The Food Crisis of 2010
“I think we have a food crisis right now.”
– Hussein Allidina, head of commodities research, Morgan Stanley
The leaves have turned all shades of red and gold. The air is crisp and cool. The fall beers are tapped. The brats are on the grill. It’s autumn. That means it’s time to talk about the harvest, in particular for corn.
Corn was the big news in markets on Friday. What some called a “harvest shocker” sent corn up 6% on the day. The USDA cut its harvest projections by nearly 4%, which took the market by surprise. And that’s just one of the reasons why the corn price has soared to $5.30 a bushel from $3.30 a bushel last July.
The shares of most ag-based companies are responding in kind. Fertilizer stocks are soaring, for example, as are the shares of irrigation equipment companies like Lindsay (NYSE:LNN). By contrast, the market has been hammering the stocks of meat producers. Tyson Foods has been falling on the theory that higher prices for corn means higher feed prices to fatten up those chickens, cows, sheep and pigs.
By historical standards, the US corn harvest is still a mighty pile – 12.7 billion bushels. It’s the third largest ever. But demand is also near record levels. And that’s why supplies are still tight.
The USDA said that US corn held in reserve will fall 47%. This means the US will have the tightest reserves since the mid-’90s. However, the US also has a lot less idle farmland than it did then, which means it’s not going to be as easy to replenish lost reserves through US production.
Of course, there are spillover effects, too. This doesn’t affect just corn. Soybeans jumped nearly 7%, and wheat was up 9%. What affects one crop affects others. They all compete for arable land and the farmer’s investment dollar. If more farmers plant corn, that could mean fewer farmers plant soybeans.
Also, in the shadows lingers the possibility of another 2008 food crisis. Some think it’s already here. Some of the largest grain exporters, like Russia and the Ukraine, have imposed export restrictions. Meanwhile, many of the chronically large grain importers in the Middle East and North Africa are starting to hoard supplies. This drama resembles the one we saw in 2008.
So I think we’ll see a mega-corn planting for next year. That will be good for fertilizer and ag equipment stocks, as farmers load up on what they need. But from this point, the best-performing stocks might be the ones getting mauled today.
The old saw in the commodity pits reminds us that the cure for high prices is high prices. The market will bring us a lot of grain next year. My guess is that corn will be cheaper in the spring than it is today.
Meat prices will continue to rise, too, and are already climbing this year. Beef prices are already the highest in a quarter-century. In this scenario, the best plays would be the beaten-down Tyson Foods of the world that turn the world’s grain into meat.
In the meantime, it’s worth noting that agricultural commodities are not the only ones rising. Metals also helped the benchmark index for raw materials hit its highest level in two years on Friday. Tin hit an all-time high of $26,780 a tonne. Copper hit a two-year peak of $8,349.50 per tonne.
Beyond the industrial metals, precious metals are also soaring. Gold hit a new all-time high of $1,364.60 an ounce. All the big gold producers are closing their hedge books. Meaning, they think the price of gold will go higher. So rather than sell gold forward at today’s prices, they will take their chances. AngloGold Ashanti was the latest to do this.
On top of this, central banks around the world keep buying gold. Overseas, governments are actually encouraging their citizens to own gold. Most recently, the Vietnamese central bank said it was thinking about lifting a ban on gold imports, which has been in place since May 2008. The market took this as bullish, because Vietnam is one of Asia’s largest consumers of gold.
Silver is putting in 30-year highs.
When all these commodities start hitting their highs together, something greater is at work than just supply and demand issues.
As the FT notes: “Investors are pouring money into commodities as fear intensifies that competitive currency devaluations and quantitative easing – in effect, pumping money into the economy – by the world’s central banks will lead to the debasement of paper currencies and to runaway inflation.”
This is exactly it. Investors are not as dumb as they sometimes seem. They see the world’s governments fighting over currency issues. They see that the likely outcome is that these governments weaken their currencies. As one does it, the other weakens in response. Then the other weakens it more. And so on and so forth.
And before you know it, you need a $20 bill to buy a cup of coffee.
Commodities trade on world markets – at least the major ones do. Prices adjust to the fall in currencies. So as the dollar weakens, the price of gold or oil ought to rise in dollar terms, everything else being equal.
Companies that produce these commodities could do even better, because their costs – such as for labor – don’t rise as fast. When you get your annual raise – if you are a salaried worker – inflation may well have already chomped 10-15% of your purchasing power.
Also, commodity producers who have already spent the large dollars to get a project up and running will find they have a big advantage over new projects. Inflation will make new projects much more expensive by comparison. This also stimulates the merger and acquisition activity we’ve seen.
Management teams will sit in their backrooms and do the math on a white board. They will see that it is often cheaper these days to buy what they want in the stock market, rather than build it themselves. This is what BHP decided when it bid for PotashCorp; it’s what Robbins & Myers did when they decided to bid for T3. So my advice is to stay with tangible assets that won’t lose value as currencies depreciate.
For the last few years, I’ve been recommending the shares of tangible asset companies like PotashCorp and T3 to the subscribers of Mayer’s Special Situations. Most of these recommendations have performed very well. But I think there’s still a lot more investment success to be had by buying into the companies that feed and power the world.
http://dailyreckoning.com/the-food-crisis-of-2010/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+dailyreckoning+%28The+Daily+Reckoning%29
China Said to Widen Its Embargo of Minerals
HONG KONG — China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted some shipments of those materials to the United States and Europe, three industry officials said this week.
A rare earth mine in China, which this week announced that it would cut its annual export quota for rare earths in 2011.
"It makes sense that a totalitarian government would, upon gaining power, use that power to what ever ends it wants. Those who rule through the gun only understand power."
Jonathan, Buffalo
The Chinese action, involving rare earth minerals that are crucial to manufacturing many advanced products, seems certain to further intensify already rising trade and currency tensions with the West. Until recently, China typically sought quick and quiet accommodations on trade issues. But the interruption in rare earth supplies is the latest sign from Beijing that Chinese leaders are willing to use their growing economic muscle.
“The embargo is expanding” beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities.
They said Chinese customs officials imposed the broader restrictions on Monday morning, hours after a top Chinese official summoned international news media Sunday night to denounce United States trade actions.
China mines 95 percent of the world’s rare earth elements, which have broad commercial and military applications, and are vital to the manufacture of products as diverse as cellphones, large wind turbines and guided missiles. Any curtailment of Chinese supplies of rare earths is likely to be greeted with alarm in Western capitals, particularly because Western companies are believed to keep much smaller stockpiles of rare earths than Japanese companies.
China experts said on Tuesday that Beijing’s assertive stance on rare earths might also signal the ascendance of economic nationalists, noting that the Central Committee of the Communist Party convened over the weekend.
A few rare earth shipments to the West have been delayed by customs officials in recent weeks, said industry officials in China, Japan and the United States. But new restrictions on exports appear to have been imposed on Monday morning.
Industry executives said there had been no signal from Beijing of how long rare earth shipments intended for the West would be held by Chinese customs officials. A few shipments are still being allowed out of the country for reasons that remain unclear: a fourth rare earth industry official said on Wednesday that one of the 32 authorized rare earth exporters in China had been allowed to export one container of rare earths to the West on Tuesday and hoped to be allowed to ship another on Thursday.
China’s official stance remained unclear on Wednesday. In an apparent reference to a report on Tuesday in the official China Daily newspaper, the commerce ministry said the report, predicting a decline of up to 30 percent in rare earth export quotas next year, was “totally groundless and purely false,” and added that no decision had been made yet on future quotas.
Without mentioning whether customs officials were interfering with statements to the West this week, the statement also said that, “China will continue to export rare earth to the world, and at the same time, in order to conserve exhaustible resources and maintain sustainable development, China will also continue imposing relevant restrictions on the mining, manufacture and export of rare earths.”
Japan’s Kyodo news agency reported on Wednesday that an unidentified diplomatic source in Beijing had said that rare earth shipments to the United States and Europe were being held up by customs officials for tighter inspections, one of the explanations that customs officials have also given in blocking shipments to Japan for the past month. But John Clancy, the trade spokesman for the European Commission, said in a statement on Wednesday that, “at this time, we cannot confirm claims made by European industry officials in media reports of China blocking rare-earth shipments to the” European Union.
The signals of a tougher Chinese trade stance come after American trade officials announced on Friday that they would investigate whether China was violating World Trade Organization rules by subsidizing its clean energy exports and limiting clean energy imports. The inquiry includes whether China’s steady reductions in rare earth export quotas since 2005, along with steep export taxes on rare earths, are illegal attempts to force multinational companies to produce more of their high-technology goods in China.
Despite a widely confirmed suspension of rare earth shipments from China to Japan, now nearly a month old, Beijing has continued to deny that any embargo exists.
Industry executives and analysts have interpreted that official denial as a way to wield an undeclared trade weapon without creating a policy trail that could make it easier for other countries to bring a case against China at the World Trade Organization.
So far, China seems to be taking a similar approach in expanding the embargo to the West.
Wang Baodong, a spokesman for the Chinese Embassy in Washington, said on Tuesday that the Chinese government was putting new restrictions on the mining, processing and export of rare earths to protect the environment. But he said that China was not violating any W.T.O. rules in doing so and that it was not imposing an embargo or trying to use rare earths as a bargaining chip.
“With stricter export mechanism gradually in place, outbound shipments to other countries might understandably begin to feel the effect,” Mr. Wang said in an e-mail. “But I don’t see any link between China’s reasonable rare earth export control policy and the irrational U.S. decision of protectionist nature to investigate China’s clean energy industries.”
Nefeterius Akeli McPherson, a spokeswoman for the Office of the United States Trade Representative in Washington, said that American trade officials were looking into the matter, after a report of the Chinese customs restrictions was published on Tuesday afternoon on the Web site of The New York Times.
“We’ve seen the news report and are seeking more information in keeping with our recent announcement of an investigation into whether China’s actions and policies are consistent with W.T.O. rules.”
Jeremie Waterman, the China director of the United States Chamber of Commerce, said that he was still checking government and industry sources to learn the extent of a suspension of Chinese rare earth shipments. “If it’s true, it’s disturbing news to say the least,” he said.
Mr. Waterman said that rare earths were so important to advanced manufacturing that restrictions on their trade might need to be put on the agenda of the Group of 20 meeting of heads of state, scheduled next month in Seoul, South Korea.
The Chinese government office that oversees rare earth policy, which operated with considerable independence for many years, was moved early last year into the Ministry of Industry and Information Technology. That ministry, formed only two years ago to draft plans for global leadership in many industries, has emerged as a bastion of economic nationalism.
Despite their name, most rare earths are not particularly rare. But most of the industry has moved to mainland China over the last two decades because of lower costs and steeply rising demand there as clean energy industries have expanded rapidly.
Congress is considering legislation to provide loan guarantees for the re-establishment of rare earth mining and manufacturing in the United States. But new mines are likely to take three to five years to reach full production, according to industry executives, although existing uranium mines may be able to move faster by reprocessing previously mined material, which often contains rare earths.
China reduced in July its export quota for rare earths for the second half of the year by 72 percent. Exporters had only six weeks’ of quotas left when China imposed its unannounced embargo on shipments to Japan.
http://www.nytimes.com/2010/10/20/business/global/20rare.html
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Alarms over radiation from thyroid cancer patients
WASHINGTON (AP) - Cancer patients sent home after treatment with radioactive iodine have contaminated hotel rooms and set off alarms on public transportation, a congressional investigation has found.
They've come into close contact with vulnerable people, including pregnant women and children, and the household trash from their homes has triggered radiation detectors at landfills.
Rep. Edward Markey, D-Mass., says the problem stems from a decision years ago by the Nuclear Regulatory Commission to ease requirements that thyroid cancer patients remain in the hospital a few days after swallowing doses of radioactive iodine to shrink their tumors.
"There is a strong likelihood that members of the public have been unwittingly exposed to radiation from patients," Markey wrote Wednesday in a letter to the NRC that details findings by his staff. "This has occurred because of weak NRC regulations, ineffective oversight of those who administer these medical treatments, and the absence of clear guidance to patients and to physicians."
The letter coincides with an NRC meeting Wednesday to examine the issue. It's unclear whether the radiation exposure occurs at levels high enough to cause harm.
About 40,000 people a year develop thyroid cancer, which generally responds well to treatment. Certain types are treated by swallowing radioactive iodine, or iodine-131. It concentrates in the thyroid, but small amounts are excreted through urine, saliva and sweat.
People given high doses may be kept in the hospital, but many patients are sent home with instructions on how to minimize exposure to others over the next few days. Most of the radiation is gone in about a week, says the National Cancer Institute's website for patients.
Traditionally such patients were kept in the hospital, but treatment has now shifted to less costly outpatient facilities. Patients sent home are supposed to follow specific precautions, such as sleeping alone in their beds and not giving hugs and kisses to young children. Markey's investigation indicates that's where the breakdown is occurring.
Staffers on the House Energy and Environment subcommittee that Markey chairs sent detailed questionnaires to states that enforce the NRC rules and conducted an online survey of more than 1,000 thyroid cancer patients.
The investigation found that:
- A patient who had received a dose of radioactive iodine boarded a bus in New York the same day, triggering radiation detectors as the bus passed through the Lincoln Tunnel heading for Atlantic City, N.J., a casino Mecca. After New Jersey state police found the bus and pulled it over, officers determined that the patient had received medical instructions to avoid public transportation for two days, and ignored them. The 2003 case highlighted that NRC rules don't require patients to stay off public transportation.
- About 7 percent of outpatients said in the survey they had gone directly to a hotel after their treatment, most of them with their doctors' knowledge. Hotel stays are a particular concern, since the patient can expose other guests and service workers. In 2007, an Illinois hotel was contaminated after linens from a patient's room were washed together with other bedding. The incident would probably have gone unreported but for nuclear plant workers who later stayed in the same hotel and set off radiation alarms when they reported to work.
- About one-fourth of outpatients said in the survey they never discussed with their doctors how to avoid exposing pregnant women and children to radiation. The survey found 56 cases in which a patient shared a bathroom or bedroom with a pregnant woman or a child, or had other close contact, which is strongly discouraged in medical guidelines.
- At least two states - Maryland and Massachusetts - said they had encountered problems with household trash from the homes of patients treated with radioactive iodine. Garbage trucks set off radiation alarms at landfills, requiring loads to be unpacked and examined, exposing sanitation workers to a range of hazards.
Markey scolded the NRC for its previous assurances that current regulations are adequate to protect the public. "It is difficult to conclude based on the survey results that this belief is justified," he wrote.
The congressman urged the agency to revise its rules so that more patients are kept in the hospital. Patient advocates say insurance companies routinely refuse to pay for a hospital room because it's not required.
Markey also urged a ban on releasing patients to hotels and letting them take public transportation. And he called for tighter government oversight of medical facilities that provide treatment with radioactive iodine.
http://apnews.myway.com/article/20101020/D9IV9RTO0.html
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