For the first time in my lifetime, there is food rationing in the United States. The last food rationing that I know of occurred during World War 2. Countries around the world are experiencing food shortages and increased prices. What does this mean for world? What does this mean for US citizens?
What’s Happening?
Food prices have increased rapidly around the world. Many countries are facing riots as poor citizens cannot afford food.
Corn
Corn (maize) is the number one food crop in the world. North America, South America and Africa rely on corn as a source of food and livestock feed.
The ethanol industry has increased the demand for corn. Government subsidies for ethanol have encouraged the construction of a large number of ethanol plants in corn producing states.
Livestock prices and thus meat and dairy prices have increased because of the competition for corn which is used as feed for a large number of animals.
Rice
The price of rice has increased over 60% since the beginning of the year. Rice is the second most consumed grain after corn (maize). A large number of poor countries rely on rice as a staple food. Therefore increases in cost of rice impact countries with a large poor population.
Unlike Corn, rice is mainly used for food. Countries like India and China are consuming more food as demand from the middle class in those countries expand.
Recently Sam’s Club has begun to ration rice. Sam’s Club claims it’s trying to prevent hoarding. Sam’s Club is a cash wholesaling division of Wal Mart.
Should You Worry?
In the short term there’s no telling what prices will do. Speculators could drive up prices. Supplies could shrink as hoarding starts. However, in the long term things will probably work out.
Increased demand is the direct cause of the price increase. It’s the most basic economic theory. Global demand is “sending a signal” to producers to increase production. That signal is being received and production will increase. How do I know?
My father is actually moving around 1,000 acres into production this year. That land has been in CRP for about 10 years. Many of his neighbors are doing the same thing. Farmers in Brazil are tearing up new ground as fast as possible. We can be fairly certain that any idle land in any country is going into production especially at these prices.
In the long run, more food will be produced and I’ll go out on a limb and predict we’ll see prices closer to normal. Actually, I'm going to speculate that so much land will go into production we'll see lower than normal prices in a year or two as it will take some time for that land to become really productive.
It’s really amazing how the market works in the long run.
Can You Profit?
Can you make a profit from this situation? That depends. Do you have farm or agricultural land? If you have a chance you may want to buy some.
You may consider stocks in some of the large agri-business companies. Monsanto and ADM are examples of companies with a large exposure to the Ag markets. I’m not endorsing these as I don’t buy individual stocks (right now anyway); I’m just listing them as examples.
If you’re really brave you could play the futures and options game. However, I don’t consider that much more than gambling. Your mileage will vary of course.
There are also the new Commodity ETFs (Exchange Traded Funds) to consider. As of right now I don’t know a whole lot about these. I need do some more research on these but they appear to offer some exposure to commodities while reducing the risk of futures and options trading.
I’m Not Worried, Yet
At this point, I’m fairly certain this is a short term crisis. I’m not hoarding 100 pounds of rice in my basement. However, it does show that we’re in a new era.
Consumers in previous third world countries are starting to enjoy a small part of the western lifestyle. I think we can expect commodity prices to trend higher in the future. After all the earth is big but it’s not infinite. There are only so many resources we can pull out of the ground and there’s a limited amount of ground to begin with.
As old farmers are fond of saying: you don’t sell land, they aren’t making any more of it.
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