripping across the Middle East.
The United Nations Food Price Index has moved to a record high and is up 62% from its recessionary low in 2009. Sugar prices are up 122% and dairy is up 92%. And just over the last eight months, the Dow Jones Grains Total Return Index, which is tied to things like corn, soybeans and wheat, is up a whopping 71%.
For many, this may seem like just another spin on the boom-and-bust cycle we've been suffering through. We saw a steep rise in food and fuel prices in 2008. Then a global recession that prompted fears of deflation -- falling prices. Now, another fearful bout of inflation. 'Round and 'round we go.
For most Americans, this will be yet another cost to crimp already strained budgets. Nearly 44 million Americans -- more than 14% of the population -- are using food stamp benefits that amount to $285 on average per month to fill their refrigerators.
For the billions of people around the world who get by on much less, it's a matter of life and death. Thus, the recent protests over rising food prices seen in places like Tunisia, Jordan, Mozambique, Algeria -- and yes, Egypt.
But there is evidence that the current rise -- driven in part by bizarre and destructive weather in important food-exporting countries including Australia, Argentina and Russia -- will be more sustained than the 2008 event. Credit Suisse researchers led by Edward Morse note that while "the predominant short-term cause for most food price spikes in recent years has been supply disruption, it is possible that over time, increased demand from emerging markets could slow or even halt the long-term downward trend in food prices evident for at least the past 100 years."
In fact, according to new research from the British government (.pdf file), we could be on the cusp of a historic change: The end of cheap food. According to their more-pessimistic projections, the price of some key foodstuffs, like corn, could double over the next 40 years.
And there's reason to believe the situation could become critical much sooner -- perhaps setting the stage for a repeat of the food price volatility of the 1970s, which resulted in a tripling of wheat and soybean prices and a 14-fold increase in the price of sugar.
That '70s show
The similarities are striking, as outlined in another report (.pdf file) from the British government: Key antecedents were a weak U.S. dollar, increased demand for foodstuffs from a growing middle class in developing countries, and rising oil prices. The catalyst was a bad harvest due to poor weather. The accelerant was speculative hoarding. The result was a decade of stagflation as the economy stalled and inflation raged.
All of these ingredients are in place now:
The dollar: American policymakers seem determined to devalue the dollar relative to its major trading partners, as witnessed by the Federal Reserve's extreme money-printing, an out-of-control fiscal position and a fast-rising national debt that is now at levels not seen since just after World War II when compared to gross domestic product. President Richard Nixon dropped the dollar in 1971 by taking us off the gold standard. Freed from the shackles of gold and the so-called Bretton Woods currency standards, the Fed promptly increased the money supply and devalued the currency.
Oil: Back then, crude oil prices spiked in the wake of the Yom Kippur War as Arab allies punished the West for its support of Israel. Now, energy prices are rising on concerns of higher demand from emerging markets. There are supply concerns as well. One wonders what the outcome of the popular revolutions underway in Cairo and Tunis will be and whether the youthful unrest they represent will spread to the capitals of major oil exporters Iran and Saudi Arabia. A glance at the chart above shows the eerie similarities between the energy price spike of the '70s and our current bout with $100 oil.
Consumer demand: The world is now girding for the pressure of newly empowered consumers in places like China, India and Brazil. In the 1970s, the pressure was from new consumers in places like Mexico, South Korea and Taiwan. As incomes rise, diets become less focused on starchy staples like rice and more calories are derived from fats, protein and sugar. That's a problem, because protein from meat requires more resources in land, feed, water and energy to produce, taxing the global food-supply chain.
Americans lead the world with the highest proportion of grain-fed meat in their diet, and that puts a strain on crops. Americans' meat habit translates to a per-capita requirement of grain four times that of a vegetarian diet. According to the work of the British Government Office for Science, the problem is about to get worse: The global cattle population is predicted to increase by around 70%, from 1.5 billion in 2000 to about 2.6 billion by 2050, while the goat and sheep population jumps nearly 69% from 1.7 billion to 2.7 billion.
Hoarding: You don't have to look very far to see signs of hoarding. Countries around the world have increased efforts to stockpile key food resources to keep prices down and placate angry citizens. Saudi Arabia said it will purchase a 12-month wheat reserve. Bangladesh has tripled its rice import target. A few weeks ago, Indonesia bought more than 900,000 tons of Thai rice. Russia has extended its wheat export ban.
Similar actions were seen back in the 1970s. The Soviet Union famously bought up much of the 1972 wheat crop in an effort to recover from a poor domestic harvest and improve its citizens' diets. The grain was also used to build up livestock herds. Global food stocks were reduced, setting off a series of export-ban actions by Thailand, Burma and even the United States.
VIDEO ON MSN MONEY
You forgot one thing. Having a garden has more benefits than the food. Keeps kids active away from sitting in front of video games.
What an article. This young man has missed the boat and now he's telling people to jump on board. Point one, John Deere has already gave investors the warning that this years sales will be off from 2010 so will earnings. Potash prices have already gone through the roof so that train left the station. He needs to read the world newspapers. Turkey's government told the truth "We have reached the point where the population is out pacing the ability of the world to feed them"
This youngman's advice is about eight months old and will lose anyone money who follows it.
One last thing, We will have a food crisis next year in the United States. We are running out of food.
So, just to put forth the 2 cents of a suburban homeowner...We have an organic veggies-and-fruits garden in our yard. Admittedly, it's a seasonal operation, but I do what I can to slash our grocery bill. If I could keep a goat, I would! If I could keep chickens, I would! If I could keep bees, I would! The blasted zoning laws in place in our town forbid these activities. S0, off to the supermarket we go.... Maybe I can tap all of the maple trees for their sap-I haven't checked zoning on that one yet!
I personally think that if we could convince the average homeowner to give up on their Cult of The Lawn, a lot more people would get fed. Oh well, as long as I'm dreaming, I'd like a pony, too.
This obsession of mine is an adjunct activity to investing, by the way! I don't think that I can solve all the world's problems in my back yard. However, if we brought back the concept of the Victory Garden as a nation, at least we could put a dent in the demand!
Now for advice on investing in Ag. Sell Deere when hoopla is over. Farmers right now in U.S. have the equipment they need. There is a over abundance almost. The leasing programs of Deere has created a very large dealer inventory sitting on their lots. Cars wear out; leasing programs for them do not create large inventories of used cars like farm equipment. Faremers have already bought EXTRA tractors just sitting all across the USA as insurance. We have a limited window in spring to plant or yields suffer, we can not afford to be without a tractor in spring. So we have bought up the excess used equipment over last decade and have it sitting in reserve in our sheds. I bought a large tractor a few years ago for when my main tractor breaks down...couldn't pass up the price.
Spring a few years back was one of wettest in U.S. history. Even FARMERS were SHOCKED at how fast the crop went in in bad conditions. No investors yet have picked up on this fact.
Now as to fertilizer. Coming in the next few years are genetic enhanced corn that will require HALF the nitrogen of current corn varieties. The seed is already proven. It is just in the stage of growing enough seed for commercial release.
As to food prices. Corn is at a high right now of $6 a bushel. Even if the coming crop year has production problems and corn doubles in price to $12; the cost of your box of corn flakes will go up about 10 cents. From $2.99 a box to $3.09. Thats right; the raw commodity can DOUBLE in price..and the cereal should go up only 3% in cost at your store.
Well I just shot myself in the foot from my previous statement about how efficent our rail system is. NO I didn't. You can buy vegetables like sweet corn same price at store as what a country stnad would be. It is processed stuff that is expensive. But hey; if you want to grind the corn and make the corn flakes at home to save money on what now costs 23 cents for a bowl of Kelloggs corn flakes...go right ahead. You will save a ton of money doing it yourself by buying from farmer and doing it all yourself. That sort of thinking if you believe it..we have a term for it on the farm. I'll give you a hint. It comes out the back end of a bull.
Response to Highcountrybound
This farmer HATED Monsanto years ago for the first really big genetic crop - soybeans. Europe freaked out about genetic crops and boycotted U.S. soy. Greenpeace was big behind boycott. So...what happened. South America took that as opportunity to clear amazon basin...bye bye rain forest. S.A. is now a huge farm area with amazon able to take ocean sized freighters thousands of miles inland where they grew non GMO beans. Hurt U.S. farmers...but we survived Well now you can kiss greenpeace for causing the clearing of the rain forest WE NEED THAT GROUND for world demand of protein. Yes you read that right...Greenpeace was a HUGE cause of destroying rain forest. Shot themselves in the foot on that one. Well now soy in S.A. is GMO as well. So environmentalists are chasing their tail now saying buy U.S. soy to combat reduction of rain forest. Like a dog chasing it's tail.
Well now Monsanto and others like Dow Dupont are saving the worlds butt with increasing my production 50% in last 10 years.
Responding to jon about 11 spaces down. Farmers are not paid to not grow food. There was a set aside program somewhere around 15 years ago. This required farmers to set aside a small percentage of ground and not plant it when grain supplies were HUGE.
There is a Conservation Reserve program where ground ..like highly erodible ground along rivers etc. is left idle. It has been a boon to wildlife populations and cleaning up sediment in rivers. There are no subsidies coming for what is grown this year. The market has taken care of that.
These programs you talk about were largely in response to Europe paying high prices to farmers there to grow grains. European politicians of 1970's-1990's remembered very well starvation during WWII in Europe...and the was no way in hell they were going to be dependant on other countries for food. So European farmers produced and flooded world with grain. U.S. that could not compete in world market to such high subsidies had no choice but to do same to keep farmers in business here. Hind site...some of best money Washington has ever spent. You think having to depend on foreign oil is bad? Want to depend on importing your food? The avg. age of the U.S. farmer is 65 years old. That is not a typo. Farmers were not getting rich by any means off gov. assistance; but we managed to keep U.S. food production in business. AND the U.S. consumer got a heck of a deal on food costs even when adding back in tax dollars spent on these programs to the U.S. citizens food bill and dividing it out per person.
Right now U.S. ag exports are one of the few saving graces we have in trade balance with other countries. Food will become more expensive. Take a serious look at this article and you will see it has been artificially been kept down for you for a long time through these programs you joke about..
44 Million on Food Stamps. Doesn't calculate out with unemployment being 9%+. Someone's lying.
Unemployment has to be in the 20%+ range.
Johnny552 said buy from the farmer. I am a farmer. Unfortunately this is only "feel good" policy. It actually wastes resources by buying from farmer direct. and then STILL going to grocery store as well. It is counterproductive. The reason the USA is the worlds leader in food production is we got away from the Norman Rockwell painting of decades past and became efficient. Farmers at one time had a few chickens , a few cows, a few sheep, a few acres of hay, a little plot of vegetables, some wheat, some corn. The were jacks of all crops and ace of none. I specialize in 3 main crops. The time needed to devote to each crop at certain times of the year can not be spread around several crops.
My neighbor is a organic farmer. They spend more man hours on their half an acre than I do on 650 acres. I had the best crops ever last year. They said weather was bad and will install irrigation this year. Well it takes a lot of water to grow weeds I guess. So people drive out to the country and get their little bag of produce each week; then drive to grocery store for rest of needs. Wastes fuel and now will waste water. My commodities go by rail in mass transit...maybe you have seen the CSX commercials about how efficient the system is.
I agree with mg930 and Steve Wood. The documentary Collapse has a lot of valid points.
Regardless of technology, we live on a finite planet with finite resources (which includes fossil fuels). You can't just plow up some land, the land has to be able to support the crop. It is an undeniable fact: we have ran out of good fertile land (a lot of good land is under concrete and houses in America), we are running out of oil (look at the extremes we go to now), and we are breeding ourselves off the planet.
Not to mention increased desertification, which is something you rarely hear about.
I found this article to be an eye-opener.
And my neighbours thought I was being too extreme for turning my entire back yard (1/4 acre) into a garden! I see now that it was the right move. I have been learning to can my food, so it's been helping my grocery bill. I stock up on flour and grains. I've been growing stevia, so I don't need sugar.
I wold love to know how many--or should I say, how few--companies control the worlds food stuffs. Some corporations have gotten so big (due to consolidations, acquisitions, patent monopolies, etc) that many previous food growers/distributors are either irrelevant in controling prices, or have been put out of business altogether.
Of course, authors such as Mr. Juback fail to illuminate this piece of the puzzle. Instead they tell us how we can profit off of this trend--AKA financially support (and profit from) the food giants such as Monsanto, Eli Lilly, etc.
So again, I would love to know (or see statistics on) how the world food stuffs control has changed over the last twenty years or so. Let's see some correlative data about that.I bet it would open a few sleepy eyes dulled into apathy by corporations telling us that contraction amongst distributors is a good thing--all the while hedging their bets that said contraction will have exactly the cause and effect we are seeing around the world right now; and those same corprations rake in truckload after truckload of the almighty $$$.
Victory gardens were the rage in the 40s. As soon as the war was over, most people stopped gardening. We need to go back to that.
Raised beds. You control the soil components and there is no walking on the freshly tilled soil. soilsecrets.com is the place to go to get the info on how to garden on marginal soil and use less water while doing it. Check into how to garden in your neck of the woods.
Canning, drying or freezing have their good or bad points. Figure out how to conserve what you grow.
We have been eating food out of season for decades, if not longer. When we learn that asparagus or strawberries aren't ripe 12 months out of the year, we will either eat what is available, or grow it ourselves.
Check out the libraries or bookstores for the gardening section. Indoor, container, polyculture, herb, edible landscaping, xeric or whatever your situation is. Don't wait for the boom to lower. Be proactive.
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