Tuesday, October 27, 2009

Food will never be so cheap again

The ever chipper Ambrose Evans-Pritchard reprises a dirge we sang back in 2007*.
From the Telegraph:

Biofuel refineries in the US have set fresh records for grain use every month since May. Almost a third of the US corn harvest will be diverted into ethanol for motors this year, or 12pc of the global crop.

The world's grain stocks have dropped from four to 2.6 months cover since 2000, despite two bumper harvests in North America. China's inventories are at a 30-year low. Asian rice stocks are near danger level.

Yet farm commodities have largely missed out on Bernanke's reflation rally in metals, oil, and everything else. Dylan Grice from Société Générale sees "bargain basement" prices.

Wheat has crashed 70pc from early 2008. Corn has halved. The "Ags" have mostly drifted sideways over the last six months. This divergence within the commodity family is untenable, given the bio-ethanol linkage to oil.

For investors wishing to rotate out of overstretched rallies – Wall Street's Transport index and the Russell 2000 broke down last week – this is a rare chance to buy cheap into a story that will dominate the rest of our lives.

Barack Obama has not reversed the Bush policy on biofuels, despite food riots in a string of poor countries last year and calls for a moratorium. The subsidy of 45 cents per gallon remains.

The motive is strategic. America is weaning itself off imported energy at breakneck speed. It will not again be held hostage by oil demagogues, or humiliated by states that cannot feed themselves. Those Beijing students who laughed at US Treasury Secretary Tim Geithner may not enjoy the last laugh. The US is the agricultural superpower. Foes will discover why that matters.

The world population is adding "another Britain" every year. This will continue until mid-century. By then we will have an extra 2.4bn mouths to feed....MORE

Also at the Telegraph:

Tequila endangered by switch to biofuels

Crops under stress as temperatures fall

Russian land boom could avert global famine

*The End of Cheap Food- What was Old is New Again AND: Profiting from Politics

This story from The Economist got me thinking
(I know, alert the media).

Rising food prices are a threat to many;
they also present the world with an enormous opportunity

FOR as long as most people can remember, food has been getting cheaper and farming has been in decline. In 1974-2005 food prices on world markets fell by three-quarters in real terms. Food today is so cheap that the West is battling gluttony even as it scrapes piles of half-eaten leftovers into the bin.

That is why this year's price rise has been so extraordinary. Since the spring, wheat prices have doubled and almost every crop under the sun—maize, milk, oilseeds, you name it—is at or near a peak in nominal terms. The Economist's food-price index is higher today than at any time since it was created in 1845 (see chart). Even in real terms, prices have jumped by 75% since 2005. No doubt farmers will meet higher prices with investment and more production, but dearer food is likely to persist for years (see article). That is because “agflation” is underpinned by long-running changes in diet that accompany the growing wealth of emerging economies—the Chinese consumer who ate 20kg (44lb) of meat in 1985 will scoff over 50kg of the stuff this year. That in turn pushes up demand for grain: it takes 8kg of grain to produce one of beef....

And what was I thinking about?
Farm implements!

The Economist's food-price index was created in 1845.
In 1846 The British Parliament voted to repeal the Corn (grain) Laws, reducing the tariff on imported grain, effectively opening the British market to American wheat.

Our post "Global Warming, Politics, Laws and Opportunity" had this list of annual sales of Mr. McCormick's reaper:

1840------- 2
1843------ 29
1844------ 50
1845------ 58
1846------ 75

As can be seen, the politics had quite an effect on the McCormick family fortunes.

In Global Warming, Politics, Laws and Opportunity--Part II:

As reported by The Economist May 16, 1846, the British House of Commons had repealed the "Corn Laws", eliminating the tariff on imported wheat, the day before. Corn in this usage is not maize but rather is generic for grain. Prime Minister Peel won the battle but lost his premiership, the quote of the day was "Peel and repeal."

Click that Economist link. I'll wait.

May 16, 1846 "Corn Laws Repealed by the House of Commons"
The bill was ushered through the Lords by the Duke of Wellington, Peel lost his job and the era of cheap food began. It lasted 160 years.

The Economist reported both ends of the story.
Not many publications can say that.
Global Warming, Politics, Laws and Opportunity
Global Warming, Politics, Laws and Opportunity--Part II