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Desert Storm
New York: January 31, 2011
By John Stephenson

Violent demonstrations have broken out in Tunisia, Jordan, Algeria, Yemen and Egypt as disgruntled young people have taken to the streets to demand change. The driving force behind the protests has been young people whose hopes and dreams have been stymied by high unemployment, corruption and a lack of political freedom. Inspired by the Al Jazeera broadcasts of Tunisia\\\\\\\'s Jasmine Revolution, a storm of change is sweeping through the Middle East.

In Yemen, an astonishing 75 percent of the population is under 25 and the unemployment rate for youth is hovering near 40 percent. Overall, the jobless rate for young Arabs is 25 percent compared with a global average of 14 percent, according to the Brookings Institution. More than 100 million people, or 30 percent of the Middle East\\\\\\\'s population, are aged 15 to 29 years old and most are better educated than their parents. But across the region, education remains largely divorced from the needs of the private sector, leaving many young people without work and with a growing resentment.

The protestors are fed up with governments that are run by sheiks, kings and presidents-for-life and have taken to the street to demonstrate. Most Arab states have failed to grow their economies fast enough to create jobs for young people. And rather than take heed to the brewing storm, many Arab leaders have continued to invest in upgrading military hardware, expanding security services and employing their relatives, rather than investing in broad economic development.

And that has led to growing unrest across the region. In Algeria, citizens rioted over soaring food prices and Jordan\\\\\\\'s King Abdullah has faced rallies demanding economic and political change. Growing income inequality and soaring costs of living have enraged the public with many of them deciding they have nothing to lose in taking to the streets. In Egypt, a country without oil reserves, 20 percent of its population lives below the poverty line.

But Egypt was the spark that lit a fire under commodity traders late last week, as they lifted crude oil prices sharply higher. Oil traders saw a growing storm of discontent sweep through Egypt, a moderate Arab state, and they considered the consequence of wider social unrest spreading to the Middle East oil exporters.

Oil may be the most visible, but it isn\\\\\\\'t the only commodity that likely will move higher on continued tensions in the Middle East. Food prices are likely to surge as the social unrest continues, exacerbating an already challenging situation globally. The stocks of major grains—wheat, corn, soybeans, rice—are at fifteen year lows helping to force global food prices higher. Prices for basic food staples have been surging lately, forcing many governments around the world to levy price controls. In India, onion prices have been on a tear, garlic prices in China have surged and cabbage prices are up sharply in South Korea putting the squeeze on a hungry populace.

With angry mobs forming in the streets, governments have been forced to stockpile food to prevent a food crisis from further stoking the fires of discontent. Algeria was forced to import a staggering 800,000 tons of wheat in a single shot—something that has never happened before. Governments around the region are looking at the unfolding situation in Tunisia and Egypt and may be tempted to aggressively stockpile food; a situation that would certainly lead to certain spike in grain prices.

For now, the unrest in Egypt is confined to the cities, but if it ever spreads to the country, an already tight global grain balance could get a whole lot tighter. More than thirty percent of Egypt\\\\\\\'s population is employed in agriculture and the six million acre river delta region is the country\\\\\\\'s agricultural heartland supplying rice, soybeans, wheat and corn. At risk are millions of Africans who depend on Egypt as a key supplier of these cash crops and whose very lives hang in the balance if food prices were to escalate further or if shortages persist or intensify.

Egypt is also the world\\\\\\\'s number one wheat importing nation. And if Egyptian officials decide to import massive quantities of wheat to bolster the nation\\\\\\\'s stockpiles in the hope of quelling a future food riot, wheat prices could spike sharply in the short-term. Draughts in Russia, China, the Ukraine and floods in Australia have emptied the wheat storage bins and left the world dangerously exposed to food inflation and large-scale riots.

As I mentioned recently on CNBC\\\\\\\'s Fast Money, one way to play the Egyptian unrest is to look to the fertilizer companies that are big producers of nitrogen-based fertilizers. Farmers faced with high prices for wheat and corn, will have little choice but to slap down plenty of nitrogen-based fertilizers to help boost their yield of these two major grains.

The good news is that democracy may be coming to the Middle East; the bad news is that it will likely cost us more to eat. As it turns out, the Middle East is strategic not only for its impact on world oil prices, but also for its impact on the prices for global grains.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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