- The USDA dropped a bombshell last week - reporting that
U.S. wheat stockpiles may fall to the lowest level in 59 years! As disturbing
as that is, it is 100% bullish for grain prices, especially given soaring
worldwide demand for agricultural products.
- Global stockpiles have already fallen to 26-year lows.
World stocks of grain - that is, the food held in reserve for times of
emergency - are now sufficient for just over 50 days. This is already
lighting a fire under prices on your grocer's shelves. But if you think
you've seen high prices, just wait you ain't seen nothin' yet.
- Our wheat stockpiles are being whittled away because
of a combination of rapidly rising demand in emerging markets and terrible
harvests that have been compounded by the effects of global warming.
- What really shocks me - and should scare you - is that
stockpiles are dwindling even as yields are growing enormously!
- In World War II, American farmers harvested about 17
bushels of wheat per acre
- By 1972, that nearly doubled to 33.9 bushels per acre
- And this year, it should come in at 40.6 bushels per
- So even though the number of acres devoted to wheat is
down a third (28 million acres) from their peak in 1981, we should be
growing plenty of wheat.
- Corn yields are rising even more dramatically:
- In World War II, the corn yield was 39 bushels per acre
- ?We should be swimming in corn, but that's not the case!
- By 1970, it was 72.4 bushels per acre
- This year, the USDA expects 155.8 bushels per harvested
acre, and a bumper crop overall.
- So we're growing just as much acreage now as we did in
World War II! Why aren't we drowning in corn?
- More and more corn is being siphoned off to make ethanol.
About 20% of last year's U.S. corn crop went to make ethanol. Plus, annual
corn-based ethanol output in the U.S. is expected to double between 2006
- It's not just ethanol, either. The USDA says total corn
usage will jump 5.3% to 763.7 million tons.
- With prices for other feed supplies rising, farmers are
using more corn for their animals.
- Plus, a series of bad harvests around the world is making
U.S. corn a hot commodity.
- Let me expand on that last point. A bad wheat harvest
in the Ukraine, normally one of Europe's breadbaskets, was followed by
poor harvests in Russia, Egypt, and Australia.
- The USDA projects wheat supplies for the 2007-2008 crop
year will fall to 307 million bushels, down 55 million bushels from its
estimate last month, due to the fast pace of export shipments.
- Globally, the USDA expects wheat production to come in
at 600.5 million tons, down from 606.2 million last month.
- And the USDA just slashed its estimates of Australia's
harvest - again! - to 13.5 million tons from 21 million.
- Meanwhile, Asian Nations Continue to
- Demand More and More Food
- ?Chinese consumers have more money to buy up food than
- China, once a huge exporter of corn, is now becoming
a corn importer for the first time in a decade. The country's exports
will plunge to 1.5 million tons from 5.2 million this year!
- China's domestic grain supply fell short by 10 million
tons last year, and despite bumper crops, the problem should get worse
- The country's soybean imports are up 2.1% year over year
in September, and it will import almost 50% of the world's oilseeds within
a decade, becoming the world's largest importer, according to estimates
from the Organization for Economic Cooperation and Development.
- Want core facts on China that are bullish for grain prices?
Along with its plunging corn production
- An outbreak of disease led to the death of thousands
of pigs in China, pushing meat prices 49% higher in August.
- Drought has withered 27 million acres in the northern
and western sections of the country.
- Floods have drowned 21.5 million acres in southern China.
- A plague of brown rice-plant hoppers have damaged 1.2
million acres in Sichuan Province.
- Between 2000 and 2005, China lost over three million
acres of farmland each year to industrialization and other factors!
- The farmland situation is so bad that China is investing
nearly $4 billion to help develop 2.4 million acres in the Philippines.
The land will be used to grow corn, rice, and sorghum. The deal isn't
legal under the Philippines constitution, but money talks.
- And as rip-roaring as the demand from China is, there
is another hungry and growing nation of consumers that could eclipse it
- India's middle class is larger than the population of
the United States, but more than 300 million people in India still live
on less than the equivalent of $1 a day. That may be changing, though,
thanks to India's rip-roaring economic growth.
- Important: Despite its rising GDP, India's production
of food grains has remained stagnant for a decade!
- ?India's production of food grains has remained stagnant
for a decade!
- Adding to the pressure on farmland is the fact that India,
which has very little petroleum of its own, is becoming very interested
in biofuels. The Indian government says it wants to plant 35 million
acres of biofuel crops. That's land that won't be used to grow food, and
so more food will have to be imported.
- Also, as people in India and China get richer, they want
to eat more meat. That's 40% of the world's people giving up their traditional
vegetable-rich diets to adopt typical "American" diets that
contain more meat and dairy products. This puts much more pressure on
grain supplies, because it takes seven pounds of grain to produce one
pound of beef.
- Bottom line: Meat demand in China has quadrupled in 30
years, and in India, milk and egg products are becoming increasingly popular.
- It's the same story all over Asia - countries are lining
up for grains. Heck, U.S. exporters just reported sales of 242,000 metric
tonnes of corn to South Korea.
- All This Demand on America's Farms Is
- Hitting Consumers Right in their Breadbaskets!
- The price of food and beverages rose 4.2% in the 12 months
ended August, led by a 12% jump in dairy items, according to the consumer
price index. Nationwide, milk prices are up 18% since the start of the
year, while eggs cost 35% more than they did a year ago.
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- Some wholesalers have tried to disguise the pain for
consumers. In June, General Mills shrunk its cereal package sizes while
keeping prices the same. Others are simply passing the pain along. Kellogg
boosted prices 5% in April based on weight, and Starbucks is charging
more for lattes and other drinks to cover its milk costs.
- Food is really a sellers' market - you can decide to
do without a lot of things, but you need food.
- The USDA estimates overall food price inflation will
run 3% to 4% in 2008. I think they should wake up and smell the coffee
- it wouldn't surprise me to see food inflation DOUBLE the USDA's estimates!
- How high can prices go? Today, about 8.5% of the American
household budget goes to food at home. That's way down from an average
of 19% of the total budget in 1960.
- Historically, food takes up a much larger part of our
budget - people in developing countries devote up to a THIRD of their
budgets to food. And one of the truths of investing is that commodities
usually revert to the historical mean.
- The U.S. dollar's decline has only made things more complicated.
Cheaper greenbacks make U.S. agricultural products - wheat, soybeans,
corn - more affordable for foreigners. Just look at this chart I made
with data from the USDA
- ?You can see that in August, U.S. agricultural exports
jumped to $7.5 billion - nearly 40% over the year-earlier period.
- I've already told you how badly China and India need
our grains. Well, Egypt also imports 50% of its wheat and Japan imports
- Countries are lining up to buy U.S.-grown grain they
consider "cheap." And that could really kick food inflation
- This problem is only going to get worse over time. Even
as desertification brought on by global warming takes its toll, the global
population is rising by 87 million people a year. There will be more people
and they'll want to eat more grain and more of that will be imported
from the U.S.
- About 15% of the world's present food supply, on which
160 million people depend, is being grown with water drawn from rapidly
depleting underground sources or from rivers that are drying up.
- What else are all these new mouths going to eat? Fish?
Sorry, but recent reports in Science and Nature suggest that one-third
of ocean fisheries are in collapse, two-thirds will be in collapse by
2025, and all major ocean fisheries may be virtually gone forty years