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Shock Wave
New York: October 25, 2010
By John Stephenson

Agricultural commodities have been on a tear lately. Corn, a major cash crop, is the latest to see a massive increase in price after the United States Department of Agriculture (USDA) stated that “Corn production is forecast 496 million bushels lower as a 258,000 acre increase in harvested area is more than offset by a 6.7 bushel-per-acre reduction in yield.” And with that, corn prices spiked sharply higher and traded limit up several times on the Chicago Board of Trade.

There are two reasons for the dramatic response. The USDA announcement was largely unexpected by the market which had not anticipated a downward revision. The second was that while the forecast was for 4% lower corn production, America accounts for 60 percent of global corn exports. And even a small revision in forecasts corresponds to a huge volume of corn for world export markets.

With corn prices moving sharply higher, pundits have been quick to proclaim the arrival of the next food crisis. But behind the hype about rising food prices, something very real is happening in the world of food. Changing diets, rapid urbanization and a growing global population are all putting unprecedented stresses on the food chain, meaning more food must be produced between now and 2050 than has been produced during the past ten thousand years combined.

Rising incomes have meant increased consumption of meat and dairy products worldwide, which places greater demands on grains production, since these foods are very grain- and water-intensive to produce. Currently, the most popular meat in the world is chicken. In China, where half the world’s pigs are raised and eaten, pork is dominant. And to feed all of China’s pigs, the country has started to import large quantities of American corn for the first time in 15 years. A meat-based diet is so resource-intensive that it takes from two to four times more land for a meat eater’s diet than it does for a vegetarian’s diet.

Further adding to the stress on the food chain, is the legislatively mandated food for fuel programs around the world. High oil prices and growing concern over the environment have prompted lawmakers around the world to pass legislation mandating the use of biofuels. In 2007, the U.S. Congress passed the Energy Independence and Security Act, aimed at increasing fuel economy in vehicles and promoting the use of alternative fuels. The law mandates that by 2022, 36 billion gallons of biofuels—or fuels made from food—be added to the nation’s gasoline. In the U.S., the biofuel of choice is ethanol, a form of grain alcohol made from corn. When mixed with gasoline, ethanol acts as a fuel replacement or gasoline “extender” by reducing the carbon monoxide that cars produce. To pay for the program, Washington provides ethanol blenders with a subsidy of fifty-one cents a gallon while slapping a tariff of fifty-four cents a gallon on imported biofuels. It may seem like a good idea at first glance, but increasing demands for biofuels have been blamed for boosting the cost of food and, in the process, making it more difficult to feed the urban poor.

The debate over ethanol as a fuel additive has raged on since the Energy Independence and Security Act was passed into law. Detractors point to a surge in corn prices and the diversion of 30 per cent of the corn crop toward ethanol production, while supporters point to the need to reduce emissions. Others have focused on the inefficiency inherent in the conversion process. A study conducted by Cornell University in 2005 found that it took 29 per cent more energy to convert corn into ethanol than the fuel actually produced. The debate over food for fuel will likely increase as American regulators are set to raise the proportion of ethanol in fuel from 10% to 15% in the next year.

A hungry world is likely to experience even greater shock waves as volatility in food prices is likely to increase. With the concentration of farming in just a few big countries, poor yields or whacky weather in a major producing country can quickly translate into sharply higher world prices for agricultural commodities.

Investors looking to cash in on the rising price trend of corn and other cash crops should look toward the fertilizer companies. Fertilized food grows faster and stronger than unfertilized food, making it a smart bet for any farmer that is looking to boost yields and maximize profit.

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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