As a general rule, the most successful man in life is the man who has the best information
Socio-economic turmoil - lawlessness, poverty, lack of adequate medical facilities and attention, low to no employment, low wages, disease, no clean drinking water or water for irrigation and shortages of food or unaffordable food can all cause socio-economic pressure to build in many countries that were once stable environments for investment.
In 2007 and 2008 roughly 40 food riots occurred – two of the more publicized examples were when people took to the streets after rising corn prices made tortillas very expensive in Mexico and skyrocketing food prices in Haiti led to the overthrow of that country’s Prime Minister.
The U.N. Food and Agriculture Organization (FAO) reported a five per cent increase in the international price of food over July and August 2010.
"I think everyone is wondering if we are going to have a repeat of 2008 when there were food riots around the world." Johanna Nesseth Tuttle, director, Global Food Security Project
The world’s developing economies mostly rely on food imports to sustain themselves. On average their citizens spend a much larger percentage of their wages on food than do their counterparts in developed nations. Some published estimates are as high as 50 to 60 percent of income going towards food.
Our agriculture system is concentrated on producing a very few staple crops - there is a very serious lack of crop diversity. Corn, wheat, rice and soy are the main staples and production is oftentimes half a world away from where the majority of the crop would be consumed. Taken together, this means if we get hit by a particularly bad harvest in one area, if a severe El Nino strikes, or more localized severe weather phenomena strikes, food supplies can get totally out of control in many countries.
Considering that the global food supply chain is weak (easily disrupted by lack of transportation, weather, insurgency, stealing) and non-existent in many areas then you have a recipe for potential disaster in many regions of the world. When, not if, this food supply shortfall happens, for whatever reason, then almost any city, and almost any countryside could be aflame with strikes, riots and civil disobedience.
Climate change
The worry about, and direct threat of, ongoing climate change impact on agriculture isn’t about the slow almost imperceptible changes caused by a gradual shift in our weather patterns. The greatest worry is that climate change might intensify already extreme events.
This seems to be happening today, witness the incredible drought and massive wildfires in Russia, the flooding in Pakistan, unbelievable hailstorms in Texas and unprecedented cold snaps in China.
And with extreme events being exacerbated by climate change an already stressed agricultural industry (by loss of arable land, shortage of fresh water for irrigation, increasing human population, staple food crops used for bio-fuel production, increasing energy costs and developing countries changing diets) is increasingly having a more difficult time feeding and clothing the world.
Many climatologists believe that the ongoing climate change the earth is undergoing will increase the frequency and severity of extreme weather events.
Inflation
As I said, the most severe consequences of non-existent or more expensive staple foods are felt in developing countries whose citizens spend an exorbitant percentage of their incomes feeding themselves and their family compared to families in the western world. The recent riots in Mozambique were caused by a 30 percent hike in the price of bread after a double digit increase for water and energy - this happened in a country where many spend nearly 75 percent of the household budget on food. People in the poorer countries simply cannot afford increases in the price of food - in Mozambique the per-capita income is $800 per year.
The USDA believes food inflation will quicken it’s pace during the final months of 2010 and into 2011. "Although inflation has been relatively weak for most of 2009 and 2010, higher food commodity and energy prices are now exerting pressure on wholesale and retail food prices." USDA food economist Ephraim Leibtag
“We continue to be shocked and amazed at the size of the cotton moves. These are, without question, going to translate into higher prices for consumers but more at the low end.” Sharon Johnson, cotton analyst, First Capital Group
There was a massive hailstorm in Texas (the centre of U.S. cotton production) and a severe cold snap in China (the world’s top cotton producer). Both these extreme weather events happened on top of already record low cotton inventories. With cotton inventories drawn down to record lows farmers might be tempted to shift their production focus from soybeans and grains to cotton.
Fresh water for irrigation and drinking is getting harder to source and more expensive. Food, the energy used to produce our food, and cotton – most of the world lives in cotton – are all moving higher.
The Rising Price of Survival
It seems to this author that the increase in the price of food is the straw that breaks the camel’s back. The real cause of angst is the rising cost of living being felt in developing areas of the world. Many of these people, already living in poverty, and those on poverties edges, are far less capable of absorbing the increased costs of what is really just basic survival for themselves and their families. Yet this is the first group of people who are impacted by the coming unstoppable waves of inflation and real shortages - whether localized or temporary because of supply chain breakages or poor harvests.
Hundreds of millions of marginalized people, people perhaps counted by the billions, across all nations, will feel the extreme pinch of increased prices, across all asset classes, on their household budgets. But especially so in what those people need the most – water, food and clothing – the bare essentials necessary for survival.
Country Risk
One of the most serious and, in many cases now unpredictable, risks facing investors is "country risk" - where the political and economic stability of the host country is questionable and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.
When a countries citizens get upset, when the drama hits the streets, when the riots start and those in power fear they are losing control and are in danger of being overthrown - regime change in many of these developing countries can quickly become a reality - they will act to please their populace. One of the first actions often taken is the nationalization of foreigners assets – often accompanied by placing the blame for the countries woes on anybody but the government, misdirecting the mobs attention.
All governments fear social unrest - social unrest breeds an upswing in regional militancy and insurgency - the 2007-08 food shortages and consequent rioting recently helped to trigger the collapse of governments in Haiti and Madagascar. Today, in Egypt, half the population depends on government subsidized bread. If Egypt’s present government cannot continue to subsidize bread for the masses upcoming parliamentary elections will be effected. In Serbia a public warning about a coming 30 per cent hike in the price of cooking oil has led to threats of demonstrations by trade unions.
The bottom line? Foreigners, no matter how entrenched in the country, have always made easy targets. Greedy, capitalist hating Marxist governments have never before needed an excuse to nationalize others assets, and they did so time after time. Now investors have something else to ponder and monitor – one that concerns all food importing countries governed by any political ideology.
Conclusion
The United Nations Food and Agriculture Organization acknowledges that higher prices are causing hardships. But they quickly add the situation that exists today is far less dire than the one in 2007-08. Hmmmm maybe, but this author does not believe that is going to be the case for long.
The relief we’ve seen, in the last two years - from this food, or rather from this higher cost of survival driven social unrest - is very temporary, a calm before the storm. A shortage of fresh clean water for irrigation and drinking, fragile and easily disrupted food supply chains and extremely expensive (or non-existent) food, clothing and energy basics for emerging and developing nations is going to be the coming norm. And it’s going to cause chaos.
"Long-term growth in global demand for agricultural products - in combination with the continued presence of U.S. ethanol demand in the corn sector and EU biodiesel demand for vegetable oils - holds prices for corn, oilseeds, and many other crops well above their historical levels." USDA
Quantitative easing and a global currency race to worthless. Inefficient supply chains, intensified weather phenomena and a race to secure dwindling supplies of commodities by developed economies (and their richer inhabitants) all mean the very basics of human survival will become increasingly scarce for the poorer people in the developing world.
Are there storm clouds on your radar screen…no?
Well, there’s a storm brewing on the horizon. Maybe you should be keeping a weather eye on developments in the countries you’ve invested in.
Richard (Rick) Mills
PS - Let’s never forget, in our rush for profit, that there is a real human cost involved. There are untold millions of adults and children who go to bed every night hungry, thirsty and cold.
