From all accounts, it appears the world is in the early stages of a major leg up in food prices. The major macroeconomic trend will likely drive economic policy and the investment outlook for years to come. Although mainstream pundits like to focus on such cyclical drivers as the weather, the real force behind the move is secular. The U.S. is leading the world in a pandemic of monetary inflation that is helping to cause commodity prices, food in particular, to skyrocket across the globe.
"Easy money behind food prices" by Michael Pento, Financial Post, Jan. 22, 2011
ReplyDeleteFrom all accounts, it appears the world is in the early stages of a major leg up in food prices. The major macroeconomic trend will likely drive economic policy and the investment outlook for years to come. Although mainstream pundits like to focus on such cyclical drivers as the weather, the real force behind the move is secular. The U.S. is leading the world in a pandemic of monetary inflation that is helping to cause commodity prices, food in particular, to skyrocket across the globe.
ReplyDeleteThe U.S. Federal Reserve's monetary excess is currently being magnified by China's misguided currency peg policy. As the United States debases its currency through excess printing, China must follow suit. In order to maintain a consistent relative valuation, China must adopt the monetary policy of the United States.
Just last week, China announced that in the fourth quarter of 2010 its foreign currency reserves leapt by US$199-billion to US$2.85-trillion. The increase was much larger than economists expected, and suggests China is printing as much as US$2-billion worth of yuan per day in order to buy dollars to maintain the peg. The big problem is that China, with a booming economy, is adopting a monetary policy of an economy that is contracting. This is the perfect recipe for inflation.
And it's not just China that is enforcing a currency peg. Many other countries intervene in the foreign exchange market when they feel their currency has risen too high against the greenback.
For example, the Chilean currency gained 17% in value against the U.S. dollar in just seven months during 2010. The surging currency underscored the country's status as an emerging markets success story. But that condition abruptly ended last week when Chile's central bank pledged to intervene in the local currency market by increasing foreign currency reserves by US$12-billion in 2011. After the announcement, the currency predictably dropped against the dollar and caused a major sell-off in Chilean equities.
The specious idea behind this action is that foreign governments believe that by keeping their currencies cheap they can bolster exports and maintain a strong economy. By stubbornly clinging to the belief that a rising currency is bad for the economy, world economic leaders are helping to unleash a wave of inflation.
Typically, food prices are more volatile than prices for finished goods. It is there that this new wave of inflation is first manifested. Unfortunately, this means that the poorer people around the world, who pay a higher percentage of their income for food, will bear the brunt of the pain. A look at some alarming movements in food prices gives a sense of how bad things are getting:
ReplyDelete-Sugar was up 25% in 2010.
-Corn and wheat were up 53% and 49%, respectively, in 2010.
-Soybeans were up 28% in 2010.
In December, the U.N.'s Food Price Index -- dairy products, meat, sugar, cereals and oilseeds -- jumped an alarming 4.2% from the previous month, passing the previous peak of June 2008.
India's food price inflation rose to a one-year high of more than 18% according to data released in early January. Rising food and energy prices in India have convinced many analysts the Indian central bank will raise rates later this month.
In China, food prices rose 11.7% from January to November 2010. In response, several cities have implemented direct controls to limit food price increases and the central government has vowed to eliminate speculation in the country's commodities markets.
Of course, global currency depreciation has also caused other commodity prices to rise. Food production is extremely energy intensive, and US$90-per-barrel oil has helped push food prices to new record highs.
The surging cost of fertilizer, driven in large part by U.S. ethanol policy, is also adding another driver to rising food costs. Congress is requiring that U.S. annual ethanol production increase to 36 billion gallons by 2022, up from 13.9 billion this year. With nearly 40% of the U.S. corn crop currently diverted to ethanol, the demand for fertilizer is likely to increase substantially.
Admittedly, there are other non-inflationary factors that are boosting global food prices. For instance, poor weather conditions in major exporting countries across the globe have significantly curtailed harvests and expectations. Rising rising Asian demand is also at the heart of the spike. China, for example, is expected to buy 60% of globally traded soybeans in 2011/12, which is double its percentage of four years ago.
But the genesis of soaring food costs lies at the feet of U.S. Fed chairman Ben Bernanke and his desire to reignite inflation domestically. However, countries such as India and China have already started to reverse the inflationary effect of linking their currencies to the U.S. dollar and are raising banks' reserve requirements and interest rates. Contrast those actions with those of our Fed chairman who has repeatedly stated that U.S. inflation is far too low. We can only hope Mr. Bernanke repents from his love affair with inflation before food riots land on U.S. soil.
In the meantime, investors can help mitigate their exposure to rising food costs by perhaps looking to invest in those firms whose financial performance improves with rising food prices.