The Global Food Crisis & Gold's Valuable RoleEmanuel Balarie With all the discussion about housing, a declining US dollar, and the inevitable recession, I feel that many people may be overlooking a potentially more devastating economic factor - rising food costs. Before I continue with why I believe this is the case, I want to mention an article that I wrote several months ago titled, Food Inflation: What's The Story. The article provides an introductory view on food inflation. I must also point out that food prices are even higher now than when the article was first published in September. One of the reasons why I decided to write this article is because I recently experienced a situation at the local food market in California. I was visiting my parents and we decided to go to the store to pick up some food for a barbeque. Having recently moved to Chicago from southern California, a backyard barbeque in warm weather sounded much better than a steak at a fancy steak house! In any case, when I arrived at the supermarket, I was surprised to see the store absolutely packed at 1:30pm on a Thursday afternoon. There were probably 5 or 6 cashiers and each cashier had a line that went back 25 people deep. My father, who grew up in communist Romania, quickly mentioned that this reminded him of the bread lines during the Ceausescu era! As I looked around the store, I realized that about 80% of the people lined up only had 4 items in their carts. Those 4 items, I quickly found out, were advertised on a flyer that touted an '8 hour-only sale'. We ended up waiting in line for about a half hour. I would guess the net savings for those 4 items were around $10-$15. That doesn't seem like a lot of money. Yet, the shoppers were willing to change their shopping schedules, wait in line for 30 minutes, and perhaps even purchase food items that were not necessarily on their usual shopping lists. Why is that? Now, I have to admit the market was located in a blue collar/middle income neighborhood. However, this does not take away from the fact that my father, who shops at the store regularly, stated that he has never experienced this before. In addition, economic hardship is first noticed by the lower and middle classes. These families typically do not have much money saved up, and their paychecks often only cover their mortgage, car payments, and bills, leaving them particularly exposed in the event of an economic contraction. But even though it starts at the bottom, you better believe that the hardships of the lower class will affect the middle class. For instance, Mr. Blue Collar might not go out to eat at the local neighborhood restaurant. Now the local restaurant owner experiences the slowdown and he may decide to layoff one of his employees. Additionally, he will decide to keep his used truck several years longer. Now the car dealer and their salesmen will suffer from decreased sales. And so on and so on. But what specifically about food prices? Why are rising food costs any different from rising energy costs? First, it is clear that rising costs across the board will affect the consumer. That's just basic inflation. When it comes to rising food prices however, we are now talking about something people cannot overlook, or cut back their in their spending. In short, people need to eat. It's Not Just Rising Prices Beyond the fact that food prices are already rising at record rates, there is also a concern about the upcoming supply of food commodities. At first glance, one would imagine that the world's population will be okay when it comes to any type of renewable commodity. In other words, while there might be less corn due to the demand for ethanol, additional acres will be planted to meet this food void. While it might take a couple of years for supply to come to the market, it will eventually arrive. This argument, however, fails to take into account the finite amount of arable farm land and the negative impact of industrialization in developing economies. Already, growing cities in China and India are quickly turning farmland into cities and manufacturing plants. This naturally takes away from planted acres of food. In addition, certain types of commodities can only grow in climate-specific regions. For example, one can't grow sugar cane in the arid deserts of Arizona... Industrialization also impacts the amount of food people consume. Think of it from this perspective: industrialization breeds wealth and wealth breeds a more lavish (think meat, coffee, sweets, etc.) and substantive lifestyle. The net effect is more mouths are now vying for the same amount of food. The Global Food Crisis While western economies are not even close to experiencing a food crisis, other economies have already started to experience the impact of higher prices. Several news articles over the weekend highlighted the fact that the Food and Agriculture Organization (FAO), a UN agency, recently released a study that stated that rising food prices will continue for the next several years. The FAO also issued the following statement:
For commodity bulls, the above comment is fairly obvious. What is alarming, however, is that the FAO also warned that the food shortages and rising prices would most likely contribute to food riots in all parts of the globe. The president of the World Bank, Robert Zooellick, also stated that he believed 33 nations are currently at risk because of rising food prices. He went on to state that, "For countries where food comprises from half to three-quarters of consumption, there is no margin for survival" In fact, food riots - in various degrees - have already taken place in India, Mexico (tortilla strike), The Philippines, Haiti, among others. Here is a recent headline from Haiti:
The Negative Impact In the same ways that lower to middle income households are the first to notice economic downturn and inflationary pressures, underdeveloped economies are the first to experience the negative impact of rising food prices. A big reason has to do with the fact that many citizens of poor countries spend as much as 75% of their income on food. While the struggle of these economies might not have an immediate impact on the lives of westerners, the instability that will develop in these regions will clearly have an impact global productivity; ultimately, this will translate into impacts for even the economies of developed nations. Focusing on the specific regions that are currently in a "food crisis", it is evident that this environment has the potential to breed civil war and regional unrest in many parts of the globe. Already in Haiti, the number 2 politician was ousted. Why? Well, when people are starving the first to get blamed is the government in power. The second step is to get food by all means necessary. This ultimately means political crisis and chaos. On a broader level, countries (whether developed or developing) are now battling for the same type of food commodities. Whereas many nations (like China) used to be net exporters of food commodities (like corn), they have now become net importers. This means, they have to look elsewhere to import food commodities just to meet their internal demand. In short, the same way that history has many examples of battles and wars that have broken out over water, oil, and other natural resources, one can imagine that, if this crisis would continue - there will be battles that erupt over food. While I majored in Political Science at UC Berkeley, I do not make any claims that I am an expert in geopolitics. The above is simply my assessment on an oft-overlooked factor that may potentially affect economic stability over the next several years. More importantly, I bring this up to revisit the reason why investors should continue with their commodity investments, specifically their investments in gold. The Gold and Commodities Hedge The obvious way to combat rising food costs is to invest in the commodities that are increasing in price. If food prices are going to continue to rise, then it might make sense to invest in wheat, corn, soybeans, coffee, meats, sugar, cocoa, and other food commodities. Think of it as a hedge against rising food costs at the local supermarket. In fact, from a value-basis, I have made the claim in my book, Commodities For Every Portfolio: How You Can Profit From The Long-Term Commodity Boom, that food commodities are still the most undervalued. As China and India bring onboard hundreds of millions of "western-like" eaters, you can expect the price of food commodities to continue to head higher. The other viable way investors can protect themselves is by investing in the one monetary investment that has survived countless empires, wars, and governments. The answer of course, is gold. The way I see it, gold continues to make sense as an investment for several reasons. First, if inflationary pressures continue - gold prices will rise alongside and hedge your portfolio against decline in purchasing power. A clear example of this is to consider that gold has moved up from under $300/ounce to near $1,000 an ounce in this rising inflationary environment. While you might be paying more at the gas pump or supermarket, the profits you would have made would have offset the higher prices. The same could not be said if you held your money in cash over the last several years. The other reason why gold makes sense in this type of "food-crisis" environment is it becomes even more powerful and relevant in times of war, economic instability, and political instability. During these times, you can be assured that gold not only protects your wealth (in terms of purchasing power), but it also provides you a globally-recognized medium of exchange recognized that has withstood countless alternate forms of money. Consider the following excerpt from my book:
Thus, while I echo the sentiments of the FAO - that we are in the midst of a global food crisis - I also believe that there are ways to protect oneself from this type of food-led instability. This is a just another reason why I believe that gold is still a long-term buy and that it's unique investment qualities continue to make it an irreplaceable part of any portfolio. Emanuel Balarie Emanuel Balarie recently [Aug 2008] started a managed futures division [Balarie Capital] for Archer Financial Services, Inc. You can access their Commodity Trading Advisors database for performance information on hundreds of managers, or open up a commodity trading account. Mr Balarie is the Editor of Commodity News Center [free commodities newsletter sign up.] and the author of the highly-acclaimed book: Commodities For Every Portfolio: How To Profit From The Long-Term Commodity Boom. [Amazon] Mr. Balarie's industry experience ranges from commodity stocks to futures to alternative investments. He was one of the few market strategists to correctly predict this multi-year bull market in commodities, the decline in the US dollar, and the downturn in housing. |