Global food costs likely to keep rising Higher costs will lead to economic, political instability in poorer countries By Monty Guild March 17, 2008
Spring is almost here in the Northern Hemisphere, and we are ready for it after a cold and wet winter in much of Asia, Europe and North America.
Global warming may be with us, but you could have fooled us about that these last few months. And as soon as the forecasters predict another dry winter here in Los Angeles, we get a good soaking.
Fortunately, forecasting economic events is easier than forecasting the weather or climatic change.
We read a lot of newspapers and news magazines from many parts of the world, and an underlying theme in all of them is the high price of commodities and rising inflation.
This pattern is common to Asia, Europe, North and South America, Australia and parts of Africa. Of course, this type of news is beneficial for the companies and economies that produce commodities, and for the investors who are holding mostly commodities-related investments.
However, it is very bad news for commodities-importing countries, especially for the poor countries that have to import food, which becomes more expensive with each passing month.
Huge hardships are being felt already by the poor in many countries, and there is little relief in sight. Rising global food costs will lead to economic and political turmoil in poor countries, and food riots are already beginning in countries such as Mexico.
For people who live hand to mouth, a small rise in the price of food can be devastating.
Many disbelieved the call Guild Investment Management Inc. of Los Angeles made a couple of months ago saying that food prices would rise, and rise rapidly, on a global basis. Since that time, food prices have really taken off. Soybeans are at an all-time high. Most grains and sugar are rocketing along, and the outlook is for more of the same.
Some have asked how we knew this would happen. The analysis was simple. It was based upon macroeconomic analysis combined with basic research and an awareness of the political situation in several grain-producing countries. We knew the following before making the prediction:
• Rising standards of living in China, India and many other countries will mean more consumption of meat. Increased meat consumption requires a lot of grain to feed animals. As most everyone knows, it takes several pounds of grain to produce one pound of meat.
• If more corn is used as animal feed, other grains will need to be substituted for other purposes. When other grains are substituted for corn, demand for those grains grows and their prices rise. It is a simple case of rising demand and almost static supply.
• Supply of grains is hard to increase, as it can take a very long time to build the infrastructure to store and deliver any new grains produced in previously unfarmed areas. To add production in already farmed areas is very difficult. More fertilizer and special seeds are two methods available to increase crop yields.
Many politicians created unintended consequences when they sought to pander to farmers' votes.
For example, corn availability is being further diminished by the politically popular but highly economically and environmentally flawed system of using corn for ethanol production.
In the United States, it has become politically popular to suggest that ethanol will reduce our dependence on foreign oil. Ethanol production from corn is supported through tariffs on imported ethanol and economic subsidies.
Ethanol will prove to be a poor alternative fuel, and very costly environmentally and financially. It is almost comical to see U.S. lawmakers falling over themselves to attract the votes of farmers by passing ethanol legislation.
It is true that stock markets all over the world are taking it on the chin.
This may be a case of investors' selling their winners because no one will buy the losers, such as mortgage bonds, for example. Or fear might be dictating that investors hold cash until the serious bank system problems are contained.
Probably, valuations are shrinking as insecure investors are paying a lower price for a unit of assets or earnings than they were willing to pay during the heady days of 2007.
Monty Guild is chief executive and chief investment officer, and Anthony Danaher is president, at Guild Investment Management Inc. of Los Angeles. This article is excerpted from the firm's newsletter, Guild Investment Global Market Commentary.
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