The Hightower Report

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From the view of the World Food organization, many G20 nations and natural resource poor countries, food costs are pegged to be too high. From a humanitarian standpoint, you could point out that the many people throughout the world are getting by on as little as $1 to $2 per day. That is certainly a concern, but we would also like to point out that being able to eat on $1 or $2 per day, on food that is grown thousands of miles away and in some cases food in areas that require irrigation, is in many ways a miracle. Many areas of the world decided years ago that genetically altered food was unacceptable, and the world as a whole has spent the better part of the last four decades pushing up the value of almost everything but raw commodities. In an era when a new car might cost $30,000, a home might be valued at $1,000,000 and even many third-world citizens are equipped with cell phone service, it is clear that capital has been channeled away from primary needs.

Another faction is suggesting that commodity prices are rising because of speculation, but if that were the case, we would expect commodity supplies to be amassing in response to the higher prices. Instead, projected supply levels fir many commodities are tightening. Some will try to point out the excess level of crude oil stocks held at the US at the Cushing Oklahoma storage facility as a sign that supplies of crude oil are building up and that it is speculation that is lifting oil prices. However, news that Brent crude oil prices reached almost a $17 per barrel premium to WTI crude oil suggests that world supply isn’t that high or that prices aren’t high enough to get energy to where it is needed. Some analysts suggest that Brent crude oil might have to reach $20 per barrel over WTI to make it cost effective to the US crude back out of the US. We would also note that energy prices hadn’t gotten high enough yet because many users of petroleum, namely US power plants (where are the “greenies” on this issue?) were still perfectly content to use significantly more expensive and less environmentally friendly fuel than natural gas. Natural gas prices are apparently so cheap that some analysts are predicting a widespread collapse in the productive capacity of natural gas in North America in the year ahead. From our perspective, significantly higher crude oil futures prices are the only way to force the US to switch to better fuel sources. But instead the powers that be think a better approach would be to artificially force crude oil prices back down. Ask yourself the question, what happens to demand and supply if prices decline? Won’t that stimulate demand, slow the shift to alternatives and in some cases reduce supply?

With the US corn market already seeing the tightest “days of supply” reading since at least the 1960′s (as far back as our data goes) and the world coarse grain supply the tightest since 1973, the world is facing a grain market that can no longer satisfy the demand without perfect weather and more costly inputs.

While the world has seen a series of minor weather setbacks over the last year, the magnitude of the crop losses have not been significant compared to history. As the drumbeat of demand thunders on, the bar for world food production is about to be set even higher. Another example of why grain prices are not high enough can been seen in the actions of many Middle East oil producing countries who have decided against irrigating and producing crops from their own land. Instead those with record oil revenues have secured land throughout Africa and South America to provide from their future food needs. In other words, grains are still regarded as cheaper than water and that it is better to conserve water in your own country and have food produced far away and shipped back. In looking at a chart of how many bushels of corn 1 barrel of crude oil will buy, one can see that corn is very cheap relative to other points in history. If one were to compare how much tin and lead prices have risen (these markets have little if any speculative impetus) relative to milk and pork prices, it is also clear that grains aren’t the only food stuffs that have become woefully undervalued. In many western countries consumers spend more on personal communication and cable television than they do on food. In conclusion, if society fails to allow significant investment to flow toward food production through significantly higher prices, there could be serious global consequences.