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Thread: Rising Food Prices - Krugman Misses the Obvious ( updated )

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    Default Rising Food Prices - Krugman Misses the Obvious ( updated )

    I love reading Paul Krugman. Seriously. I do. I can't stand him personally for his vicious demeanor and disgraceful lack of intellectual honesty, but his columns do entertain.

    In today's N.Y. Times he outdid himself. After a reasonably thorough overview of rising commodity prices and the causes for same ( bad weather in the Ukraine and Australia ; our stupid ethanol policy; higher demand for meat and thus feed grains in China; high cotton prices causing conversion of fields from food to fiber ) Krugman approaches and then takes a dive on a PRIME cause for the recent run-up in food prices and resultant political chaos in Egypt, Tunisia and elsewhere. He literally dismisses with a wave of his hand Bernanke's monetary policy and instead reaches down and comes up with the real root causene of his favorite bugaboos btw, Climate Change ! In the immortal words of Robert Wuhl , "I shit you not ! "

    Without any expertise in geography, climatology or meteorology ( Not to worry Paul, it never stopped Al Gore. ) Krugman says it's all the fault of Climate Change.He doesn't give a single crop figure or harvest numbers. He just cites to a few supposedly apocalyptic weather phenomena from last year and this and then pronounces them as the root cause of current agricultural price disruptions. And this guy ( and Al Gore ) won a Nobel Prize ? He is an economics professor at Princeton. If he had submitted that kind of dreck as his PhD. thesis I'd like to think he would have flunked. One can never be too sure given the intellectual corruption in American academia. Cornell West is also a tenured professor at Princeton, so anything is possible.

    Let's assume Krugman is right. Let's give the Fed a pass and blame it all on Climate Change. So what ? There is nothing that can be done that would have any meaningful or practical effect. We've gone over the "how's" and "why's" too many times to count.

    Let's assume hybrids are part of the solution. The same folks pushing them are the same ones opposing new nuclear plants. Plants needed to generate the electricity that those and fully electric cars need to keep running.
    Last edited by Eric Stoner; 02-07-2011 at 01:52 PM.

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    Default Re: Rising Food Prices - Krugman Misses the Obvious

    sticking to the bare facts, the actual statistic that Paul Krugman is hanging his analysis on is 'bad harvests'. Indeed he appears to try and blame the entire cause of bad harvests on 'climate change'. However, as we have discussed piecemeal right here in dollar den ...

    - part of the reason for reduced harvests is reduced fertilization / pest control. It has been previously pointed out that, in the US as well as many other countries, the rising ( energy linked ) costs of fertilizer and pesticides, combined with tighter credit restrictions for many farmers, has already resulted in 2010 summer crop yields and 2010-2011 winter crop yields dropping for the simple reason that the small farmers couldn't afford - or couldn't get affordable financing for - maximum levels of fertilization and pest control.

    - balancing of planted acreage has indeed changed, based on rising futures prices for certain agricultural products versus steady ( or more slowly rising ) futures prices for other agricultural products. As you imply, farmers aren't stupid ... they're going to concentrate on planting crops where futures prices promise the greatest opportunity for profit. Indeed some of the crops yielding the highest futures prices are not human edibles ( i.e. cotton, GenEng ethanol corn varieties etc. )

    - balancing of planted acreage is also developing some gov't mandated distortions ... particularly where feedstock corn for ethanol refineries is concerned.

    - known lack of surpluses is also causing an increasing percentage of 'marginal' farm land to be planted. In past years, areas that are sandy, rocky, dry, wet, etc. were normally planted with 'grazing' crops because the soil and water conditions pretty much guaranteed substandard yields. It's thus no surprise that if farmer X brings 20% additional 'marginal' acres back into production that the average production of his entire farm will drop noticeably ( i.e. 110% production but using 120% of acreage, fertilizer, seeds, tractor fuel, irrigation, farm labor etc.). This factor alone, by Krugman's own analysis, explains an 8% overall drop in average yields !!!


    And in regard to your other issue, indeed where US dollar denominated pricing levels are concerned, thanks to a host of factors from ethanol fuel additive mandates to the energy content of fertilizers to the petroleum content of pesticides, food and energy prices are now inexorably linked. Thus as QE2 continues to devalue the US dollar, food and energy prices automatically rise in concert ( well, at least as long as the US dollar remains the world's reserve currency and the US remains the primary food exporter ).

    Another issue that Krugman touched on, but evaluated far too simplistically, is the result of gov't directives in Russia and other countries to stop exports of food surpluses. This obviously removes supply from the world food commodities markets and as a result drives up pricing levels for remaining supplies. The 'gold foil hat' crowd would tell you that there is a strategic element to such gov't decisions - specifically that a reserve of grain in storage silos is 'worth more' than the fiat currency that could have been earned from the sale of surplus grain. In other words, the Russians and others are building up physical food reserves as 'insurance' against future bad harvests, but also as a hedge against future US dollar devaluation ( which is arguably just as effective as building up gold reserves ).

    ~
    Last edited by Melonie; 02-07-2011 at 04:03 PM.

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    Default Re: Rising Food Prices - Krugman Misses the Obvious

    You circle around one of many FACTS that Krugman and his ilk either refuse or are incapable of grasping ( I neither know nor care which ) : People will act in their own self interest.

    Farmers will plant those crops in those amounts that make the most economic sense for them.

    Speculators will go long on those commoditiies that they expect will increase in price and short those they anticipate dropping.

    Russia and other countries will withold enough grain from the world market to enable them to feed their own people. Similarly, if they expect that the world's reserve currency ( the Dollar ) will decline in value, they will hoard things like gold and grain likely to increase in value.

    China, India and other developing countries will pursue their own policies of industrialization and burn as much fossil fuels as necessary to do it.

    While Krugman is always good for a laugh, I found it amazing that a Nobel Prize winning economist would so lightly wave off Fed monetary policy as a root cause of the current problem. Most economists point to QEII as a PRIME cause of rising commodity prices.

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    Default Re: Rising Food Prices - Krugman Misses the Obvious

    from

    (snip)"Food inflation driven by freezing weather in Florida during December and in Mexico during February, is hitting the US supermarkets in the coming day’s. Sysco sent out an alert that announced an “Act of God”, to address their contracted supply issues.

    The cold of the Superbowl weekend in Texas, has had a more lasting impact than on just the game plans for lots of travelers. The deep cold sank into the produce fields of northern Mexico, destroying fresh produce crops. This is the biggest page 16 story, about to hit a headline, that you have seen in a while. Your restaurants will be low on fresh produces for weeks. They will have to raise prices significantly or cut the produce out of the menu.

    On Feb. 8, the U.S. Department of Agriculture reported prices of $22.95-24.95 for two-layer cartons of 4×4, 5×5 and 5×6 vine-ripe field-grown tomatoes from Mexico, up from $6.95-9.95 the week before and $5.95-7.95 the year before.

    This cold storm has brought to the food growing region the coldest temps in 50 years. This has caused damaged to most of the fresh produce available to US supermarkets in the winter spring season. This is going to impact the price you pay at the Supermarket anywhere in the North American continent.

    This event will add to the worlds food supply issues already impacted by fires in Russia, rains in Australia, droughts in China, and now freezing temperatures in Florida & Mexico. Here are some quotes on the topic

    “The last time there was a freeze of this severity was 1957,” said Jerry Wagner, director of sales and marketing for Nogales, Ariz.-based Farmer’s Best. “It’s still too early to tell, but there’s a lot of damage.”

    “It’s been a rough day,” said Lee Anne Oxford, marketing director for Raleigh, N.C.-based grower-shipper L&M Cos. Inc. “Right now we have all of our growers out in various fields. We’re expecting to regroup over the weekend and hopefully know where we stand by Sunday.”

    The Packer

    “The early reports are still coming in but most are showing losses of crops in the range of 80 to 100%. Even shade house product was hit by the extremely cold temps. It will take 7-10 days to have a clearer picture from growers and field supervisors, but these growing regions haven’t had cold like this in over half a century.”

    “Florida normally is a major supplier for these items as well but they have already been struck with severe freeze damage in December and January and up until now have had to purchase product out of Mexico to fill their commitments, that is no longer an option.” Via Sysco Alert

    “Supplies of tomatoes, peppers, cucumbers and other vegetables from Mexico will be severely limited until at least March following an early February freeze.”(snip)


    ^^^ which speaks to another US 'vulnerability' re rising food prices. With the exception of ridiculously priced organic vegetables still grown almost entirely in the USA, the high US minimum wage + EPA pesticide + FDA tracking rules etc. has managed to force many regular quality US vegetable growers to 'close up shop' due to profit margin squeeze. Arguably, this winter's unseasonably bad weather will provide yet more reason for remaining US vegetable growers to 'pack it in'.

    In turn, via a low profile transition, many regular quality vegetables on US supermarket shelves and restaurant plates have been replaced with vegetables now imported from Mexico, from Asia etc. Besides US supermarkets and restaurants now being dependent on a somewhat precarious supply chain i.e. SYSCO, there is also a looming risk factor that in times of short food supply those Mexican, Asian etc. vegetable exports may be cut off at the source or vastly bid up in price.

    As you correctly point out, and as Paul Krugman appears to ignore, people acting in response to gov't incentives and dis-incentives has now resulted in a US agricultural crop distribution which is heavily comprised of non human edible corn for ethanol feedstock, a small volume specialized niche of very expensive organic farm produce, but ever smaller amounts of normal quality human edible vegetables ! In as seeming replay of changes in US manufacturing, this transition in the US food industry is also bringing new risk factors to the table ( literally and figuratively ! )

    ~
    Last edited by Melonie; 02-13-2011 at 04:33 AM.

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    Default Re: Rising Food Prices - Krugman Misses the Obvious ( updated )

    Here's more good news : China's wheat crop is in serious jeopardy from severe drought in the Northern China Wheat Belt. China supposedly has a surplus equivalent to 1/2 of one year's consumption but when that is gone, China will still have to buy additional wheat to feed its people.

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    Default Re: Rising Food Prices - Krugman Misses the Obvious ( updated )

    this 'long term' assessment was just released by Phoenix Capital Research at


    (snip)The Real Crisis That Will Soon Hit the US

    Forget stocks, the real crisis is coming… and it’s coming fast.

    Indeed, it first hit in 2008 though it was almost entirely off the radar of the American public. While all eyes were glued to the carnage in the stock market and brokerage account balances, a far more serious crisis began to unfold rocking 30 countries around the globe.

    I’m talking about food shortages.

    Aside from a few rice shortages that were induced by export restrictions in Asia, food received little or no coverage from the financial media in 2008. Yet, food shortages started riots in over 30 countries worldwide. In Egypt people were actually stabbing each other while standing in line for bread.

    We’re now seeing the second round of this disaster occurring in Egypt and other Arab countries today. Thanks to the Fed’s funny money policies, food prices have hit records. And even the Fed’s phony measures show that vegetable prices are up 13%!

    The developed world, most notably the US, has been relatively immune to these developments… so far. But for much of the developing world, in which food and basic expenses consumer 50% of incomes, any rise in food prices can have catastrophic consequences.

    And that’s not to say that food shortages can’t hit the developed world either.

    According to Mark McLoran of Agro-Terra, the Earth’s population is currently growing by 70-80 million people per year. Between 2000 and 2012, the earth’s population will jump from six billion to seven billion. We’re expected to add another billion people by 2024. So demanding for food is growing… and it’s growing fast.

    However, supply is falling. Up until the 1960s, mankind dealt with increased food demand by increasing farmland. However, starting in the ‘60s we began trying to meet demand by increasing yield via fertilizers, irrigation, and better seed. It worked for a while (McLoran notes that between 1975 and 1986 yields for wheat and rice rose 32% and 51% respectively).

    However, in the last two decades, these techniques have stopped producing increased yields due to their deleterious effects: you can’t spray fertilizer and irrigate fields ad infinitum without damaging the land, which reduces yields. McLoran points out that from 1970 to 1990, global average aggregate yield grew by 2.2% a year. It has since declined to only 1.1% a year. And it’s expected to fall even further this decade.

    Thus, since the ‘60s we’ve added roughly three billion people to the planet. But we’ve actually seen a decrease in food output. Indeed, worldwide arable land per person has essentially halved from 0.42 hectares per person in 1961 to 0.23 hectares per person in 2002.

    It’s also worth noting that diets have changed dramatically in the last 30 years.

    For example, in 1985 the average Chinese consumer ate 44 pounds of meat per year. Today, it’s more than doubled to 110 pounds. That in of itself is impressive, but when you consider that it takes 17 pounds of grain to generate one pound of beef, you begin to see how grain demand can rise exponentially to population growth with even modest changes to diet.

    Make no mistake, agriculture is at the beginning of a major multi-year bull market. We’ve got rapidly growing demand, reduced production, and decade low inventories.

    This is an absolute recipe for disaster.

    Good Investing!

    Graham Summers(snip)


    This analysis was of course prepared with investors in mind, with the implied recommendation being that being 'long' on agricultural commodity futures ( or proxy agricultural sector ETF's or agricultural sector muni fund shares ) is a pretty solid medium term investment.

    However, the basic facts that agricultural productivity per acre has plateaued over the past two decades, that sustaining current agricultural productivity levels going forward will be difficult ( and ever more expensive, since fertilizer and pesticide price levels are inexorably linked to oil prices ), that 'improving' economic status of workers in China / India / Asia is resulting in a change in diet that actually consumes much more agricultural products per person, that gov't and free market food reserves are being depleted, all raise the possibility that future food prices could go 'parabolic' at some point.


    Arguably, speculation and money printing have in the past been able to manipulate the prices of many stock shares and commodities - based on investors buying and selling 'paper' with no actual intent of taking possession of the product or commodity itself. This is NOT the case with agricultural commodities, because some level of actual and ongoing consumption of agricultural commodities is absolutely necessary.

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