Monday, March 10, 2008

sufficient grain supply?

an interesting article in the NYT about global grain supply caught my attention because of how superficial it was. my understanding is that virtually all grain prices globally are going up partially because China and India rising out of poverty is increasing demand while supply isn't keeping pace.

Also, some countries (ahem, EU, USA, no point trying to hide in the back) are diverting increasing amounts of food crop towards fueling their commutes through frankly idiotic food-to-biofuel processes. (is the green feeling of driving with biodiesel or bioethanol really worth making food too expensive for the world's poor?)

Those factors surely account for some part of the problem, but there is a much more important factor that has nothing to do with supply or demand and everything to do with speculation which was completely ignored by the article.

Commodities are considered the one safe place to invest money right now. Investors are fearful of the Stock Market because of the financial meltdown for the last few months. They are fearful of or uninterested in the Bond and Treasury Markets because the chances of corporate failures are too high and the yields from US treasuries are too low (some of them may actually be negative, depending on how inflation goes). They are fearful of the Mortgage Market because it is falling apart and nobody knows how much any of it is worth.

So if you're gonna avoid stocks, bonds, treasuries, and mortgage backed securities, what is left to put money in? Commodities. This is why gold, oil, silver, platinum, rice, corn, wheat, and virtually every other commodity are going through the roof. Many of them have more than doubled since last summer when the credit problems started to surface.

I have no doubt that the demand for commodities is increasing faster than supply, but how much has the demand increased in the last 8 months? enough to warrant a doubling of prices? i kind of doubt it.

so, when thinking about the sad situation of the Nigerian man who had to skip the butter so that he could afford to buy a single slice of bread for his breakfast because of rising prices mentioned in the article and when thinking about people having to cut back to be able to afford the gas for their commute, remember who caused the situation.

it has a little to do with China and India, a little to do with misguided (at best, "shortsighted and corrupt" is more likely the appropriate description) biofuel policy, and a lot to do with speculative investors.

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