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April 2008 Wholesale Inflation Results are Old News
Posted by Louis Navellier on 5/20/08 9:29 am
The April Producer Price Index (PPI) report should be taken with a grain of salt. It showed that wholesale inflation rose just 0.2% last month, half as much as expected, thanks to a 4.6% drop in gasoline prices.
The PPI core rate rose 0.4%, twice as much as expected. The core was boosted by a 1.3% jump in light truck and 0.4% increase in car prices.
There is no way these results will be sustained in May. Gasoline prices have gone through the roof this month, up about $0.30 a gallon, and truck and auto prices are expected to drop now that consumers are getting pinched by record food and energy prices.
I’m expecting ugly results for the CPI and PPI in May.
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Rising Food Prices Series: Part VI
Posted by Patrick O'Connor on 5/19/08 11:59 am
This post contains agricultural stocks that are in our top-ten holdings.
This article is the sixth part of a multi-part series about rising global food prices. In this installment, we will explain one of the factors that is contributing to a rise in global food prices: trade restrictions. In the following weeks, we will discuss other factors. Read Parts I, II, III, IV, and V.
Trade restrictions prevent supplies from flowing to the places of highest demand
Rising food prices have caused protests and even riots in some of the world’s poorest countries, prompting many governments to maintain or increase trade restrictions such as quotas, price controls, and export bans. But the unrest could be a blessing in disguise if it makes governments eliminate the trade barriers that push prices higher, according to the International Policy Network (IPN), a non-partisan, non-profit organization dedicated to encouraging public understanding of the role of the institutions of a free society.
Food prices are rising because demand is increasing, primarily from the growing middle class in China and India. But this increase in demand should easily have been accommodated by a free global market. As demand increases, prices should rise, encouraging production of the agricultural goods that are most in demand. Then, as more agricultural goods flood the market, prices should fall.
The problem is that many countries resist free trade in food by limiting imports and exports in some way—through outright bans, quantity restrictions, or tariffs, for example. Almost all agricultural staples are affected. A number of Asian countries, including China and India, restrict the export of rice. Russia and Kazakhstan restrict the export of wheat. Argentina restricts the export of corn, wheat, and soybeans.
This may seem understandable: why send food abroad when it is needed at home? And why let another nation sell food to your population when producing your own food would increase local jobs? But longer term, trade restrictions prevent supplies from flowing to the places of highest demand. This makes crops the least profitable when they are most needed—and leave little incentive for farmers to plant, harvest, and store crops in case hard times arise.
Indeed, decades of trade restrictions have helped Sub-Saharan Africa—home to some of the world’s poorest countries—little. According to the IPN, crop yields in much of Africa have steadily decreased since the 1980s. As a result, 70% of the continent’s work force is still in agriculture, but contributes only about 25% of gross domestic product.
In addition to having no positive effect, trade restrictions have a negative effect: they cause prices to rise. Rice may be the best example. Only about 5 percent to 7 percent of the world’s rice production is reportedly traded across borders. This means that when prices rise, the people who want the rice most cannot obtain it. This causes prices to rise even further. Indeed, the price of many types of rice has roughly doubled since 2007—and it is not because of limited supplies. The United Nations Food and Agriculture Organization (FAO) estimates that global rice production increased by 1 percent in 2007 and will increase 1.8 percent in 2008. That’s not a significant amount, but it should not lead to starvation.
So, which countries are most to blame? According to the IPN, the world’s poorest countries have the highest trade restrictions: the IPN estimates that 70 percent of the world’s trade barriers are imposed by governments in poor countries on people in other poor countries. It would be unfair, however, to ignore the role of wealthier nations’ trade restrictions. Although the United States and the European Union (EU) tend to be less protectionist overall, they by no means have full free trade in agricultural goods. The EU’s Common Agricultural Policy (CAP), for example, imposes tariffs, quotas, and bans on food imports from countries outside the EU; this protects inefficient European farmers and keeps efficient non-EU farmers away from the wealthy EU market, forcing food prices up within the EU and keeping them artificially low elsewhere. Meanwhile, the United States pays farmers to not grow corn for food (in the form of ethanol subsidies; see Part III of this series).
Africa may have the worst trade restrictions. For many years, regional governments forced farmers to surrender their crops to state-run marketing boards at below-market rates. Although some of these boards have been abolished, many other trade restrictions remain. Nigeria, for example, has banned imports of wheat, rice, maize, and vegetable oil. According to the IPN, agricultural exports between sub-Saharan countries face an average tariff of 33.6%, the highest of any region in the world.
How damaging are trade restrictions such as these? The World Bank has estimated that free trade in all goods globally would add $287 billion to world income each year, half of that going to poor countries. Sixty-three percent of that gain would come from freeing agricultural trade alone.
World policymakers are pressuring the World Trade Organization (WTO) to exert whatever influence possible to get food-producing countries to maintain exports. European Union Trade Commissioner Peter Mandelson has said that “if we restrict trade, we’re simply going to add food scarcity to the already large problems of food shortages that exist in different countries.” And Japanese Agriculture Minister Masatoshi Wakabayashi has said that Japan will propose that the WTO set clear rules for food export restrictions.
In response, a few countries are looking into easing trade restrictions. Thailand, for example, is considering a cut of 50% in tariffs on a variety of agricultural imports, including corn, soybeans, and other animal feed, according to the IPN.
It may be too little too late, however. Today, many populations—including that of the Philippines—are responding to the global food crisis by hoarding food, which only makes the food crisis worse.
Below is a list of Navellier agricultural companies that are top-ten holdings.
Vantage Portfolio:
Terra Nitrogen Co., L.P. (TNH); 1-yr Chart; Profile
Dynamic MPT Portfolio:
Mosaic Co. (MOS); 1-yr Chart; Profile
Potash Corp. (POT); 1-yr Chart; Profile
CF Industries Holdings, Inc. (CF); 1-yr Chart; Profile
Terra Industries, Inc. (TRA); 1-yr Chart; Profile
We want to hear your thoughts! Comment to this post by clicking the ‘comments’ link below.
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.
To receive email updates from Navellier All Cap Blog, click here.
Rising Food Prices Series: Part V
Posted by Patrick O'Connor on 5/19/08 11:56 am
This post contains agricultural stocks that are in our top-ten holdings.
This article is the fifth part of a multi-part series about rising global food prices. In this installment, we will explain one of the factors that is contributing to a rise in global food prices: rising energy prices. In the following weeks, we will discuss other factors. Read parts I, II, III and IV first.
How rising energy prices are driving up the cost of foods
From the mid 1980s through September 2003, the inflation-adjusted price of a barrel of crude oil trading on the New York Mercantile Exchange (NYMEX) was around $25. By August 2005, prices had risen to $60 per barrel, and on May 22, 2008, they reached an all-time high of $135.09.
This spike in oil prices is forcing up food prices in two ways. First, it is driving up the price of nitrogen fertilizer, which many farmers depend upon to nurture a good crop. That’s because natural gas is a key component of nitrogen fertilizer production. According to the Oil Depletion Analysis Centre, the price of fertilizer has more than doubled in the past few months. For example, the fertilizer DAP, which cost $398 a ton last year, now costs $1,000 a ton, according to Arkansas-based Oakley Fertilizer.
Another problem presented by rising oil prices is increased transportation costs. Today, it costs more than ever to truck food from farms to local markets and ship it abroad. For example, in April 2007, it cost $60 per ton to ship grain from the Gulf Coast to Japan and $38 per ton to ship it to Europe. Today it costs $110 a ton to ship that grain to Japan and $75 a ton to ship it to Europe—83% and 97 more, respectively.
These rising fuel prices are affecting global food prices in a number of ways. Perhaps most obvious, the rising cost of producing and transporting food is being passed onto consumers. But in response to rising fertilizer prices, some farmers are choosing to plant soybeans instead of corn, because soybeans use less fertilizer. This is depleting corn supplies, which are already low due to biofuel diversion, as explained in Part III of this series, and forcing up both the price of both corn and the livestock that feeds on it.
In response, many people are calling for a decrease in dependence on oil—but in many cases, the use of alternative fuels only exacerbates the problem. As we explained in Part III of this series, the push to produce biofuels as an alternative to hydrocarbons is straining already-low food supplies, especially in the United States, where ethanol subsidies have diverted farmers from growing corn for food.
Rising oil prices are causing problems in the least likely of places. For example, bread lines have formed in Egypt, the world’s largest importer of wheat, despite the country being surrounded by petroleum-rich neighbors. Since the beginning of April, at least 10 people have been stabbed to death while waiting in line in Cairo, and others have died of exhaustion. That’s because Egypt is not awash in oil dollars as many other Middle Eastern nations are, and almost half of the Egyptian population survives on less than $2 a day.
Moreover, according to FOX News, United Nations World Food Program (WFP) documents show that OPEC nations are refusing to help their Arab neighbor. The WFP has asked for $750 billion in food aid to help manage the global food crisis. The United States leads all donors, pledging more than $1 billion. Middle Eastern countries, however, have not been so generous. Saudi Arabia has pledged nothing for 2008, and the United Arab Emirates has pledged just $50,000—several times less than the amount pledged by the impoverished Bangladesh. As a result, in Egypt, the Army has been called out to bake and distribute bread.
It is important to note, however, that rising energy prices are not the only problem. Egypt heavily subsidizes the sale of flour so that it sells for about $3 per 100-pound bag (a price that rises to $45 on the black market). While it seems that this would help, not hurt, the global food crisis, trade restrictions, in the long-term, are doing more damage than good. We will examine that issue in more detail in our next column.
Below is a list of Navellier agricultural companies that are top-ten holdings in our all-cap portfolios.
Vantage Portfolio:
Terra Nitrogen Co., L.P. (TNH); 1-yr Chart; Profile
Dynamic MPT Portfolio:
Mosaic Co. (MOS); 1-yr Chart; Profile
Potash Corp. (POT); 1-yr Chart; Profile
CF Industries Holdings, Inc. (CF); 1-yr Chart; Profile
Terra Industries, Inc. (TRA); 1-yr Chart; Profile
We want to hear your thoughts! Comment to this post by clicking the ‘comments’ link below.
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested.
It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.
To receive email updates from Navellier All Cap Blog, click here.
Rising Food Prices Series: Part IV
Posted by Patrick O'Connor on 5/19/08 11:41 am
This post contains agricultural stocks that are in our top-ten holdings.
This article is the fourth part of a multi-part series about rising global food prices. In this installment, we will explain one of the factors that is contributing to a rise in global food prices: changing climate conditions. In the following weeks, we will discuss other factors. Read parts I, II, and III first.
Changing climate conditions create problematic agricultural conditions, driving a rise in global food prices
As world governments continue to release new data confirming escalating food prices, many organizations are taking a harder look at some of the factors contributing to the crisis—including climate change.
At the root of the global food crisis, as we’ve noted before, is rising demand and dwindling supply. But one factor for the dwindling supply is the changing world climate.
A rapidly growing population combined with the industrialization of the developing world has led to the proliferation of so-called greenhouse gases. In fact, the levels of one greenhouse gas—carbon dioxide—are increasing 200 times faster than at anytime in the last 650,000 years, and the earth’s temperature has been consistently above average since 1982, according to Science magazine. The resulting change in weather patterns is causing floods and droughts, destroying marine life, and in the process, threatening the world’s food supply.
That may seem unfathomable, as technological advances in agriculture—such as genetic modification, irrigation technologies and improved pesticides—would seemingly have led to a dramatic increase in crop yields. The problem is, despite these improvements, agriculture is still highly dependent on the climate because the sun, the temperature, and precipitation levels are the main drivers of crop growth.
As a result, changing climate conditions are causing changes in agricultural conditions. In some cases, that might help farmers: growing seasons are getting longer in typically colder climates. But it is also causing a variety of problems. While the increase in the Earth’s temperature is making some places wetter, it’s making some places dryer; and, flood and drought cycles are becoming more erratic.
These effects may be most noticeable in low-latitude regions, where many developing countries are located. One example is the arid farming region close to the equator. In Australia’s once-fruitful food production region of New South Wales, a severe drought—which many attribute to shifting rainfall patterns—has lasted for five years. Speaking on the issue last year, South Australia Premier Mike Rann said “what we’re seeing with this drought is a frightening glimpse of the future with global warming.”
According to the United Nations Food and Agriculture Organization (FAO), climate change has both an environmental and economic impact on agriculture. Changes in the availability and quality of land and water resources are reflected in crop performance. The decline in production in the face of growing demand can drive up prices in regions that may lack the technology to deal with these environmental changes—for example, by improving irritation systems in drought-ridden areas.
Indeed, Joachim von Braun, general director of the International Food Policy Research Institute (IFPRI) and lead author of a recent report examining how various global trends are impacting world hunger on both the supply and demand ends of the market (“The World Food Situation: New Driving Forces and Required Actions”), says “climate change will also have a negative impact on food production” and “surging demand for feed, food and fuel have recently led to drastic price increases, which are not likely to fall in the foreseeable future.”
According to the report, shifting weather conditions resulting from climate change will disrupt the rainfall patterns that farmers rely on to nourish their crops and water the land that feeds their livestock. As a result, cereal production in South Asia could drop 22 percent by 2080, during which time wheat production in Africa could come to a halt. All things considered, temperature increases of more than three degrees Celsius could drive food prices up by as much as 40 percent.
In an election year, the issue is becoming political, with some Republicans arguing that Democrats are overemphasizing the role of climate change in rising global food prices to promote environmental reforms.
But politicians aren’t the only ones to argue about the role of climate change in rising global food prices. Kym Anderson, a professor of economics at Adelaide University in Australia, says that while “our drought hasn’t helped… we are a small part of the total world market,” and “it’s really petroleum prices that have gone up and that has encouraged both Europe and America to set targets to move towards biofuels and that is driving up the demand…”
Anderson makes a good point. As noted above, changing climate conditions are certainly just one part of a multi-faceted problem. In our last column, we talked about the issue of biofuels, and in our next column, we’ll talk about rising energy prices, which have driven up the cost of transporting food.
Below is a list of Navellier agricultural companies that are top-ten holdings in our all-cap portfolios.
Vantage Portfolio:
Terra Nitrogen Co., L.P. (TNH); 1-yr Chart; Profile
Dynamic MPT Portfolio:
Mosaic Co. (MOS); 1-yr Chart; Profile
Potash Corp. (POT); 1-yr Chart; Profile
CF Industries Holdings, Inc. (CF); 1-yr Chart; Profile
Terra Industries, Inc. (TRA); 1-yr Chart; Profile
We want to hear your thoughts! Comment to this post by clicking the ‘comments’ link below.
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.
To receive email updates from Navellier All Cap Blog, click here.
Rising Food Prices Series: Part III
Posted by Patrick O'Connor on 5/19/08 11:39 am
This post contains agricultural stocks that are in our top-ten holdings.
This article is the third part of a multi-part series about rising global food prices. In this installment, we will explain one of the factors that is contributing to a rise in global food prices: food production challenged in both developed and developing countries. In the following weeks, we will discuss other factors. Read parts I and II first.
Developing and developed countries are experiencing food production challenges
The U.S. Agriculture Department raised its forecast for U.S. food prices for the third consecutive month in May. With the latest increase of 0.5%, the forecast is approaching levels not seen since 1990, when food prices climbed 5.8%.
But that’s a small increase compared with those being seen in developing countries. This year in Indonesia, for example, the price for one kilogram of rice has risen from 3,500 rupiah (about 40 U.S. cents) to 5,000 rupiah, according to the U.N. Office for the Coordination of Humanitarian Affairs— a desperate situation for a nation where most people live on less than $2 a day. In fact, Nobel Laureate Economist Gary Becker has estimated that a 30% rise in food prices over five years would cause living standards to fall by 3% in rich countries and more than 20% in poor countries.
As noted earlier in this series, increased demand from developing countries such as China and India is being blamed for much of the recent rise in global food prices—but there are many other factors to consider. One is that both developed and developing countries are experiencing food production challenges—albeit for different reasons.
It’s easy to understand why developing countries would have trouble producing food: they tend to have underdeveloped technologies and inefficient economies. Questionable property rights, poorly developed irrigation systems, limited access to fertilizers and pesticides, and unskilled labor make crop production difficult, and impassable roads can present transportation problems.
But developed countries are also experiencing their own challenges. Although they generally have the knowledge, technology, and skills necessary to produce and trade crops successfully, they have been diverting their arable land and food crops to the production of biofuels, which are fuels derived from recently dead biological material, such as plants.
Perhaps the most notable case of this is the biofuel ethanol in the United States, which has been in the news a lot this year. Just last year, ethanol—which is made from sugar cane or corn, but most often corn—was being touted as a green fuel that could help nudge the country away from fossil fuel dependence. President Bush called it key to his strategy to cut gasoline use by 20% by 2010.
According to the U.S. Department of Agriculture (USDA), the ethanol industry is expected to consume 4 billion of the 12.1 billion bushels, or 33%, of the corn that U.S. farmers are expected to produce in 2008. That number is up from about 5% in 2000. (A similar situation is occurring with other biofuels. For example, 15% of the total soybean oil production is expected to go to biofuels this year, according to the USDA.)
As a result, there has been less U.S. corn available to feed the world, and that’s significant, because the United States exports 66% of the world’s corn. In response, the price of corn—one of the most ubiquitous ingredients in the food supply, used for everything from feeding livestock to making breakfast cereal—jumped nearly 30 percent in 2008.
The prices of other food staples have been affected as well. A dairy cow must eat around 10 pounds of corn daily in order to produce milk, and it takes six pounds of corn to produce one pound of beef. As a result, European countries have responded to the corn shortage by importing sorghum—a grain widely consumed by the world’s poorest populations—for livestock feed. Now sorghum prices have risen, from $95 per metric ton in 2004/2005 to $191 per metric ton in 2007/2008.
A similar situation is occurring with soybeans: In the United States, farmers who usually rotate corn and soybean crops have been so busy planting corn they haven’t planted enough soybeans, driving up the price of that staple as well.
Moreover, the situation is only expected to worsen, with the USDA projecting that U.S. farmers will plant less, not more, corn in 2008—86 million acres, an 8 percent drop from 2007.
As a result, a political battle is brewing in Washington, D.C. In recent weeks, food manufacturers and livestock producers have tried to undermine the country’s ethanol mandates, such as the requirement that the oil industry use 15 billion gallons of corn-derived ethanol by 2015.
U.S. Department of Agriculture Secretary Ed Schafer has responded by blaming rising food costs on other factors, including weather problems. We’ll discuss that factor in more detail in Part IV of this series.
Below is a list of Navellier agricultural companies that are top-ten holdings in our all-cap portfolios.
Vantage Portfolio:
Terra Nitrogen Co., L.P. (TNH); 1-yr Chart; Profile
Dynamic MPT Portfolio:
Mosaic Co. (MOS); 1-yr Chart; Profile
Potash Corp. (POT); 1-yr Chart; Profile
CF Industries Holdings, Inc. (CF); 1-yr Chart; Profile
Terra Industries, Inc. (TRA); 1-yr Chart; Profile
We want to hear your thoughts! Comment to this post by clicking the ‘comments’ link below.
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.
To receive email updates from Navellier All Cap Blog, click here.
Tip-off from the TIPS Market
Posted by Tim Hope on 5/19/08 11:04 am
The market for Treasury Inflation Protected Securities (TIPS) offers investors one measure of inflationary expectations. Despite significant price increases in oil and other commodities, traders in the TIPS market believe that the present level of commodity prices is not sustainable. Thus, the TIPS market is indicating that inflation should finish the year at a rate of about 2.95% a far cry from the 5.2% expectation on the part of consumers.
We want to hear your thoughts! Comment to this post by clicking the ‘comments’ link below.
To receive email updates from Navellier All Cap Blog, click here.
Oil Prices Coming Down?
Posted by Patrick O'Connor on 5/15/08 2:33 pm
Oil prices have almost doubled in the last year, but most energy industry executives believe that what goes up, must come down.
In a 2008 KPMG survey of 372 energy industry decision-makers, most believe that the current spike in oil prices is only temporary. 91% of survey respondents say that oil prices will drop from their current levels (at about $127 per barrel in mid-May). 55% say that prices will fall to less than $100 per barrel. Most say domestic drilling is the U.S.’s best chance at keeping prices down, but most also agree the chances of oil companies drilling domestically, especially in Alaska’s oil-rich ANWR region, are mote, given the current political climate.
Read More about what petroleum industry chiefs have to say about oil prices.
To receive email updates from Navellier All Cap Blog, click here.
Rising Food Prices Series: Part II
Posted by Patrick O'Connor on 5/15/08 2:26 pm
This article is the second part of a multi-part series about rising global food prices. In this installment, we will explain one of the factors that is contributing to a rise in global food prices: Changing demand from developing countries such as China and India. In the following weeks, we will discuss other factors.
Rising and changing demand from developing countries contributes to global food crisis
As noted in Part I of this series, a sharp rise in food prices has developed into a global crisis, according to the United Nations. The prices of many food staples, such as wheat, have approximately doubled over the past year. The reason: Demand is outpacing supply, in part because of changing demographics in developing countries.
The Population Reference Bureau (PRB) says the next half century will see wild swings in population sizes, with most Western developed nations declining slightly in population and developing nations expanding rapidly. The organization says that “nearly 99% of all population increase takes place in poor countries.”
Perhaps nowhere is this likely to be most noticeable than in Asia. Today, China and India together comprise more than a third of the world’s population, and they are only expected to expand. According to the United Nations Population Division, India’s population will grow from 1.08 billion to 1.63 billion people in 2050, overtaking China, whose population will grow from 1.3 billion to 1.44 billion over the same time period. To put that in perspective, by 2016, the population of India is expected to be larger than the population of all the more developed countries combined—that is, all the countries of Europe (including Russia), as well Australia, Canada, Japan, New Zealand, and the United States.
Of course, all of those people are demanding more of the food staples they typically eat—cereal grains. In developed nations, cereal consumption is substantial, but in some developing nations, it constitutes practically the entire diet of poor people. Maize (or corn), rice and wheat together accounted for 87% of all grain production worldwide and 43% of all food calories in 2003, according to the Food and Agriculture Organization of the United Nations (FAOSTAT). Developing countries are certainly demanding more of these cereal grains as their populations increase.
But what people eat is also changing—because of improving economic prosperity. Until now, only a small fraction of the world has enjoyed the fruits of economic well-being, with high-income industrial countries accounting for less than a fifth of the world’s population, according to the Brookings Institution, a nonprofit public policy organization based in Washington, D.C. Since 1980, however, China and India have achieved remarkable rates of economic growth and poverty reduction. And when people have more money to spend, they typically spend it on foods they haven’t been able to afford in the past, such as animal proteins.
This is certainly true in Asia, where animal protein consumption continues to increase. For example, annual meat consumption in China began increasing as early as 1983, when it was 16 kilograms per person, according to the World Resources Institute. From 1995 through 2008, annual meat consumption in China increased from 30.075 million tons (25 kilograms per person) to 70.013 million tons (53 kilograms per person).
This, of course, is driving up the price of meat, but it is also driving up the price of grains. Eating meat is not the most efficient way to consume food, because farmers have to grow grain crops to feed the animals first. It takes 7.5 to 8 ounces of grain to produce a pound of beef, and 5 to 7 ounces of grain to produce a pound of pork. According to the World Resources Institute, in 1995, 150.375 million tons of grainwere needed to support China’s meat consumption; today, 350.065 million tons are needed. So, a 39.938 million ton increase in meat consumption resulted in a 199.69 million ton increase in grain consumption.
Just how much developing countries such as China and India are contributing to the global food crisis is debatable, since there are many other factors to consider. Another possible culprit in the global food crisis, the biofuels industry, is certainly pointing the finger. “Those who see biofuels as the driving force behind recent food price increases have overlooked not just one elephant standing right in front of them, but two,” said European Union Commissioner for Agriculture and Rural Development Mariann Fischer Boel in a speech at the European Policy Centre, a think-tank in Brussels. But is the biofuels industry simply trying to divert attention from its own role in the global food crisis? In Part III of this series, we’ll examine that issue in more detail.
To receive email updates from Navellier All Cap Blog, click here.
Rising Food Prices Series: Part I
Posted by Patrick O'Connor on 5/15/08 8:01 am
This article is the first part of a multi-part series about rising global food prices. In this installment, we explain the factors that are contributing to a rise in global food prices. In the following weeks, we will discuss each factor in more detail.
Consumers tighten their belts as food prices soar
A sharp rise in food prices has developed into a global crisis, according to the United Nations. The situation has become increasingly desperate, with the prices of many food staples—including wheat, corn, and soybeans—approximately doubling over the past year. The result: Political tensions in less-developed regions, from North Africa to Southeast Asia, with riots in several countries, including Egypt, Haiti, and Somalia. What’s driving prices up, and how is the food crisis impacting the global economy?
The fundamental reason for soaring food prices is simple: the law of supply and demand, which is one of the most fundamental economic concepts and the backbone of a market economy. Demand is the quantity of a product or service desired by buyers. Supply is how much of those goods sellers can provide. When supply and demand are equal, an economy is said to be at equilibrium, because sellers are selling all the goods they have produced, and buyers are getting all the goods they have demanded, and everyone is satisfied. But sometimes the equilibrium tips, and there is too much supply or too much demand. When there’s too much supply, prices tend to fall, because producers need to unload their extra goods. But when there’s too much demand, prices tend to rise, because producers can get more for their goods.
In the case of the global food supply, demand is currently outpacing supply, so prices are rising. But there are many reasons why this is happening. As noted above, we will provide an overview of those reasons today, then discuss them in more detail later.
Part II: Demand from developing countries is rising and changing
Many developing countries are experiencing dramatic growth rates. At the same time, the populations are growing wealthier. And when people have more money to spend, they typically spend it on foods they haven’t been able to afford in the past, such as animal proteins. This is certainly true in China, where animal protein consumption has increased significantly since 1980. But eating meat is not the most efficient way to consume food, because farmers have to grow grain crops to feed the animals first. As a result, there isn’t just more demand for meat; there’s more demand for grains to produce the meat. Read More.
PART III: Developing and developed countries are experiencing food production challenges
It’s easy to understand why developing countries may have difficulties producing food: They tend to have poor technologies and skills, which lead to inefficient production. Questionable property rights, poorly developed irrigation systems, and impassable roads make crop production and transportation difficult. Selling a product is also challenging, as developing countries also tend to be the most protectionist; many don’t even have the freedom to trade within their own borders.
But many wealthy countries are also finding it difficult to produce enough food, for a different reason: They have been diverting their own arable land and food crops (most notably corn in the United States) to biofuel production.
Traditional fuels, such as coal, are fossil fuels, meaning they’ve been derived from long-dead biological material, such as plants. In contrast, a biofuel is fuel derived from recently dead biological material. One example of a biofuel is ethanol, which is made from sugar cane or corn.
You’ve probably heard a lot about ethanol in the news. Just last year, it was being touted as a green fuel that could help nudge the United States away from fossil fuel dependence.
As a result, an increasing amount of the corn crop in the United States—which exports 66% of the world’s corn—has been diverted to ethanol production. And again, we come back to supply and demand; because there is less corn available, corn prices have skyrocketed, as have the prices of other foods used in place of corn. Read More.
Part IV: Changing climate conditions have led to problems in agricultural conditions
While the increase in Earth’s temperature is making some places wetter, it’s making some places dryer, leading to more erratic flood and drought cycles. This is having a dramatic effect of food production. Read More.
Part V: Rising energy prices have forced the cost of transporting foods up
In April 2007, it cost $60 per ton to ship grain from the Gulf Coast to Japan and $38 per ton to Europe. Today it costs $110 a ton to ship to Japan and $75 a ton to ship to Europe—83% and 97% more, respectively. These rising fuel prices are being passed onto consumers. Read More.
Part VI: Many major exporters of food have implemented trade restrictions
Many Asian countries, including China and India, restrict the export of rice. Russia and Kazakhstan restrict the export of wheat. And Argentina restricts the export of corn, wheat, and soybeans. As a result, when prices rise, supply can’t flow to the places of highest demand. This may seem understandable: Why send food abroad when it’s needed at home? But longer term, trade restrictions make crops least profitable when they are most needed—and leave little incentive for farmers to plant, harvest, and store crops in case hard times arise. Read More.
Part VII: Opportunities and outlook
According to the law of supply and demand, when the price of a good exceeds equilibrium, a surplus of the good will result (because buyers can no longer afford it), and producers will be motivated to lower the price. However, reaching equilibrium can take time. In the meantime, while the global food crisis presents challenges for developing populations, it presents opportunities for investors. As agricultural production has increased to meet demand, for example, a number of companies could benefit: biotech companies involved in the genetic modification of crops to improve quality and yield, pest resistance companies, fertilizer companies, farm equipment companies, and climate advisory services. Read More.
Sources: Bloomberg; Food and Agriculture Organization of the United Nations; Food and Agricultural Policy Research Institute; International Grains Council; Renewable Fuels Association; U.S. Department of Agriculture; World Bank.
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Cargo Container Shortage Slows Exports, Contributes to Inflation
Posted by Patrick O'Connor on 5/14/08 12:38 pm
U.S. exporters are running into serious bottlenecks at shipping ports. Not only is there a shortage of ships, there’s also a major scarcity of shipping containers.
As a result, U.S. exporters that are trying to take advantage of the weak dollar cannot meet orders. This is affecting prices for agricultural producers and anyone else who is shipping goods overseas.
“We could export a good 20% more in agricultural products from this country if there was the capacity to handle it,” said Peter Friedman, general counsel for the Washington-based Agricultural Transportation Coalition.
Read the Los Angeles Times article “U.S. exporters face cargo container shortage at ports” by Ronald D. White.
How can investors take advantage of this? After all, there aren’t any publicly traded shipping container companies in the U.S., and most of the shipping lines are foreign, too.
You have to go overseas to invest in these sectors. However, our International Growth portfolio has some positions that are benefitting from these shortages. Learn More; Watch Video
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