Tuesday, April 29, 2008

The Food Shortage

They're Blaming Hedge Funds, but What's Really Behind this Global Food Shortage?
At last count, the United Nations has cited food riots and shortages in 33 different countries. Supplies are growing scarce for everything from wheat to rice. World inventories are sitting at 30-year lows. And governments are getting more aggressive with speculators and the exchanges that trade coarse grains. In Washington last week, lawmakers grilled the Commodity Futures Trading Commission (CFTC). They're trying to understand why rice and other grain prices continue to trade at record highs. One lobby group, the American Bakers Association, blames hedge funds, index funds and other speculators for the growing supply shortages. For the record, grain prices have indeed more than tripled off their lows in 2006. But if you adjust for inflation, grain prices remain 60% to 150% below their highs. Still, that is no comfort for countries and consumers struggling to gain access to dwindling supplies. Many emerging market nations, including the Philippines and Haiti, now impose rice rations. Other countries have begun hoarding rice and other grains to counter bulging price increases this year.The argument among the agricultural bears is that grain prices are too hot right now. These sky-high grain prices are widely publicized in the popular press and eventually will draw some sort of government response to control prices. That might be true, if only temporarily. High oil and gas prices have already made headlines for the last several years, yet prices remain at record highs amid a shortage of about two million barrels of crude daily. But when it comes to food, investors should probably take notice because voters have to eat. They don't necessarily have to drive.I have been long and strong the grains in my Commodity Trend Alert (CTA) service since late 2006 and I am still very bullish. We bought DBA over 15 months ago and I'm still bullish on this multi-grain and sugar index fund. Hedge funds, index funds and other traders certainly play a part driving prices higher. But that's not the bullish case for the grains.The facts are that global supplies are shrinking. The rapid industrialization of the emerging markets in Asia this decade has resulted in more than two billion consumers vying for healthier diets, including rice, corn, soybeans and wheat. Combined with chronic shortages caused by plunging harvests in several grain belts since 2006 - namely Argentina, Australia and the Ukraine - prices have skyrocketed. Also, the biofuel boom has diverted food supplies to alternative energy sources like ethanol and biodiesel. I do not expect that trend to change, either.Global governments will try to coerce prices lower to pander for their electorates. I expect the grains to correct this summer - wheat prices have already plunged from their highs. But longer term, I have no doubt that prices are heading much higher as more people join the food chain in Asia and other emerging markets. Quite simply, we are outgrowing the Earth's resources. Unfortunately, food is becoming scarce and nothing will change that for the foreseeable future.

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