{"id":31800,"date":"2012-08-22T12:26:19","date_gmt":"2012-08-22T16:26:19","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/08\/get-ready-for-food-crisis-part-ii\/"},"modified":"2012-08-22T12:26:19","modified_gmt":"2012-08-22T16:26:19","slug":"get-ready-for-food-crisis-part-ii","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/08\/22\/get-ready-for-food-crisis-part-ii\/","title":{"rendered":"Get Ready for Food Crisis Part II"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

If the definition of insanity is doing the same thing over and over again and expecting different results, then Congress and the Administration must both be stark raving mad.<\/p>\n

It was just four years ago that the world found itself facing a food crisis.\u00a0 If you are reading this article, you may very well not remember the food crisis of 2007-2008.\u00a0 By virtue of being a MarketWatch reader, chances are very good that your income was sufficient to cover rising food costs without making any major lifestyle adjustments. But in many poorer countries, the spikes in the cost of basic food staples were enough to cause riots and social unrest, not to mention hardship and misery on those struggling to put bread on the tables.\u00a0 Readers may recall the infamous \u201cTortilla Riots\u201d in Mexico City, which brought more the 70,000 people to the streets.<\/p>\n

The causes of the food crisis were varied.\u00a0 Weather conditions were a factor.\u00a0 And taking a long-term macro view, rising incomes in China and other developing countries have led to higher-protein diets (i.e. more meat), which in turn means more demand for grains to be used for animal feed. This is certainly a trend that no one would want to stop; Chinese diners deserve to eat steak too, after all.<\/p>\n

But then as now, one of the drivers of high food prices was government policy and specifically the U.S. corn-based ethanol program.\u00a0 The United States is the biggest producer and exporter of corn in the world, and roughly 40% of the crop is used to make ethanol for American cars.<\/p>\n

At a time of rising food prices, this is madness.\u00a0 The price of corn recently hit an all-time high and at time of writing is up 57% over the past month.\u00a0 As corn prices rise, so do the prices of substitutes; wheat, soybeans and most other staple crops have seen large price spikes.<\/p>\n

Every kernel of corn used to make fuel is a kernel of corn that can\u2019t be ground into tortillas or used as feed for a cow. (You\u2019ll have to excuse me; I\u2019m from Texas and had beef fajitas for lunch).\u00a0 And while it may sound like I\u2019m making light of it, it is anything if not serious.\u00a0 The United Nations considered it important enough to request that the Obama Administration to cease all government-mandated ethanol production, following similar pleas from the G20, China, India and France.<\/p>\n

This puts the Administration and Congress in a bad place. Do they abandon their environmental goals of producing green energy and also risk causes prices to rise at the pump? (Biofuels account for roughly 5% of U.S. oil consumption according to estimates by the Financial Times<\/a>, or an amount roughly equivalent to the annual production of Libya or Algeria.)\u00a0 Or do they risk causing mass suffering among the world\u2019s poorest citizens?<\/p>\n

These are broad moral and political questions, but as investors our concerns are far more specific: What are our risks during a food crisis, and how do we position our portfolios?<\/p>\n

I see no obvious buys today.\u00a0 The would-be obvious move\u2014to trade corn futures\u2014is not one I would recommend to an individual investor.\u00a0 The volatility is unacceptably high.<\/p>\n

Food stocks\u2014companies like General Mills ($<\/span>GIS<\/a>)<\/strong> and Kellogg ($<\/span>K<\/a>)<\/strong>\u2014might eventually be good contrarian bets, though I would hesitate to buy them just yet.\u00a0 Their margins are sure to be crimped in the short term, which will force them to raise prices.\u00a0 But once their input costs start to fall again (say, following a reversal of U.S. ethanol policy) they are less likely to lower their prices.\u00a0 This could mean a nice boost to margins, say, a year from now.<\/p>\n

As for risks, my fear is that rising food prices will put a brake on what I consider to be the most important trend of the next decade: the rise of the new emerging market middle class.\u00a0 The opportunities I see in up-and-coming markets such as Africa (see \u201cAfrica: The Last Investment Frontier<\/a>\u201d) could easily evaporate if spending on basic necessities crowds out discretionary spending.<\/p>\n

For now, I remain an emerging markets bull.\u00a0 But Food Crisis Part II is something that has my attention.\u00a0 If we see a return of the social unrest and instability we saw four years ago, it might make sense to reevaluate some of your more speculative emerging market positions.<\/p>\n

Disclosures: Charles Sizemore has no position in the stocks mentioned.\u00a0 This article first appeared on MarketWatch<\/a>.<\/em><\/p>\n

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