The growing Food Crisis -what should I invest in

Around the world, rising food prices have made basic staples like rice and corn unaffordable for many people, pushing the worlds poor in places such as Africa and Asia to breaking point. It is incredible listening to the news these days to hear the headlines about Global Food Shortages and riots in countries like Haiti  and Mexico. We have become so used to the availability of food in our stores that it is sometimes easy to forget that for some people it is not just a case of heading to the nearest store to get food for their table.For some it is a matter of life and death to be able to get staple items such as wheat and rice.

It has become such a problem that some of the worlds governments have had to step in to try to protect the stock that they hold.Just yesterday India placed a ban on futures trading in several commodities, including soybean oil, chickpeas and potatoes.This was an attempt to preserve supplies and keep down the rampant inflation that is being caused by the increase in food prices.

In Asia the problem is just as acute with rice continuing to make new highs on world exchanges.The demand placed on the prices of rice due to the huge populations of China and India has seen it reach astronomical levels with the price more than doubling in the last year.

As well as the impact on populations desperate to feed themselves, we are seeing the impact on countries as farmers try to capitalise on the current high prices by seeking land wherever they can to grow the crops that are being demanded across the globe.

Until the end of the last century, soybeans were practically unknown in the Amazon basin. It was not until the grain terminal was built that soybean farmers came to the region from farther south. The land there was cheaper, the banks were offering low-interest loans and sales were guaranteed.

Villages, rubber plantations and grazing land for cattle were transformed into bean fields. The farmers cut enormous swathes into the rainforest, until environmentalists put a temporary stop to the unchecked rash of clearcutting. In Mato Grosso, the most important farming region, producers and environmental activists agreed on a two-year moratorium on the purchase of soybeans from the Amazon basin.

From the Río de la Plata to the Amazon, the Chinese are sucking the markets for soybeans dry. Large segments of the state of Mato Grosso are already covered with a green, pesticide-drenched monoculture. In the dry season between August and November, a cloud of smoke descends on Cuiabá, the capital of Mato Grosso. Despite a government ban, many farmers burn down sections of the rainforest to gain more farmland.

In Brazil we see huge swathes of land being used to grow Soybeans to satisfy the demand from China .Brazil is one of China's major trading partners. Long-term contracts between the two countries are intended to secure raw materials for China -- and, more recently, food products in particular.

This rising world power, with its population of 1.3 billion, must take steps to ensure that it too does not become a victim of the Food Crisis .However it has a competitor on the horizon.India home to 1.1 billion people, has caught up with China in terms of the power it wields as a massive market. Together, the two Asian nations must feed more than a third of the world's population. In times of exploding food prices, their sheer size alone makes the crisis even worse.

It isn't difficult to imagine what happens to prices when the world's two most populous countries buy up other food products in a similarly aggressive fashion. In more and more dangerously poor countries, wheat and meat have become an almost unaffordable luxury, while famine and hunger riots are only likely to get worse.

Over the next few years I can only see these challenges becoming worse and prices continuing to rise.

In order to invest in these commodities we need to look once again at our favoured ETFs, I have a position in DBA the Powershares Agriculture Fund.You could also look at the AIGG Grains ETF (AIGC) or the individual ETFS for Soybeans (SOYB) or Wheat (WEAT).

There is likely to be volatility in  these markets so I would not bethinking short term and I will place stop losses of around 20% on any positions that I have or buy in to. Over a 3-5 year period I think these holdings will do very well.

 

Best Wishes

 

Alan

 

Technorati Tags: Agricultural Commodities,Brazil Fund,China,Commodity Investing,DBA,Commodity ETF,Grains,Soybean,Wheat

The Case for $200 Oil

On Tuesday I wrote a post about the prediction from a Goldman Sachs Analyst that Crude Oil could hit $200 a barrel, $200 Crude Oil-surely not ? today I want to spend a bit more time looking at some of the reasons why that is not a crazy prediction and may even be on the low side.

The world’s known supply of crude oil has decreased by about 13% since 2001 It was estimated that the total world supply of Crude Oil was around 2 trillion barrels. We have already used around half that in about 150 years. As the planet’s supply of oil slips below one trillion barrels, and America’s pile of liabilities soars above 54 trillion dollars, crazy things might start to happen – crazy things like $200 oil.

But crude oil is not the only natural resource that is depleting and/or in short supply. And the U.S. dollar is not the only currency on fertility drugs. So a forward-looking investor could expect to see the prices of most major commodities rise in terms of most major currencies. But this simple conclusion is easy to miss when most of the relevant data points contain nine to twelve zeros.

Most of us have some vague idea that one trillion is the number that lies somewhere north of one billion ,beyond that, we have no clue. So how much is one trillion anyway?

• 1 trillion seconds = 31,546 years.
• 1 trillion dollar bills placed end to end would reach 96.9 million miles, far enough to reach the Sun.
• The average new car costs $28,400. $1 trillion would buy more than 35 million cars.
• The entire Federal budget is $2.8 trillion. A stack of that many dollar bills would circle the Earth more than 7 times.
• Gross Federal debt is more than $8.7 trillion, which would make a stack of dollar bills that would reach from the Earth to the Moon and back with some to spare.
• $8.7 trillion in one-dollar bills would cover an area larger than each U.S. state except for Alaska and Texas.”

 

But there is something else at play that doesn't help the situation-the weakening of the US dollar which helps pay off the US debt but it also has some undesirable results in the form of $1000 gold and $120 crude oil.

In other words, the skyrocketing oil price is as much a monetary phenomenon as a geophysical one. Paper currencies and debts proliferate rapidly. Natural resources do not. That’s why the prices of natural resources like crude oil MUST increase over time. And that’s why you should listen to that little voice inside your head when it tells you: “$200 crude oil may be crazy, but not nearly as crazy as the size of the US Deficit.”

We are running out of Natural Resources there is no doubt, it is unlikely that we will see them completely depleted in most of my readers lifetimes,however if the Dollar continues lower (or is allowed to weaken to cover up for poor fiscal policies) then it will accelerate the incessant rise of these Natural Resources.Since the vast majority of Natural Resources are paid for in Dollars it stand to reason that as the resources become scarcer and the dollar becomes worth less that suppliers will be demanding more of them for whatever it is they have to sell.

Best Wishes

 

Alan

 

Technorati Tags: $200 Oil,Commodities,US Dollar,Strong Dollar Policy,Oil

Gold Stocks -Time to Buy ?

I am sure we have all been following the rise of gold in the last 6 months or so peaking at just over $1000 per oz.Gold has now worked its way back down and is sitting today just shy of $870.There could be many reasons for this including the whispers about concerted Central Banks efforts to push the price down. One thing that stands out though is that even when Gold shot up to over $1000 the Gold Producers didn't follow along

America's largest gold producer, Newmont Mining (NEM), announced its first-quarter earnings towards the end of April. The company's revenue was 60% higher than the same quarter last year. Its average selling price for Gold was  $933 per ounce during the quarter, up 40% from the same time in 2007. Unbelievably Newmont's share price fell !!

This seems to be common across the industry currently... and I think it just might be fantastic opportunity to get into these stocks.Gold prices have doubled since April 2005 to today. However the share prices of major gold producers have hardly moved. Newmont Mining's shares rose only 6% over the same period.

Usually Gold Producers shares perform even better than Gold... meaning that if gold doubles in price, gold stocks often quadruple in price. It all comes down to the "leverage effect"...

If  a Gold Company can mine gold for $200 an ounce and sell that gold for $300 an ounce, it makes a profit of $100 an ounce. However, if the gold price jumps  to $500 an ounce, the profit per ounce increases from $100 to $300... Now let's say the price of gold really gets rocking, increasing $800 an ounce profits increase dramatically. You would therefore expect that the share price would respond in expectation of these profits .However, it hasn't quite worked out that way in the past few years. Due to the soaring costs of fuel, equipment, and upgrading facilities, the costs to mine gold have risen nearly as much as the gold itself!

On May 1, 2006, the AMEX Gold Bugs index (HUI), which tracks the big gold mining companies, closed at 380. Today it closed at 407.  The index has hardly moved during a period in which gold gained more than 30%. But I think the news from Newmont is the latest sign that gold miners are now really starting to rake in the cash. Newmont's quarterly profit rose 444% over the first quarter of 2007. The elevated gold price is finally kicking in. And the situation is the same with other big miners, including Barrick and Goldcorp... But like Newmont, these stocks are sitting dormant right now.

If you don't have exposure to gold stocks yet, now is the time to get some. I think we are still in a raging bull market for gold and that the current prices for the Gold stocks are way off where they should be if that is true.

 

 

Best Wishes

 

Alan

 

Technorati Tags: Barrick Gold,Gold Bugs Index,Goldcorp,Newmont Mining,Invest in Gold,Gold Stocks

$200 Crude Oil-surely not ?

  It wasn't that long ago that Goldman Sachs printed the "crazy prediction that Crude oil would reach over $100 a barrel .well they are at it again and who would dare doubt them this time. The story below from Bloomberg quotes the analyst behind that earlier prediction Arjun Murti as saying that within two years we could be seeing oil hitting between $150 and $200 a barrel. I wrote about Peak Oil and its impact in this article Has Oil Peaked ?

Based on this prediction it most definitely looks like there is a growing acceptance(unless you are a Politician or in Saudi Arabia) that we may actually be running out of oil. If this prediction comes true (like the last one did) then it really will have some ramifications for the world economy and possibly also stability.

 

 

May 6 (Bloomberg) -- Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.

The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record $120.93 today on speculation demand will rise during the peak U.S. summer driving season.

``The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,'' the Goldman analysts wrote in the report dated May 5.

A report yesterday showed U.S. service industries expanded in April, signaling higher energy use. The Institute for Supply Management said its index of non-manufacturing businesses, which make up almost 90 percent of the economy, grew for the first time since December. China is increasing refining capacity and boosting imports to meet rising demand for the Olympic Games.

U.S. gasoline demand typically climbs going into the summer season when Americans take to the highways for vacations. The peak-consumption period lasts from the Memorial Day weekend in late May to Labor Day in early September. Monthly fuel sales were the highest during August in five of the last six years, according to data from the Department of Energy.

China Consumption

China, the world's fastest-growing major economy, has more than doubled oil use since New York crude oil dropped to this decade's low of $16.70 a barrel on Nov. 19, 2001. Record prices have failed to stem rising consumption in developing nations, with demand led by China, India and the Middle East.

Price forecasts for spot U.S. benchmark West Texas Intermediate crude oil for 2008 to 2011 were revised higher by Goldman. The 2008 price estimate was raised to $108 a barrel from $96, the 2009 forecast to $110 from $105, and 2010 to 2011 estimates are projected at $120 from $110, the analysts said, citing slowing supply growth in Mexico and Russia, and low spare production capacity in OPEC.

Oil has also rallied amid a dispute between the U.S. and Iran regarding the Persian Gulf oil producer's plan to develop nuclear energy.

In Nigeria, Africa's biggest oil exporter, militants have attacked oil installations and kidnapped workers since the beginning of 2006, forcing Royal Dutch Shell Plc to halt output.

Venezuela Slump

In Venezuela, production has slumped to about 2.34 million barrels a day from almost 3 million barrels a day in 2002, according to Bloomberg's estimates, before President Hugo Chavez fired almost 20,000 workers who had closed the state oil company in an attempt to overthrow the government.

Iraq's oil production has yet to reach levels attained before the U.S.-led invasion of 2003 as the country struggles with sectarian fighting and attacks on its energy infrastructure.

Mexico's production has fallen below 3 million barrels a day since October as Petroleos Mexicanos, the state-owned oil company, failed to compensate for a 30 percent drop at Cantarell, its largest field, which accounts for 40 percent of output.

``There are supply constraints with many producers, especially from non-OPEC struggling to find new reserves and China and Middle East demand keeps growing,'' said Victor Shum, senior principal at energy consultant Purvin & Gertz Inc. in Singapore. ``The fundamentals are prompting investors to get into oil in a big way and all that points to higher prices.''

OPEC Capacity

Spare production capacity of the Organization of Petroleum Exporting Countries is low and the group's exports may fall because of ``lackluster'' supply growth and rising domestic consumption in member countries, the Goldman analysts said.

``Non-OPEC supply is struggling to grow, with notable declines being seen in Mexico and Russia showing signs of rolling over following an extended period of rapid growth,'' said the analysts from Goldman, the world's biggest securities firm by market value.

Prices are also poised to gain as major oil-exporting countries restrict foreign investments, limiting supply growth, while demand from developing countries, or ``non-OECD'' nations is rising on economic expansion and power shortages, prompting higher demand for gasoil and fuel oil, the Goldman analysts said.

Crude oil for June delivery was trading at $120.47 a barrel, up 50 cents, at 8:42 a.m. in London in after-hours trading on the New York Mercantile Exchange. Yesterday, futures closed 3.1 percent up at $119.97 a barrel, the highest closing price since trading began in 1983.

`Super-Spike'

``The core of our super-spike view has been that a lack of adequate supply growth coupled with price-insulated non-OECD demand growth'' is leading to higher prices, the analysts said. That could result in a ``sharp correction in oil demand,'' the Goldman analysts said.

Crude oil's increase above $100 a barrel was partly because of the dollar's decline against the euro, which boosted oil prices because it made commodities cheaper for buyers outside the U.S. and attracted investors as a hedge against inflation. Oil in New York touched $100 a barrel on Jan. 2.

The U.S. currency has declined 5.4 percent against the euro so far this year, and 11 percent last year.

Members of OPEC, which supplies about 40 percent of the world's oil, have said supplies are adequate and blamed speculators for pushing prices up to records. The producer group won't consider raising output before it meets in September as the market is well supplied, Qatari Oil Minister Abdullah al-Attiyah said on May 2.

There's a fundamental misperception that so-called speculators are driving prices to unjustified levels, the Goldman analysts said. ``Unfortunately, we do not think the energy crisis will be solved by finding and punishing the big bad speculator.''

Commodity investors, the Goldman analysts wrote, are ``helping to solve the energy crisis'' by speeding up the process for oil companies to spend more on energy projects and at the same time encourage efficiency.

Bloomberg.com: Worldwide

 

Technorati Tags: $200 Oil,$100 Oil,Peak Oil

Steel is getting more expensive so invest in Coal

As if most people are not struggling enough with the increases in Gas and Food prices which I wrote about here (Higher Food Prices) but the latest blow comes in the form of increases from the utility companies to the price of your electricity.

In a recent article the Associated Press writes "NEW YORK (AP) — "Consumers struggling with high gas prices, rising food costs and falling home values have something new to worry about: Sharply rising electricity rates due to a surge in coal prices over the past year."

As the article highlights the increase in the price of coal has meant that there have been hikes by the utility companies in the price of Electricity to the end user.One of the main reasons for the increase in coal prices is the demand from emerging countries(yes China again !!) for coal to fire their increased demand for Steel.

U.S. coal exports jumped 19.2 percent last year, according to the Energy Department, and are expected to rise another 15 percent this year.

"As more of the world develops and uses more energy, and supply tries to keep up with demand, we're going to have these pinch points," said Carol Pfeiffer, director of fuels for the U.S. for utility giant E.On AG.

Coking coal is the type of coal used in steelmaking. Demand from steelmakers is driving prices higher. In fact, many steelmakers, including the world's second-largest producer (Nippon Steel), recently agreed to pay triple what they previously paid for coking coal.

 

The chart above shows the price of coal over the last five and a half  years up an  450%.The above index doesn't contain any U.S. coal – it's 60% South African, 30% Colombian, and 10% Australian. But the market for coal, like oil, is global. When the price of foreign coal spikes, the U.S. exports more of its coal... resulting in higher U.S. prices.There are a limited number of ways to bet on the price of coal but you can do it mainly through coal stocks... but they are expensive right now.A few of the big names are Peabody (BTU), Consol (CNX), Massey (MEE), and Arch (ACI).

My favourite play would probably be buy a basket of coal producers with the Market Vectors Coal ETF (KOL).Currently prices are high and I would wait for a pullback maybe to around the $43 dollar level at support before considering a purchase. There is no doubt that high energy costs are here to stay whether the cost of our gas in the tank or the price of our electricity one way to mitigate the impact is by buying the companies an sectors that will benefit from us paying them more.

 

Best Wishes

 

Alan

Technorati Tags: Peabody Coal,Utility prices,Steel,Invest in Coal,Massey,Consol

Invest in Water it is the new Oil

I was working recently in Lisbon in Portugal and was talking to some of the locals  about the weather,being from Scotland I was looking forward to some of the Lisbon sunshine and warm temperatures.Unfortunately for the three days that I was there the weather was similar to my native Glasgow- wet and windy. The locals had commented that they had a lot of rain so far this year but not enough to make an impact on water prices.

Now being from Scotland as I mentioned it is strange to me that people pay for water usage-in Scotland we pay a local tax for sewerage and treatment facilities but not the amount of water that we use.What struck me as I thought about it was the wastage that there is in countries like Scotland compared to other countries in the world where water is a much scarcer  commodity. Loch Katrine which supplies most of Glasgow's water has a capacity of approx 64.6 million litres and is regularly topped up by the Scottish Weather.

Listening to my colleagues in Lisbon I realised that we could do a lot more such as not having the tap running constantly when brushing our teeth and not using running hot water to do dishes .These practices are fairy common in Scotland but in other parts of the world would be considered crazy and wasteful. We are in the privileged position in Scotland( but not all of the UK where some areas do suffer from droughts and water restrictions) of not having to worry about a plentiful supply of clean water.In the rest of the world it is a very different story. The world's immediate need for fresh water remains paramount.

Loch Katrine: Scotland

In China, for example, two out of every three major cities have less water than they need. Cities in northeast China have roughly six years left before they run completely dry.

A recent report on the water situation in China  says up to 300 million people are drinking contaminated water every day, and 190 million are suffering from water related illnesses each year. If air pollution is not controlled, it says, there will be 600,000 premature deaths in urban areas and 20m cases of respiratory illness a year within 15 years.One third of the length of all China's rivers are now "highly polluted" as are 75% of its major lakes and 25% of all its coastal waters. Nearly 30,000 children die from diarrhoea due to polluted water each year

Although China is the world's fourth largest economy, growing 10% a year and closing rapidly on the US, Japan and Germany, its environmental standards are often closer to those in some of the poorest countries in the world, says the report. More than 17,000 towns have no sewage works at all and the human waste from nearly one billion people is barely collected or treated. Nearly 70% of the rural population has no access to safe sanitation.

"A majority of the water flowing through China's urban areas is unsuitable for drinking or fishing. Some 300 million people drink contaminated water on a daily basis," says the report.

Although China has tried to improve its air quality, it has not invested enough to keep up with the flood of people to its cities, many of which have some of the worst pollution in the world. The burning of more than 2bn tonnes of the dirtiest coal a year is costing the economy the equivalent of 3-7% of GDP (£8-15bn a year), according to the report. While no specific figure is given for the overall cost of China's pollution, in 2004 it was thought to be in the region of £32bn.

Songhua River in Harbin China

The report estimates that 27% of the landmass of the country is now becoming desertified. Much of the country already suffers from water shortages, but the Chinese Academy of Sciences expects water demand to increase by nearly 50% in the next 40 years. Industry's share of this is expected to grow from 16% to 41%.

Low environmental standards are now making people wary of buying Chinese goods, said Lorents Lorentsen, OECD's environmental director in Beijing yesterday. "If you have a reputation for being a polluted country, then you have a bad trademark abroad. It's very hard to sell pharmaceuticals, to sell food and feed from a country that has a reputation for being polluted," he said.

A lot of westerners, however, take water for granted. We simply turn on the tap and it flows. But that's certainly not the case the world over. And from they way things are looking, that may not be the case here much longer. Lakes around the U.S. are running dry. In the West, we see this happening at Lake Mead. In the East, it's Lake Lanier.

While it may not be traded in Chicago, water is a commodity. When scarce, it's the one commodity even more valuable than oil or gold.So when Big Oil starts pouring money into water rights and alternative energy, we want to pay special attention. We tend to believe that water rights will be valued in this century much as oil rights were in the last.

Companies that invest in cleaning up water I believe will do well in the years to come as the world realises that it has to do more to ensure clean drinking water for all.Countries like China are a huge market for these companies.

One of my favourite stocks in this area is Veoila Environment (NYSE:VE)  they are a a world leader in environmental services and stand to do well out of the shortage of clean water in the future.

We can see from the chart that the trend is most definitely up but there has been a pullback since the beginning of the year which may present a good buying opportunity.

 

 

 

 

Best Wishes

 

Alan

 

Technorati Tags: Invest in Water,Ve,Veolia,Water Stocks