Saturday, February 5, 2011

Another QE Head Wind

The US equity market may be experiencing low volatility but beyond that HFT driven "market" volatility is rising fast. There are a lot of moving parts right now, each of which on their own could cause a severe shock to an extremely fragile global economy.  It is important to stay focused on what is out there and the risks they present.  Maintaining a false sense of security regarding the future of QE is ignoring the real investment risks that are present today.  One does not know when nor which event will be the tipping point so patience is needed.  It's important though to stay focused and educated so when events surface as investors we are ready to react.

I want to focus on global food prices, primarily the recent price action in rice.  Below is an excerpt from a  2009 USAID Study 

"Approximately 1 billion people—or one sixth of the world’s population—subsist on less than $1 per day. Of this population, 162 million survive on less than $0.50 per day. At the household level, increasing food prices have the greatest effect on poor and food-insecure populations, who spend 50 to 60 percent or more of their income on food, according to the International Food Policy Research Institute (IFPRI). Overall, increased food prices particularly affect developing countries, and the poorest people within those countries, where populations spend a larger proportional share of income on basic food commodities."

Even within the US, food prices affect one in seven Americans.  That is because 15% of the US population does not have the income to pay for the most basic necessity of life and that is food. Rice is one of the largest staples of the global diet and its recent price action is signaling yet another threat.  

This heat map of rice consumption per capita shows Asia as the most at risk to rising rice prices

Rice prices in 2010 relative to the 2007-08 highs are relatively low but as the chart shows, price can accelerate very quickly. 

The chart below shows just how fast prices have begun to move since 2009.  In fact the prior resistance level has already been taken out and a massive melt up is not only possible but also probable.  We are in a yield chasing environment right now.  Those who missed the move up in sugar and cotton, etc will pile in to the rice trade and accelerate this move.  

"It's really very simple Governor, when people are hungry they die..."  Bob Geldoff


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