Is the price of your bagel going up?
Paul Schwartzmeyer
Paul Schwartzmeyer
www.paulschwartzmeyer.com
Walnut Street Securities, Inc.
#2 Court Street Plaza, Batavia, NY 14020
585-757-2347
is the price of your bagel going up?
Things you probably won't read anywhere else. September, 2010
the world is currently in the midst of a severe run up in the price of basic foodstuffs, especially wheat, corn, rice, coffee and palm oil. In the last three months corn is up 40%, wheat is up 44% and coffee is up and an eye popping 46%. (1)
Adjustments to store prices come much later. America has 318 million acres of farmland currently planted. We have about twice that including fallow land. That acreage has fallen by about 6 million acres since 2008.
Of that planted land, 259 million acres or 81% is for Wheat, Corn, Soybeans and Hay. In other words, feed grains, oil grains and petroleum grains. (2)
WHY DOES THIS MATTER?
Because it goes to the basic assumptions of the US being the world's breadbasket. The US is three times more efficient in FEED GRAINS than the rest of the world, ex Canada. We are a mile behind in other areas.
China has quietly become the monster in the farm shop. Almost every category of US non grain production in the US has lagged or fallen since 1998 and almost every one in China has gone up. Chinese tomato production has gone up 100% the US is up 10%. For lettuce China is up 120%, the USA,25%. For onions, China is up 90%, the US, 19%. Carrots, China up 100%, the US down 15%.
For many food categories like Garlic, Cantaloupe and Watermelon, the situation is even worse. China produces 3 times more potatoes than the US, and 7 times more Onions Carrots and broccoli, but they also produce 137 times more asparagus, 33 times more spinach, 53 times more Garlic, 30 times more Cucumbers and 33 times more Watermelon and Cantaloupe. (3)
The USA is simply not competitive in industries that require labor. Here in NY, finding workers to pick Cabbage, work the Onion Fields and do shift work in the Dairies is always a severe challenge. I have a neighbor that farms 1,200 acres of land with 8 employees. In China, the average family owned Rice field is the size of a US living room and employs a family. America has 3.5 million farm workers on it's 318 million acres. China has 230 million workers on about the same amount of acreage.
Aside from labor, the big issue is world production.
The world has 750 million acres of land dedicated to feed grains. 78 million of that is in Africa. But the USA uses HALF the acreage Africa uses and produces THREE TIMES the tonnage of feed grains. (4) This is true for most of the third world. In other words, if you can grow it with a tractor, the US competes. If you need people, forget it.
The problems are essentially these..
First, the US has a lot of land and plenty of capital, but they simply do not have a labor force that will work on farms. This mis-allocation is enormous. The US has 16 million unemployed people and a labor shortage. Americans simply will not or cannot work on farms. We have 17 million college graduates and the percentage in food production is less than of one percent. General engineering, less that of one percent.
Second, the US is becoming a major importer of processed and fresh food. Since 1990, as US exports have stayed about the same based on volumes, imports have skyrocketed. Fruit Juices, up 50%, Beer up 200%, Wine up 400%, Fresh Vegetables, up 300%, Fruits and nuts have doubled and oil seeds and vegetable oils, up 300%.
Finally, this can be seen in the makeup of the American diet and the enormous levels of obesity and type 2 diabetes, a disease almost always caused by diet. Since 1970, the caloric intake of the average American has risen to over 2,700 calories, a 25% jump. The average caloric intake needed for a 180 pound man is about 1,600. Of that increase, virtually all of it came from consumption of processed grains and oil. None came from vegetables, fruit or nuts.
What does this say about the future?
First, it says that the USA is in very serious trouble. During the great depression, the shift of labor off farms combined with the growth of department stores which caused the closing of hundreds of thousands of corner groceries, caused a major labor dislocation that took decades to correct. There's no reason to believe this one will be easier.
Also, when you really think about it, there's no reason to believe the USA will stay competitive even in feed grains. The primary driver of yields is fertilizer and hybrid seeds. Why would America assume it will dominate those businesses when it's getting beaten in so many others.
But from a macro standpoint a few things become obvious. We are in the very early stages of a time when food production is going to become paramount. The third world has most of the people. They already produce most of the food. Even if they don't import, their stopping exports will hit the markets hard.
World grain prices are way up, but world grain production is 5% below the USDA projection made in the spring. USDA is already predicting a gradual drop in land used for food production in the US and most of the EU. All that great land we used for McMansions can be farmed again... if somebody wants to tear down all the McMansions. In the mean time we're in a bind.
From an investment standpoint, even though it would seem obvious that we have opportunities in literally hundreds of industries, putting together a strategy that actually capitalizes on that is another story. There are literally hundreds of companies between a seed and your hamburger. Fertilizer manufacturers, potash mines, seed producers, natural gas companies, land companies, world food conglomerates, processors.. you name it. Were that not enough, you have markets and currency valuations, foreign companies and economics.
When I was a young oil worker in the Middle East an acre of farmland in Pakistan was about $2,500. When I arrived back here in the US, an acre of land was about $800. I knew something was amiss. Something still is.
CME group, futures prices, 20 minute delayed, as of September 15, 2010.
USDA, National Agricultural Statistics Service, Acreage report, 6/2010
USDA, Selected Vegetable production in selected countries, 1999 to 2008.
USDA, World Agricultural supply data, September 2010.
The statements and opinions in this article are those of Paul Schwartzmeyer and do not in any way reflect the views of Walnut Street Securities, Inc. (WSS) The material is for informational use only and should not be viewed as an offer to sell or a solicitation to buy any security from or through WSS or it's affiliates. WSS makes no representation or warranty relating to the facts presented or that all material facts necessary to make an investment decision are presented.
Is the price of your bagel going up?
By: Paul Schwartzmeyer
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