Three Big Bubbles Will Burst: Part III

Food prices are not truly a bubble, but more like a balloon. They expand and contract constantly. Occasionally, they will exaggerate their movements in either direction. Right now, for the most part, the price balloon is getting quite large, and is probably not finished growing.

Prices have gone up 30%-50% over the past 1 to 2 years and will most likely continue for at least another 30%-40%.

Here are the important factors:

1. Weather.
2. Supply
3. Demand
4. Stupidity.
5. Speculation.

Unlike other commodities such as the dollar, oil, & gasoline, food is immensely influenced by weather. It has to grow, whether it is a plant or an animal that feeds on the plant!

Food prices world-wide have been pushed by the 6 year drought in Australia. Sixty percent (60%) of the rice crops in Burma were destroyed by the cyclone and storm. On the other side, the cool spring and mild winter has given us a bumper crop of wheat (causing the price to drop 25-30% from its high).

As you can see nothing is static in this arena. Weather obviously influences the supply in the short run, but there are other things that do in the long run. Arable land that is set aside unfarmed as was in the U.S. from the 1950’s until recently is one. Land not used because of political changes and logistics, such as in the Ukraine, classically known as Europe’s Bread Basket, is another. When prices go up, the obvious response is to grow more crops. Both the U.S. and the Ukraine are coming back into the business in a big way. Barring any major weather problems, they will affect the world price of food soon. These are only 2 examples from a huge gallery of areas.

Demand has been increasing and will continue to do so, as more people world-wide become more affluent. Hundreds of millions are working their way from poverty and near-poverty to something near a middle class. With that progress, there develops an appetite for something other than the basics, such as rice & beans. Unless there is a major calamity or war, this will definitely go on.

As the demand increases and supply decreases, the result can be conflict, anger, and in many cases war. This is already occurring in some of the poorest countries. Many of them have leaders that don’t give a damn or have a vested interest in part of their population dying (genocide). I have written about this before and will again.

Stupidity is my favorite. It has no geophysical, political, or educational limits. Some of the smartest people in the world can be so damn ignorant and naive. Take ethanol for instance. Whoever the wunderkinds were that figured you could convert a huge part of the world supply of corn into fuel without upsetting the balance of supply and demand should be institutionalized. Dante has a prime place in hell for them. My god: use sugar if you have to do something this dumb. No one needs it anyway, and it is dirt cheap.

Anti-hording laws and price controls (a political favorite when backed into a corner) are not only self-defeating, but in the long run completely distort the market. Let the market be, it will take care of itself.

Even though grains, coffee (yes it is a basic necessity), cocoa, sugar and more are traded in the commodities markets, speculation is fairly short and is mostly self-correcting when the traders lose their asses and become the last fools.

Speculation in other markets that are indirectly and directly involved is another story. The current push on oil, cash, and currencies are greatly influencing food prices. The costs of these materials for growing, processing and distributing food are responsible for at least 20% to 50% of the current rises.

Food is a renewable resource and supply can change very quickly. It is an industry that can involve everyone from a background gardener, small farmer to mammoth corporations. If prices go up, more is raised, and prices go down.

When the oil & gas, and US dollar big bubbles burst you will see prices retreat, maybe not to the original cheap levels, but a lot lower than today. Even if they don’t, more people will raise more food and there will be some relief.

There are a myriad of other factors and related subjects in this area, too numerous to expand on here. Believe me I will be back to it. If there is one thing in life I like to do, it is eat, not quantity, but quality.

As always, be aware, be prepared, don’t panic, and if possible don’t vote for liberals, they are the biggest market offenders, and they really don’t care about you or anyone else in the world.

Next time: Speculators & Politicians: which do you think are the bad guys?

The Hammer

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