Monday, March 30, 2009

Do we really need an imposed food shortage?

This is what likely to happen, or, has happened, when the US Dept. of Agriculture gives us their periodic acreage estimate. FT

The estimate will show a sharp decline in acreage usage in the farm sector. This will increase the food shortage, which the FAO and the UN state as growing. I don't have that recent report, but they say that grains and wheat production, will go into serious decline by the end of 2009 and already in troubling decline--since late 2008. But, world food stocks are up at record levels in an earlier report by the FAO and the UN. So, what's the truth?

But, and this speaks directly to the US farm sector, I thought that they got a heft dose of stimulus in the latest 2009 American Reinvestment package passed by the US congress?

In fact, aside from green technology, farm subsidies was second on the list. In fact, if we add the local and state assistance programs within the 2009 stimulus, which was geared not for farms but for rural areas and tribal lands, agriculture, got most of the money out of the stimulus.

What do US farms go and do now? They are cutting their production--like OPEC and oil-- to raise the prices. They cite in the FT article the rise in prices in fertilizer and low market prices. the low market prices is believable, only if you didn't know that they set the initial prices in the market. Also, the financial market for commodities they have no hand in--it's the financial firms that make the value added profit from the derivative prices and not them.

Now, we can say that derivatives trading raised the future price, from month end to month end and hence, as a sub-sequence, farmer profits go up automatically. However, there is a market for food and with stockpiles decreasing, the US and UN should encourage stock piling and reduced purchases and off selling, at a time of global crisis.

Secondly, the market for fertilizers should not be increasing, if everything else in the commodities market is increasing. I find it hard to believe off of the cuff that high fertilizer prices is a problem now.

There has been many reports about the volatility of the fertilizer market--most noting that the boom between 07-08, but the bust between the end of 08-09. Global demand is down, so the argument that demand being high while fertilizer demand is weak and hence, pushes up the price, is a non starter on the other end of the price volatility debate.
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