Chances Quite High for More Food Shortages in '09
Roseman
November 11, 2008
Roseman
From their lows earlier this year the grains complex has plunged about 40%, with corn, soybeans, wheat and rice all down hard since mid-July. That’s consistent with the CRB Index, now off more than 40% since hitting an all-time high in early July.
But if the credit crisis finally caught up to commodities in July after six straight years of big gains, then the same credit phenomenon might propel the grains higher eventually. That’s because crop yields are now shrinking again after a harvest boom in 2008; projections for grain harvests in 2009, however, look grim.
Many farmers in the United States and especially overseas in the emerging markets are increasingly being denied credit to fund purchases of fertilizer (potash) and machinery – vital inputs necessary to boost crop output. Without external financing, farmers must delay or reduce plantings. Worse, grain processing companies that typically extend credit to farmers, like Cargill and Archer-Daniels Midland, are now tightening terms and in some cases, denying weaker borrowers credit altogether since September.
According to the USDA, global inventories of corn, wheat and soybeans before the harvest in the Northern Hemisphere next year will be the second lowest since 1974 or enough for 67 days of consumption compared with 144 days of supplies in 1986. The chances are quite high that another round of food shortages will emerge again next year as grain prices recover. In April, the United Nations proclaimed that over 30 countries were facing food shortages as rice and other grains went through the roof during the first quarter. Prices have since declined sharply and food riots have eased.
According to AgResources, a Chicago-based agriculture consultancy firm since 1979, “stockpiles are going to be extremely tight. The world cannot afford any dislocation in production next year or there will be a real shortage.”
The credit crisis therefore will adversely impact crop output in 2009. This implies a major reversal lies ahead for the grains complex and investors should start building fresh positions.
Until July, most commodities, including the grains, also provided portfolios with invaluable portfolio diversification as stocks swooned. I suspect the bull market in the grains is far from over with the entire sector now trading well below their inflation-adjusted highs in 1980 and since July, about 40% off their nominal highs. The grains are cheap.
The world will continue to consume foodstuffs. People might reduce spending on discretionary items like cars, holidays and electronics. But it’s a pretty safe bet that consumers won’t compromise their diets. The grains might just lead a commodity recovery in 2009 as demand continues to flourish while net supplies are shrinking, exacerbated by the ongoing credit squeeze.
http://rosemanblog.sovereignsociety.com/2008/11/credit-storm-hi.html
www.standeyo.com/NEWS/08_Food_Water/081111.grain.shortages.2009.html