marketskeptics - 2009-2010 food crisis.doc

8/13/2019 Marketskeptics - 2009-2010 Food Crisis.doc

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Link original: http://www.marketskeptics.com/2009/11/200910-food-crisis.html

Tuesday !o"em#er $ 2009

2009/10 Food Crisis

by Eric deCarbonnel

%elow is another section from the ma&or article. This section is not completely finished #ut is fairly close 'needs another 2 or $ hours of work(.

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1) Chinese demand driving commodity prices

) ha"e #een predicting hyperinflation would start in *hina leading to the dollar+scollapse . !ow it is happening. *hinese efforts to #oost domestic consumption whilesupporting e,ports with its dollar peg and adopting loose monetary policy are creatingenormous demand for raw materials. s a result *hina is sucking up the world+s supplyof raw goods putting massi"e upwards pressure on commodity prices especiallysoy#eans.

The dollar peg fuels demand from Chinese export sector

ince the dollar eptem#er last year the yuan has #een ho"ering around . $ as shownin the chart #elow.

s the *hinese yuan has #een pretty much pegged to the dollar and the dollar has #een uickly losing "alue the yuan has depreciated .9 percent since 3e#ruary this yeargreatly helping *hina4s e,port sector. eptem#er+s month-on-month import and e,port

num#ers showed the se"enth consecuti"e month of positi"e growth since 5arch. 6hile*hina+s e,ports ha"e dropped significantly its market share has not and its trade

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*hina4s money supply has e,ploded since *hina re-pegged. %ei&ing has scrappedlending uotas adopted a loose monetary policy and kept interest rates at four-yearlows to #olster li uidity and promote growth. The policy has o#"iously worked:*hinese #anks ha"e e,tended a massi"e . trillion yuan ' 1.2 trillion( in new loansthis year. To put this lending in conte,t consider the following:

( . trillion yuan far e,ceeding the *hina4s initial full-year target of ; trillion yuan.%( !ew #ank lending in the first nine months of this year is up 2;0 percent from thesame period last year.*( *hina has lent out more money in the first four months of this year than in the wholeof 200 .

The effects of all this o"ere,tension of credit can #e seen in the graph of *hinese moneysupply growth #elow.

*hina4s increasing supply of aising su#sidies for auto replacements from 1 #illion yuan to ; #illion yuan.

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2( llocating 2 #illion yuan to encourage home appliance upgrades.$( llowing non-deposit-taking institutions to offer consumer loans to *hinese citi7ens?( lashing the minimum financial re uirement for commercial property in"estmentsfor the first time in 1$ years 'from $; percent to 20 percent(.;( @armarking #illion yuan ' million dollars( for low-rent house #uilding pro&ects

across the country.( )ssuing new rules to allow insurers to in"est in corporate #onds without #ank

guarantees and allow smaller insurers to trade stocks directly.( *reating its own A! B CA 'the *hi!e,t(.( @ncouraging the creation of new commodity deri"ati"es 'trading in steel futures rice

futures and poly"inyl chloride 'DE*( futures ha"e #een launched this year(.9( Dromoting hanghai as a glo#al financial center and a ma&or gold trading market.10( upporting ele"en national research programs with at least 2. #illion yuan.11( Cuickly e,panding its social security net and allocating 2 #illion yuan ' 10

#illion a 29.? percent increase from prior year( for education medical and health caresocial security employment low-income housing and culture.12( Be"eloping its own credit rating agencies and so"ereign credit rating standards1$( Fpening its capital markets and currency to the world .

*hina4s efforts are working. Bomestic consumption has #ecome the dri"ing force of thenation+s growth. *hina has already surpassed the nited tates last Ganuary to #ecomethe world+s largest auto market #ased on monthly sales. *hinese we# shopping isreaching record highs . dditionally with a significant part of *hina+s population at theage of peak consumer spending domestic consumption holds the potential for a periodof e,tremely rapid growth o"er the ne,t decade.

*hina+s efforts to #oost consumption 'economic li#eration massi"e go"ernmentspending etc...( are hugely inflationary creating tremendous hunger for raw materials.

Chinese demand driving commodity prices

trong *hinese demand for the raw material is dri"ing up commodity prices across the #oard . *hina is importing record uantities of e"erything from wood to sugar. The priceof copper used for autos and construction had its #iggest si,-month gain in 22 years as*hinese #uyers #oost imports to records to replenish stockpiles. *hinese demand hasalso #een a key dri"er of soy#eans prices this year. 3irst uarter imports alone wereup an incredi#le $1H from the same period in 200 . The *hinese go"ernment has #een

purchasing soy#eans to protect the interests of domestic peasants and encourage them tokeep planting. This is forcing *hina to import more soy#eans from merica.

@"entually *hinese demand will dri"e up commodity prices to an e,tent which forces itto drop the dollar to contain domestic inflation. Gudging #y its incredi#le le"els ofcommodity imports this e"ent will happen in the "ery near future.

2) ,ust-in-time inventory system facing collapse

ince 19 0 a com#ination of o"ersupply ultra high interest rates and new #usiness practices uickly turned the idea of owning e,tra in"entory into financial heresy of the

highest order leading to &ust-in-time in"entory management. Gust-in-time in"entorymanagement means that e"erything is deli"ered &ust as it is needed or nearly so which

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lowers in"entory le"els and frees up cash for other purposes. The last two decades oflow inflation ha"e lulled purchasing managers into #elie"ing that needed materialswould #e cheaper tomorrow than today leading to the widespread use of &ust in timesystems. )n almost e"ery corner of the glo#e and in almost e"ery organi7ation spartanin"entories ha"e #ecome an essential cost-cutting measure to remain competiti"e.

sers of commodities and manufactured goods today ha"e #usiness models that rely onweekly or e"en daily calculations to determine their in"entory needs. 3or e,ample6al-5art tries to keep much of its in"entory on the road in trucks to maintain low costsand fle,i#ility.

nfortunately there is a pro#lem: &ust-in-time in"entory is COMPLETELY DEPENDENT ON A STABLE DOLLAR. )n a high inflation en"ironment e"ery act ofrestocking in"entory #ecomes a painful e,perience destroying the &ust in timemanagement4s cost sa"ing &ustifications. )f the dollar goes into a freefall the entireglo#al &ust-in-time system will collapse .

.) Catastrophic fall in glo&al food production

IIIII*atastrophic 3all in 2009 Jlo#al 3ood DroductionIIIII

%ater shortages

Ff all the en"ironmental trends that are shrinking the world+s food supplies the mostimmediate is water shortages.

Kunfinished

Longer term the water situation is e"en scarier. Two #illion people face acute watershortage this century as 8imalayan glaciers melt. The Ti#etan plateau 'The glaciers ofthe 8imalayas( is the faucet for much of sia+s drinking water and the melting glaciersof the 8imalayas feed the ma&or ri"ers of *hina )ndia Dakistan !epal %hutan%angladesh 5yanmar Thailand Eietnam Laos and *am#odia. The shrinking8imalayan glaciers which could melt entirely #y 20$; will turn *hinese and )ndian

ri"ers like the Janga and the


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Besertification refers the spread of e,isting deserts and the creation of new ones.desertification isn+t the result of glo#al warming 'thought it is possi#le glo#al warmingis making it worse(. )t is the result of reckless and e,tensi"e o"eruse of drylands aroundthe world.

19$0+s Bust %owl is a perfect e,ample of desertification. 6hen the nited tatesentered an economic recession in the 1920s farmers in 6estern states tried to raise

profits #y plowing and planting more acreage with new mechani7ed farming methods.6ithin a decade a massi"e drought hit the entire country. trong winds swept acrossthe Jreat Dlains stirring up loose topsoil that had #een displaced #y o"erplowing ando"ergra7ing of cattle. The results were do7ens of epic dust storms that swallowed wholecities in #lack clouds and turned day into night.

Today the ! is warning that parts of the world could #ecome +economic deserts+un"ia#le for people or agriculture and may ha"e to #e a#andoned. @"en in richcountries people are hitting the limits of what can #e done with money andinfrastructure #ecause there simply isn+t enough water anymore. Bisaster is feared asdesertification spreads .

1( )n *hina+s northwest desertification has escalated from 1 ; 0 s km annually in the19 0s to 2 100-2 ?00 s km in the 1990s. Bust storms from the Jo#i desert regularly

#low through %ei&ing and the go"ernment+s response is getting more desperate: *hineseauthorities ha"e #egun telling hundreds of "illagers that farming will cease and that theywill ha"e to gi"e up their animals.

2( trong desertification processes ha"e #een de"eloping in Latin merica with se"eralcountries of the region as well as significant sectors within some countries in a state ofwater stress. This situation is pro&ected to worsen significantly o"er the medium term.

$( Becades of war and mismanagement compounded #y two years of drought arewreaking ha"oc on )ra +s ecosystem drying up ri"er#eds and marshes turning ara#leland into desert killing trees and plants and generally transforming what was once theregion+s most fertile area into a wasteland.

?( The ahara desert is encroaching into the !igerian landmass at the speed of 00meters per annum there#y threatening the country+s food #ase. 5ost "illages in the

northern states ha"e already #een o"ertaken #y sand dunes.;( 90 percent of the water in Lake *had which is considered to #e the si,th largest inthe world and is #ordered #y four countries '*had !iger !igeria and the *ameroon(has #een lost to the ad"erse effects of climate change. Lake *had ser"ed as source offresh water to the more than $0 million people li"ing around its #ank.

( The ahara Besert is crossing the 5editerranean and the li"elihoods of .; million people li"ing along its shores could #e at risk.

( ? million acres of fertile land along the 5editerranean is turning to desert gi"ing

rise to the term ahelisation 'ie: #ecoming part of the ahara desert(.
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a#out 1.1 million acres in *anada. o e"en discounting drought related losses the *anada and other food producing nations are facing lower agricultural output in 2009.

3alling 5ilk Drices Mill *ows

ac' of credit

lack of credit for farmers cur#ed their a#ility to #uy seeds and fertili7ers in 200 /2009and will limit production around the world. The effects of droughts worldwide will also

#e amplified #y the smaller amount of seeds and fertili7ers used to grow crops.

prices may rise #ecause a lack of credit for farmers cur#ed their a#ility to #uy seeds andfertili7ers and may limit production

dverse eather conditions

Kunfinished

5iddle @ast and *entral sia suffering worst droughts in recent history

Te,as Brought *onditions %ecoming 8istoricThe Te,as drought continues

IIIIITorrential >ains Be"astate )ndia+s 6heat *ropIIIII

an A !-3>@ M)!-%@L)@E %L@A 8ar"est

IIIII>ains wamp *rops nd 6ash way ny 8ope Ff Becent 8ar"estIIIII

+isaster in the ma'ing the 2009/10 food crisis

)f you are keeping track so far we ha"e:

1( )ncreased demand2( Becreased supply$( !o #uffer in"entory

ounds #ad like a pretty #ad situation rightN 6ell it gets worse. To Akeep e"eryonecalmA and Apre"ent panicsA go"ernments are lying a#out the looming food crisis .

3 some experts and governments, in !"" #ogni$an#e o t%e a#ts, &ant !snot to #reate pani# and paint a pi#t!re o par#%ed #rops and a "ooming

ood #risis. T%is, t%e' sa', &o!"d p!s% !p ood pri#es !nnat!ra""', "ead to%oarding and !"timate"' res!"t in a sit!ation &%ere man' more mi""ions

a#ross t%e &or"d &o!"d go %!ngr'. nd hether it is the developingorld or the developed( it is those at the &ottom of the pyramid ho are
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the most affected in such scenarios

T%is "eads to a #on !sing divide (et&een rea"it' and government prono!n#ements, or even (et&een t%e perspe#tives o governmentdepartments.

The food crisis should have started ast ,une

t the #eginning of last Gune concerns were mounting o"er the sharp rise in food costs .3aced with the terri#le outlook for 2009 glo#al wheat output agricultural markets weregetting fairly ner"ous a#out the tightness in food stockpiles. *hina was chewing through

old-crop soy#eans with month after the month of record e,ports. 8edge funds andother #ig institutional in"estors had #egun to pour money into the agricultural markethelping to dri"e commodities prices higher against the weakening dollar.

gainst this #ackdrop the B #egan a campaign to suppress rallying food staples.To start off the B magically disco"ered an e,tra 11$ million #ushels of soy#eansupply within its Oresidual useP accounting column to ensure soy#ean end stocks wouldnot slide #elow 100 million #ushels. @"en worse the B #egan releasing productionestimates which were pure madness. 3or e,ample despite a )*+ drop in p"anteda#reage The B left their production estimate for rgentina+s wheat cropunchanged at 11 55T a st!nning + %ig%er t%an "ast season-s . MMT 'The%uenos ires Jrain @,change rgentine was predicting a 55T wheat crop at thetime(. The B also announced that wheat ending stocks would increase in 2009/10and that world wheat stock to use ratios would clim# to a comforta#le 2 .;pct. Themedia #ecame filled with #earish stories #ased on the B 4s #earish propaganda: the

will not run out of #eans prices will ration demand *hina ha"e more than enoughand will go away etc. >umors of cancelled soy#ean e,ports sales were widespread'these cancellation ne"er happened(. To culminate e"erything on Gune $0 th the Bshocked the trade with estimates showing record soy#ean and near record corn

plantings . omehow the B found a million more wheat acres one and a halfmillion more soy#ean acres !B two million more corn acres than they had in 5archQ

Ji"en the stark contrast #etween B num#ers and reality there is no way that theflawed data released last Gune was an innocent mistake. The B deli#erately misleadin"estors a#out the true state of the world+s food supplies .

The ugust 2009 !oy&ean Crisis

6hile the B might ha"e successfully changed perceptions a#out the food supply itcould not alter the reality. 6ith %ra7ilian soy#ean supplies on the open market ha"ingall #ut ran out the was left as the only shop in town resulting in monstrous soy#eansales to *hina. %y the end of ugust grain mo"ement in the came to a "irtualstandstill with farmers are mostly sold out of soy#eans . Those few soy#ean end-users'ie: feedmakers and poultry producers( were caught short and were forced to pay pricesas high as they paid at the "ery height of the #ull market a year ago in 200 .

!oy&ean shortage causes intense &ac' ardation

The struggle to secure uick-deli"ery soy#eans in the cash markets sent soy#ean

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futures into intense #ackwardation '#ackwardation is when cash prices are higher thanfuture prices(. Besperate 5idwest crushers were #idding up to 2. 2 a #ushel o"er*%FT eptem#er futures contracts to ac uire scarce soy#ean supplies. ome processorsin the heart of the 5idwest soy #elt grew so desperate for soy#eans to crush that they

paid to transport some of the early har"est from the 5ississippi >i"er Belta northward

to )llinois.

The chart #elow shows the #ackwardation of soy#ean futures on ugust 2 . !otice thehuge price gap #etween promises to eptem#er and !o"em#er contracts. !otice thee"en larger gap #etween cash prices and eptem#er futures.

The threat posed &y soy&ean &ac' ardation

3utures markets are dependent on confidence in the same way as #anks. 3utures marketsoffer promises to deli"er commodities on specific dates 'commodity )F s( and %ankoffer deposits which promises to deli"er cash on demand 'dollar )F s(. 3uturesmarkets and #anks issue far more )F s then they ha"e cash and commodities on handto make good on these promises. 3or #oth futures markets and #anks a loss of faith inthe a#ility to make good on these )F s is fatal. 8ad the #ackwardation in soy#eanscontinued into eptem#er a panic could ha"e uickly de"eloped spreading otheragricultural commodities.

4e ave of !+ propaganda

The intense #ackwardation in soy#eans did not last. )n the first week of eptem#er the launched a new attack on soy#ean markets which included:

1( 5ore insane production estimates predicting a record #reaking soy#ean crop.

5stimates for ! soy&ean production

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http://4.bp.blogspot.com/_EZMGVwURo3M/SvAPZ_cSfoI/AAAAAAAAB7A/gzZrEyyJtDs/s1600-h/Soybean+Backwardation+on+August+28-767058.PNG


11/15

ug-11 B $.199#illion #ushels!ep-1 FC!tone . 266 #illion #ushels!ep-. 7nforma . .82 #illion #ushels!ep- llendale . .09 #illion #ushels

2( >umors that *hina was planning on unilaterally terminating FT* soy#ean deri"ati"econtracts 'ie: more rumors a#out *hina cancelling outstanding e,port sales(.

$( >umors a#out a huge supply of old crop soy#eans that were going to #e dumped onthe market to make way for the OrecordP 2009 corp.

?( The sale of 10?.; million #ushels of soy#ean futures to reinforce the idea thatsoy#ean prices were headed for collapse.

;( 8elpful news stories warning farmers a#out a imminent price collapse and suggestingthey sell #efore its too late.

%elow is a good e,ample of what this B propaganda looked like :

:;7C5 C< :!5


12/15

is no #umper har"est #ail the world out. sian demand for soy#eans is surging .The reality of food shortages in 2009/10 remains unchanged.

Fn the other hand B propaganda has succeeded in making the situation much

worse.

1) %aiting for ne crop has created a lot of pent up demand

5any processors e,tended their plant downtime maintenance in Guly due to #othweaker profit margins and the unwillingness to out#id e,porters for spot soy#eans.

s a result soy#ean consumption has plunged in the last three months as seen inthe graph of monthly soy#ean crush data #elow.

ll the soy#ean crushers who shutdown production waiting for the new crop will #ecrushing far more soy#eans than normal to make up for lost time which means there isa lot of pent up demand.

n insane amount of outstanding export sales for ! soy&eans

%elow is a graph of total outstanding e,port sales for soy#eans going #ack ten years'data straight from the B 4s we#site (. s of Fcto#er 1 the has alreadycommitted to e,porting 19 1 2 5etric Tons ' 2? million #ushels( of soy#ean fromthe 2009 crop. The nited tates has ne"er had a #acklog of e,ports sales this si7e. )fthe B 4s record har"est ne"er comes in things are going to get ugly rea" fastQ

12
http://www.marketskeptics.com/2009/10/surging-asian-demand-for-us-soybeans.htmlhttp://www.marketskeptics.com/2009/08/monstrous-soybean-sales-to-china.htmlhttp://www.marketskeptics.com/2009/08/monstrous-soybean-sales-to-china.htmlhttp://www.fas.usda.gov/export-sales/esrd1.htmlhttp://2.bp.blogspot.com/_EZMGVwURo3M/SvAPY_dwBcI/AAAAAAAAB6o/NpnM4i0FXwQ/s1600-h/Monthly+US+Soybean+Crush+Data+%282006-2009%29-763255.PNGhttp://www.marketskeptics.com/2009/10/surging-asian-demand-for-us-soybeans.htmlhttp://www.marketskeptics.com/2009/08/monstrous-soybean-sales-to-china.htmlhttp://www.fas.usda.gov/export-sales/esrd1.html


13/15

@"eryone is waiting for the record har"est that doesn+t e,istQ

2) o prices are causing to overconsumption and underproduction

!ew crop of soy#eans is already #eing rapidly consumed: early har"est from the5ississippi >i"er Belta is #eing shipped to desperate 5idwest crushers.

@"en go"ernments are #eing duped #y the B production estimates with graine,ports pouring out of desperate kraine . Bespite is 20H fall in grain production cash-star"ed ukraine continues to e,port grain ahead of e"en last season+s record pace.%ecause they are unaware of the food shortage facing the world distressed sellers like

kraine are mismanaging their grain supplies and will ha"e little grain a"aila#le fore,port during the second half of 2009/10 'when glo#al food shortage will #e at itsworse(.

5eanwhile farmers are allowing millions of #ushels to rot in the rain #ecause it is tooe,pensi"e to har"est and dry them at current prices. cres of spring wheat are goingunplanted #ecause

.) The !+ s false estimates ill lead to panic

!+ estimates have 4< C;5+7*7 7T@

%elow are the latest B estimates for soy#ean production imports and e,ports . )highlighted in red the num#ers that are worth noticing.

Thousand =etric Tons

Bate *reated 10/9/2009 :??:; 5

1$
http://www.marketskeptics.com/2009/10/grain-exports-pouring-out-of-desperate.htmlhttp://www.marketskeptics.com/2009/09/no-chance-of-bumper-us-harvest.htmlhttp://www.fas.usda.gov/psdonline/psdReport.aspx?hidReportRetrievalName=Table+07%3A+Soybeans%3A+World+Supply+and+Distribution&hidReportRetrievalID=706&hidReportRetrievalTemplateID=8http://1.bp.blogspot.com/_EZMGVwURo3M/SvAPZIsSZ5I/AAAAAAAAB6w/_Fv8x3nX6Ts/s1600-h/Total+Outstanding+Soybean+Export+Salesv4-764865.PNGhttp://www.marketskeptics.com/2009/10/grain-exports-pouring-out-of-desperate.htmlhttp://www.marketskeptics.com/2009/09/no-chance-of-bumper-us-harvest.htmlhttp://www.fas.usda.gov/psdonline/psdReport.aspx?hidReportRetrievalName=Table+07%3A+Soybeans%3A+World+Supply+and+Distribution&hidReportRetrievalID=706&hidReportRetrievalTemplateID=8


14/15

2006/07 2007/08 2008/09 2009/10ProductionUnited States 87,001 72,859 80,749 88,454Brazil 59,000 61,000 57,000 62,000Argentina 48,800 46,200 32,000 52,500China 15,967 14,000 15,500 14,500India 7,690 9,470 9,100 9,000Parag a! 5,856 6,900 3,900 6,700Canada 3,460 2,700 3,300 3,500"ther 9,337 8,004 9,090 9,413

#$tal 237,111 221,133 210,639 246,067

ImportsChina 28,726 37,816 40,700 39,500

%U&27 15,291 15,123 13,000 12,400'a(an 4,094 4,014 3,450 3,950)e*i+$ 3,844 3,614 3,100 3,535#ai an 2,436 2,149 1,830 2,250#hailand 1,532 1,753 1,500 1,705Ind$nesia 1,309 1,147 1,200 1,600# r-e! 1,268 1,277 950 1,280%g!(t 1,328 1,061 1,200 1,230.$rea, S$ th 1,231 1,232 1,130 1,200"ther 8,003 8,976 7,175 7,494

#$tal 69,062 78,162 75,235 76,144

ExportsUnited States 30,386 31,538 34,836 35,516Brazil 23,485 25,364 29,986 23,650Argentina 9,559 13,837 5,885 9,700Parag a! 4,361 5,400 2,400 4,900Canada 1,683 1,753 1,975 2,000"ther 1,836 1,627 1,845 2,085

#$tal 71,310 79,519 76,927 77,851

ome of the glaring pro#lems with these estimates for 2009/10:

1( The !+ expects the nited !tates to harvest a record &rea'ing AA B ==T=illion =etric Tons) 6ith soy#ean fields #uried in snow across the 5idwest this

seems highly unlikely.

2( Bespite predicting that *hinese soy#ean production will drop #y 1 55T in 2009/10

'from 1;.; 55T to 1?.; 55T( the B is also predicting *hina will import 1.255T less 'from ?0. 55T to $9.; 55T(. That makes a#solutely no senseQ )f *hinese

1?


15/15

demand for soy#ean is soaring 'see a#o"e( and *hinese production is down for hatpossi&le reason ould the !+ predict Chinas soy&ean imports to &e less in2009/10D

$( )ndia is suffering from the worst drought in o"er forty year yet the !+ is

expecting 7ndian soy&ean production to fall only 1E in 2009/10$

?( The !+ is predicting a 2E increase in soy&ean exports for 2009/10$ )n light ofsurging sian demand for soy#eans and the huge amount of e,port sales outstanding

predicting that the will e,port only $;.; 55T of soy#eans is simply ridiculous.

The B +s num#ers don+t add up. The shortages of wheat soy#ean sugar etc willsoon reach the point where no a#out of spin can hide them. s the world will reali7ethere are a few a few months food supply missing faith in the B will crum#le and

panic will start. Drices of "irtually all agricultural commodities will dou#le or triple'sending the dollar into a freefall(.

The orld is heading to ards a complete disaster

s a result of go"ernments co"ering up a#out the looming food shortage o"er the lastfew months there has #een no stockpiling 'which would ha"e help ease the crisis(.6orse with the B predicting record crops for e"erything under the sun end userswere con"inced to shift demand from 200 /09 'when world had a #umper har"est( to2009/10 'which saw a catastrophic fall in production(.

Dosted #y @ric de*ar#onnel at $:0 5 Belicious email Drint this post

Labels : Food_Crisis

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