Mexico goes back to the land

Gustavo Esteva

guardian.co.uk, Monday 14 February 2011 15.00 GMT

This is grim news: food prices are reaching record levels worldwide. The thousands of farmers who have killed themselves over the past decade seem to have no precedent. According to the UN’s Food and Agriculture Organisation’s director, the goal to reduce the number of hungry people by half will only be achieved in 2050.

In Mexico, this is just another facet of the crisis that started in the 80s, when the government dismantled its support for peasant farmers. “My obligation as minister of agriculture is to get rid of 10 million peasants,” declared Carlos Hank in 1991. “What are you going to do with them?” a journalist asked. “That is not my area of work”, he answered.

But no one assumed that responsibility. Vicente Fox, former president of Coca-Cola and president of Mexico from 2000 to 2006, used to say “those peasants can be gardeners in Texas”. For him and other policymakers, Mexico had too many peasants; America, their model, was producing food for the world with only 2.5% of the labour force. In 1992 they opened to the private market the land which had been in the hands of peasants since the 1910 revolution. The North American Free Trade Agreement, which came into force in 1994, consolidated this anti-peasant orientation in the name of free market.

Those policies drastically reduced food production, and Mexico now imports more than half of the grains it needs. Many Mexicans were forced to emigrate, and a fifth of Mexicans now live in the US.

In 1974, the US minister of agriculture Earl Butz coined the expression “food power” – food pragmatically used as a political weapon. Hunger became one of the most profitable businesses of the century: immense subsidies transformed north America and Europe into food suppliers for countries previously exporting food, whose productive capacities were progressively dismantled. Today, OECD countries allocate $365bn a year to that purpose, a number now enlarged with ethanol subsidies: 120m tons of cereals feed cars, instead of people or animals, with no net reduction of emissions.

Many Mexican peasants resisted the dominant policies and began to build their own alternative. Without official support, they increased both farmed areas and yields. Migrants invested part of their income in cultivation. Those initiatives are complemented by urban agriculture, following the Cuban example: Havana currently produces more than half of the food it consumes.

The proportion of peasants in Mexico may have been falling (from 75% in 1945 to less than a third today), but their total number is higher than ever, with ranks continually swelled by urbanites escaping from unsustainable and violent cities who use modern technologies to create a new lifestyle in the countryside. (In the spirit of full disclosure, I should say that after 50 years in Mexico City, I now live in a small Zapotec village in southern Mexico where I produce more than half of what I eat, while learning convivial practices from my neighbours and plugging my computer into the internet.)

A trend is settling. Just take a look at Vía Campesina, the biggest peasant organisation in history which started in Latin America in the years of “structural adjustment”. It soon became global and now boasts millions of members. Today, it is one of the main actors in the world food scene, opposing transnational corporations and affirming its food sovereignty paradigm and its new peasant internationalism. Novelist Eduardo Galeano said that in these times of global fear, some people are afraid of hunger and others afraid of eating, aware of the contaminated junk served in their plates. Vía Campesina pressures all governments and attends all the pertinent international forums. But the hope for its members is no longer hanging on the market or the state. They put their hope and trust in their increasing capacity to define what they want to eat, and to produce it themselves. That is our hope.

Food: Growth Industry

By Alan Walsh

I’ve written about this topic before, and recent events just help drive my point home. Food is a growth-industry that career-aspirants, investors, and budding entrepreneurs should be taking a hard look at.

The world population just continues to grow.  All those people have to eat.  The amount of arable land available is limited; and some has been lost to poor land-use.  Much land is put to poor use due to lack of knowledge and/or technology & money.  Food riots and political unrest have arisen due to short-supplies and/or price-increases.  Corn is being increasingly turned away from human & animal food to ethanol production; reducing the food supply and driving prices up.  Acts of nature and man periodically wipe out or severly damage harvests.  Governments fight over supplies.  Those “with” play political football with those “without”.  For a variety of reasons, food prices just keep rising.  Poverty separates millions from a decent meal (or a meal at all).  People starve; lots of them.  One-sixth of the U.S. population is on Food Stamps.  Meanwhile that global population of hungry mouths just keeps growing.

The supply/demand imbalance will only intensify in coming years.  Governments, institutions, and businesses continually seek new and better methodologies of food production & delivery.

- Career-aspirants; as the situation unfolds, people of every stripe will be needed; including farmers, scientists & engineers, manufacturers & distributors, business managers, and people with many other skills & specializations.

- Entrepreneurs; even though big business dominates the market, new businesses are continually finding profitable niche opportunities.

- Investors; you have a vast array of opportunities to choose from.

It’s not “sexy”, but food is at the core of human existence.  We’ve all gotta’ eat!  It’s an honorable profession.  Those of you seeking to make a “green” impact, or leave a positive legacy should take a hard look.

The food industry is interlaced throughout the fabric of our society.  It’s everywhere, in many forms.  Much of it is infrastructure and research related, thus not readily visible.  Open your mind to the possibilities.

Economic Recovery: The View From Bernanke’s Helicopter

Joel Bowman, reporting from Buenos Aires, Argentina…

This week, the world caught a glimpse of what Henry Hazlitt might have called the “seen” – the primary, most conspicuous consequence of a preposterous economic policy. Of course, it is the “unseen,” what comes next, that we ought to be worried about.

We are referring here to the dawning of the QE2 era. In the shadow of the midterm elections, Federal Reserve Chairman Ben “full steam ahead” Bernanke announced the second round of quantitative easing, or, for us non econo-scholars, “money printing.”

In a nutshell, Bernanke committed the Fed to purchase $600 billion in Treasuries over the next 8 months. In addition, those nasty mortgage securities the Fed gobbled up during operation QE1 will continue to be rolled over into Treasuries. All in, the total price tag comes to $875 billion brand spankin’ new dollars…with the option to open the spigots further should inflation (the CPI version) come in under what the Fed deems as “healthy.”

Markets rejoiced over the news, sending the major indexes up 2…3…4%. Gold rallied to within $3 of the $1,400 per ounce mark yesterday. Silver leapt out of the gates too…as did just about everything else priced in dollars. Oil made a charge towards $90 per barrel and the “ags,” already on a blistering run this year, continued to soar.

Behind the scenes, the dollar took it firmly on the chin. Our mates over at The 5 provided the following chart, showing the once-mighty greenback’s response to Bernanke’s systematic currency debasement:

The dollar is now more or less at parity with the Canadian loonie, the Aussie dollar and the Swiss franc.

But not everyone was pleased with the Fed’s magic monetary potion.

Brazil’s central bank president, Henrique Meirelles, said “excess liquidity” in the US economy is creating “risks for everyone.” The Chinese, who hold an uncomfortably large quantity of ever-depreciating dollars, were equally miffed. Vice Foreign Minister Cui Tiankai said, “many countries are worried about the impact of the policy on their economies.” Tiankai went on to say that the US “owes us some explanation on their decision on quantitative easing.”

Bernanke defended his position to a group of college students in Jacksonville, Florida, on Friday. “Our first objective, the first goal that we have, is to meet our mandate to get price stability and maximum employment in the United States,” he said. “A strong US economy, a recovering economy, is critical not just for Americans but it’s also critical for the global recovery.”

Has Bernanke stumbled upon the ultimate formula for wealth everlasting? Has the man who once said he would drop money from helicopters if the need arose cracked the code to eternal, effortless prosperity? Just print money and be happy?

“If this were true,” ventured Bill Bonner earlier this week, “it was a giant step forward for humanity, at least equal to discovering fire, creating Facebook or blowing up Nagasaki. Jesus Christ multiplied loaves and fishes. But He had something to work with. The Federal Reserve multiplies zeros…creating money – out of nothing at all. If it can really do the trick, we are saved. The legislature can go home. It no longer needs to worry about raising taxes or allocating public resources. Government can now buy all the loaves and fishes it wants. And give every voter a quart of whiskey on Election Day.”

Readers may feel a healthy welling of skepticism here. To be sure, a strong economy, a recovering economy, is important…but debasing the nation’s currency won’t get you there. If a country could grow rich and prosperous by simply allocating printed money to troubled sectors of its economy, Zimbabwe would be the jewel of the African continent and there would be a statue of Gideon Gono, her former central banker, in Harare’s town square. If the Weimar Republic had been able to make WWI reparations in 50 billion mark notes, the world may have avoided the unmitigated catastrophe of WWII. And, to belabor the point, if the Romans were allowed to finance their foreign escapades by simply handing out I.O.U.s, Edward Gibbon’s classic, The Decline and Fall of the Roman Empire, might seem a little odd on the bookshelf of history.

For the moment, the markets have awarded Bernanke’s stimulus plans a vote of confidence. That is the immediate, seen, effect. Like an athlete on steroids, they are looking to break records, to rewrite their own history books. The Fed has them off to a flying start, but pretty soon the effect of the drug will wear off. Reality will kick in. It is then that the “unseen” effects of trying to cheat the system will come into plane view. The global economy, built on the back of a strong, stable world currency, will once again come to realize that history makes no excuses and does no man any favors.

Regards,

Joel Bowman
for The Daily Reckoning

Lower Food Prices Hit Farmers, Help Grocers

By Ed Maixner, Editor, The Kiplinger Agriculture Letter

October 6, 2009

The drop in food prices is hitting farmers a lot harder than grocery stores. The grocers have lowered prices 2% on average from a year ago. But margins on raw farm products are rising, leaving farmers with smaller shares of the consumer dollar.

Farm prices are down much further—by more than a third for milk, 20% for livestock and 17% for crops. Of course, 2007 and 2008 were boom years on the farm—crop and livestock prices rose nearly 30% in that period. In fact, the average farm price of milk was breaking records at around $22/cwt. two years ago, but has been selling in the $12 to $13 range so far this year.

Farmers ramped up crop and livestock output for years to keep up with rising demand both at home and abroad. But demand eroded quickly as the recession, which began in December 2007, set in last year. Agricultural exports, for example, are down 21% so far in 2009. And domestically, there’s now an overabundance of commodities. No surprise, then, that the U.S. Department of Agriculture’s (USDA) September price index for all crops is down 18% from a year ago.

Complicating the lower prices received by farmers: Costs of supplies haven’t receded as much overall. Sure, some things are cheaper. The price farmers paid for fuel, for example, was 34% lower in September than a year earlier. But the price index for all farm expenses remains 16% higher than it was in September 2007. And that trend continues to gnaw at farmers’ bottom lines. With overall cash receipts down $40 billion and 2009 operating costs down $10 billion, farmers’ net cash income will be down by 30% this year.

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The World’s Most Precious Resource – Water

esterday, I met with Ben Simpfendorfer, who is chief China economist for the Royal Bank of Scotland. He works out of Hong Kong, but is in the U.S. on business. We struck up a correspondence a few months ago after I read his book The New Silk Road (which I heartily recommend). We soon learned we are kindred spirits on a lot of what is happening around the world, and I was glad to finally meet him in person.

Simpfendorfer’s book highlights the growth of trade between China and the Arab world, a point I’ve also tried to show in my newsletters. It’s important for several reasons, not least because volumes are starting to become significant. They are also growing exponentially. For instance, a decade ago, Chinese exports to the Middle East totaled $4 billion. Today, they total more than $60 billion.

There are all kinds of investment implications from this shift in trade, which I’ve tried sorting out in these pages and in Capital & Crisis. The non-U.S.-centric trading models will affect the value of the dollar and commodities and more. Simpfendorfer talked about some of this over lunch.

If you’ve read this publication for any length of time, you know one of the critical issues is water. This is still not widely appreciated. But Simpfendorfer, who has traveled extensively throughout the Middle East and China — and speaks Mandarin and Arabic (“Yes, I have no free time,” he says) — will tell you it’s a “huge problem.”

In fact, when we talked about the state of the U.S. economy, Simpfendorfer ventured that water might be what keeps the U.S. on top for decades yet:

“The Silk Road has an average of 2,260 cubic meters of internal renewable water per person. The equivalent figure is 9,300 in the United States. In fact, an abundance of water is an important, but often overlooked, reason why the United States might defy its critics and remain the world’s major power through the end of this century.”

Conversely, when you look at the new Silk Road — an area that covers North Africa, the Middle East and Asia — water is what could “bring the region to its knees,” as Simpfendorfer says.

We talked about how water was crucial to nearly everything — and not just for drinking. You need water to run factories and to make textiles and consumer goods of all kinds.

This week, there were many warnings in the headlines that the water crisis is worsening. Simpfendorfer talked about Syria and how a quarter of a million farmers had to abandon their land due to drought. It’s worse in Iraq, where water flows have fallen by two- thirds. Lack of water, Simpfendorfer offered, might do more harm to the rebuilding effort in Iraq than Islamic extremists.

You probably saw the headlines about Mexico. It’s experiencing its worst drought in half a century. Mexico City is close to running out of water and Mexican farmers will likely report crop losses of over $1 billion.

According to the LA Times:

“Hard hit have been corn, beans, barley and sorghum, plus livestock. Farmers and officials say the impact, including lost earnings, unpaid debts and shortages of staple foods, could be felt well into next year.

“‘Although no one wants to recognize it, there is a food crisis,’ said Cruz Lopez Aguilar, president of a national federation representing rural dwellers. He and others say increasing imports to make up for lost crops could raise food costs.”

Mexico is not alone. Kenya, Argentina, Australia, India, and other places have suffered drought this year. The problems are deeper than drought, but drought does magnify the weaknesses in the world’s water systems.

As an investment theme, it means companies that help alleviate water stress, manage water resources more efficiently or even own water resources outright, should grow in value over time.

Over the weekend, Barron’s published a favorable piece on Nalco (NLC:nyse), a stock I recommended several months ago to the subscribers of Mayer’s Special Situations. Nalco is the world’s largest water treatment company. According to Barron’s, “It is about three times the size of GE, its biggest competitor.”

The company has many solutions. One highlighted by Barron’s is 3D Trasar Boiler technology, which saves water and energy and also reduces emissions. Nalco is also just starting to crack the growing markets along the New Silk Road:

“This year, Nalco has added 80 people in China and India, and recently hired a well-known Chinese ex-diplomat to lead Nalco’s thrust there. The company has established a research center in Nanjing to develop products for Asia. With its huge infrastructure, polluted water systems and heavy dependence on coal-fired energy, China is a perfect prospect for Nalco’s anti-pollution services and equipment.”

Nalco has dramatically outperformed the S&P 500 Index since I first recommended the stock. Also interesting to note, Berkshire Hathaway owns 6.5% of the company and is its largest shareholder. Nalco won’t double or triple overnight, but it ought to remain a rewarding investment over the years.

During our lunch, Simpfendorfer talked about Hyflux (HYFXF:pink sheets), a diversified Singaporean water company. He met with the company and believes it is in a great position to prosper from the water troubles along the New Silk Road.

As for China, specifically, you might wonder what Simpfendorfer’s views are given that there is much debate right now about China’s economy. He said the next five years or so “would be very difficult,” but he did not expect China to collapse. This is very important, because if China does collapse, it would devastate commodity markets. Yet even modest growth in China could buoy commodity prices for years.

Chris Mayer

Bad News for Homeowners – Good News Concerning Water, Food, and Energy

Joel Bowman, reporting from Manhattan, New York City…

The tide is rising…and American homeowners are strapped into their concrete boots.

According to a new report by Deutsche Bank half of U.S. mortgage- holders will be “underwater” or “upside down” on their loans by 2011 – that is, they will owe more on their loan than their property will be worth. And it’s not just those risky subprime borrowers who will feel the pressure of the rising debt waters (although the report suggests up to 69% of home “owners” in that category will be submerged).

As it turns out, prime conforming loans, those ordinarily considered to be the safest bets, will sink the quickest. The report suggests that 41% of these relatively “safe” home loans will be underwater by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009. Furthermore, forty-six percent of prime jumbo loans (those greater than $417,000) will be larger than their properties’ value, up from 29% over the same period.

Partly, this equity to debt inversion will be due to continued fall in home prices. Covering 100 U.S. metropolitan areas, the bank predicts home prices will tumble another 14% through the first quarter of 2011, for a total drop of 41.7%. The problem is exacerbated when people simply give up on their loans, knowing full well that, without jobs or a rise in the value of their home anywhere on the horizon, they might just be better abandoning the whole situation and starting from scratch (with a demolished credit rating, of course).

It goes without saying that your editors have no idea what home prices will do tomorrow. Maybe the government will bulldoze excess inventory to stimulate prices on the supply side. (That sounds just dumb enough for them to undertake, come to think of it.) Or maybe they will fall another 14%, as Deutsche Bank forecasts. Either way, the days of the ARM ATM seem to be over. And, without a job to supplement that home equity “income,” consumers might find the going tough for some time.

This dour news, however, has nothing to do with the column below in which Rude favorite, Chris Mayer, offers some unusually uplifting news for commodity investors. Please enjoy…

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Oil and Water Do Mix
By Chris Mayer

The oil price is stubborn, like a two-year-old who refuses to eat his mashed peas. Despite all evidence that the market is well supplied, oil is over $70 a barrel again as I write. Taking the view out to the horizon, though, I think it will go higher and will drag the price of most commodities higher in its wake.

Part of the reason for the rise is weakness in the dollar. People often say that oil is denominated in dollars. But maybe it is the other way around; dollars are denominated in oil. A dollar is worth how much oil it can buy. Part of oil’s rise is simply marking down the value of the dollar. Weak dollar means higher oil prices.

People will blame the higher oil price on speculators, but something interesting is happening in the markets for minor metals like molybdenum. Prices are rising, too. The silvery metal, used to strengthen steel, is now $15 a pound — nearly double the $8 and change it fetched in April. This is significant, because there is no futures exchange for “moly.” It trades on a physical spot market. Speculators play a very small role here. The buyers of the metal use the metal.

So there is a demand story shaping up here, too, mostly focusing on a fragile recovery of some sort and mostly centered on China and the emerging markets. The market is looking ahead.

For instance, over the weekend, South Korea reported numbers that show signs of a recovery in that country. Industrial output fell less than expected, and trade volume surged to $60 billion. That was its best showing since last October. Also, South Korean companies have been reporting better-than-expected results.

The biggest buyer of South Korean goods is China. Still, it’s a confusing time because of all the stimulus money that governments around the world have been spending. So it’s hard to say what’s real and what’s just an illusion created by a temporary spending binge.

Another piece of the puzzle from last week: Spot iron prices in China (meaning iron ore for immediate delivery) topped $100 per ton. That’s the highest level since October 2008. The other breakthrough in iron ore last week came when BHP Billiton, the world’s largest miner, announced that a third of its customers were moving to prices linked to the spot market.

This is big news for the industry. The old way was to have annual contracts with a negotiated price. This was bad for iron ore companies because the contracted price lagged the increase in iron ore prices. And when iron ore prices fell, steelmakers just reneged on their contracts. As the iron companies found out, having contracts was a great way for iron ore producers to cap their upside and leave them with all the downside. Not so good.

The industry now looks like it is moving toward more spot pricing, which is a good thing for the producers. Iron ore prices have rallied too, along with crude oil and moly.

Every rally, like every bottle of beer, has a finite life span. There will be lots of bumps along the way, but the prices of many commodities — such as oil, iron ore and moly — will tack higher, in my view.

The price of water is also rising — at least in China. I’ve long watched for this, as it affects companies like Hyflux (HYFXF:pink sheets) – a stock I recommended to the subscribers of my investment service, Mayer’s Special Situations. Water rates in China are well below average. One cubic meter of water in China costs about one tenth of what it does in Germany, for example.

Yet as we’ve covered here, China has a serious water crisis. Mother Nature did not smile on China when it came to water. The amount of water available per capita is only a third of the global average. Low prices only make that worse. Raise the price and people will get smarter about how they use water.

So finally, many cities are raising the price of water. The WSJ points out several places where water prices could rise 25-48%. Shanghai, for instance, raised water rates 25% in June and plans another 22% increase next year.

This is all good for Hyflux, which is in great position to capture those increases. The fact that those water prices are now rising partly explains why the stock is up 80% from its lows.

The stock was too cheap before, anyway. As I pointed out in an e- mail alert on March 16, Hyflux had gotten about as cheap as it has ever been on an earnings basis when it hit $1 per share. I continue to believe that Hyflux has a great future and enormous growth potential ahead of it.

One other note on the news this week: Japan is shifting its focus to investing in agricultural commodities. Japan is the largest importer of food in the world, with an annual bill of more than $40 billion. Now Japan’s big trading houses are looking to invest in assets that produce soybeans, wheat, corn and more. They are eyeing grain elevators and export terminals and grain processors. Some of them are investing in their own farmland.

Mitsui, for example, has nearly 250,000 acres of farmland in Brazil. Itochu, Japan’s fourth largest trading company, aims to double the amount of grain it handles. (All of this from the Financial Times piece this weekend titled, “Japan Thinks Global to Fix Food Shortage” by Javier Blas).

Years of underinvestment in food production around the world is now catching up with us. So I continue to believe that some of the best performing stocks over the next few years will come from the ranks of commodity companies that keep the world supplied with water, food and energy.

I like to say that now is a good time to invest in those things that keep civilization a going concern. The budding economic recovery may prove to be a mirage, but dwindling water and food and energy resources certainly will not.

Buy What China Buys, Part II

Buy What China Buys, Part II
By Chris Mayer

China is hungry…and gets hungrier every day. Satisfying hunger requires fertilizer…lots of it. Think: Potash.

China is not only getting hungrier, it is also developing a taste for the good life. Protein consumption always increases as a population’s wealth increases. That’s because wealthy populations tend to eat more meat than poor ones, while also eating more fresh fruits and veggies. The diet becomes more diverse, less centered on consuming base grains.

The demand for grains doesn’t diminish, though, because the need to produce meat increases the demand for grains exponentially. Depending on who’s doing the math, five to ten pounds of grain goes into every pound of beef that lands on a dinner plate.

China’s population is also increasing, of course, which is further boosting demand for grains. There are some special issues with China, too. It holds only 10% of the world’s arable land, but 20% of the population. And its arable land resource is in decline. There were about 121 million hectares in service at the end of 2008. That’s down from 133 million hectares as recently as 1988. Increasingly, because of water shortages, desertification, development, urban migration, pollution and a host of other reasons, China is growing less of its own food and relying more on foreign suppliers.

The Chinese government is not happy about that trend and has made food production a priority. In fact, recently, the Chinese premier laid out a number of goals for China:

* Boost Chinese grain production by 50 million tonnes by focusing on increasing the yield per acre

* Subsidize agriculture – which the government does by giving farmers subsidies for irrigation equipment and new seeds and for improving crop yields and crop quality

* Invest in the infrastructure of agriculture – for water supplies, roads and the like.

So it would seem a good idea to be around Chinese agriculture in some way.

Let’s back up a bit and look again at how the dietary pattern has changed. I’ve written about how China consumes a lot more grains before. China is now also one of the largest consumers of fruits and vegetables.

That China is now a consumer of size in the world of fruits and veggies is a relatively new development. China is also a big producer of fruits and veggies. According to the FAO, China produces nearly half of the world’s vegetables and 16% of the world’s fruit. China is today a major exporter of these goods to other Asian countries, supplanting U.S. suppliers.

Well, fruits and veggies have an interesting angle when it comes to fertilizers…

You know if you’ve been reading this letter that the three main nutrients are nitrogen, phosphate and potash. Farmers use fertilizers to boost yields and improve crop quality. Perhaps not surprisingly, China is the largest consumer of fertilizers in the world, with about 25% of global demand.

China is self-sufficient in nitrogen and phosphate. As a result, its application rates are on par with those of farmers in Europe and America. But China is not self-sufficient in potash. The country has few developed potash mines. As a result, it consumes around 12-15 million tonnes per year, but produces only 3 million tones.

Therefore, China relies on imports of potash to obtain most of its supply. But Chinese farmers could use a lot more of this unique fertilizer. In fact, China’s potash “application rates” are half what they are in the West. Quite simply, the Chinese need to use more potash to boost their crop yields to where the U.S. and Europe are.

Potash is an important nutrient because it controls the plants’ water intake, reduces water loss, increases root growth and improves drought resistance. Clearly, crop yields are higher and crop quality is better with the application of potash.

Yet last year, China’s consumption of potash fell. It will probably decline slightly again this year. That’s incompatible with the goals – and the need – of increasing crop yields and quality.

Potash prices soared in 2008 and Chinese farmers pushed back by buying less. The price of potash is cheaper now, but not by all that much. In any event, the Chinese farmers can afford it, as the economic return from using potash is compelling. This two-year decline in potash consumption is unprecedented. And its effects on crop yields and production will not be good.

Most of the potash suppliers that deal in the Chinese markets believe that Chinese demand will pick up later this year as the Chinese burn through their existing inventories of potash and look forward to the 2010 planting season. The Chinese will be hard- pressed to match the record production of 2008 without potash. The quirky thing about potash is that it tends to stay in the soil and you can skip a year, maybe even two, but no more than that.

So potash is also going to be a good way to invest in China’s food story. But there is another layer here.

You see, you can’t use potash directly to grow fruits and veggies. These crops – tomatoes, avocados, melons, etc. – are sensitive to chloride and salt. So you have to modify the potash and remove the chlorine. These potash-based fertilizers, potassium sulphate (SOP) and potassium nitrate (NOP), are ideal for fruits and veggies.

As it turns out, you also need SOP and NOP to grow tobacco. Tobacco is fussy about what fertilizer it will take without messing up its taste or combustibility. It also needs a lot of potash. Yet again, chlorine is a detriment. Chlorine makes the leaves taste sour and can destroy the commercial value of a crop. As with fruits and veggies, you need SOP and NOP.

Selling SOP and NOP to China’s tobacco farmers is also a good business. For one thing, China has the largest population of smokers on the planet, some 350 million. Since potash represents less than 1% of the cost of making cigarettes, the tobacco growers are less price sensitive. What they really want is a quality product consistently delivered.

One of the companies I’m following is the largest producer of SOP and NOP in China and serves both the fruit and veggie market and the tobacco growers. But there are really many ways to get a hand in the Chinese agricultural story. Watch this space.

Investment Suggestion – Agriculture

The Best Investment Opportunity of 2009
By Chris Mayer, editor of Mayer’s Special Situations

“Investing in agriculture today will be like investing in the oil sector in 2001-2002,” writes Mark McLornan in the May issue of Marc Faber’s Gloom Boom & Doom Report. McLornan runs a fund that invests in farmland. Some of his on-the-ground observations confirm many of the things I’ve been telling my readers for the past several years.

As for likening agriculture today to oil in 2001-2002, an investor’s pulse quickens. We all know the great run oil stocks had as the price of oil sprinted from under $30 to a peak of $143 per barrel. Investors made hundreds-of-percent gains – even thousands-of-percent gains. What most investors forget is that oil prices halved from 2000 to the bottom in 2001, just before the great run-up. The same sort of setup seems to be happening today in the agriculture sector. Most ag commodities fell more than 50% after hitting their June 2008 highs.

This is the pause that refreshes.

The biggest reason to get excited about agriculture is the fact that supplies are at multi-decade lows. In fact, as McLornan points out, “agriculture is one of the very few sectors globally that currently face supply shortages.”

The “stocks-to-use ratio” provides a helpful context. This ratio measures how much supply is on hand versus how much we use. High ratios imply a fully supplied market. Low ratios hint at possible shortages. You have to go back to the 1970s to find ratios in wheat and corn as low as they are today.

The kicker to all this is that last year, the world’s farmers produced a record wheat crop and the stocks-to-use ratio barely budged. There is no way we are going to top that harvest this year with all the drought hitting different parts of the world.

The International Grains Council (IGC) predicts a fall in total wheat output in 2009-10. The IGC predicts global wheat output of 650 million tons, down by 5% from the previous year. The largest declines are seen in the European Union, the U.S., China, Russia, and Ukraine. “Although conditions in the Northern Hemisphere are generally favorable,” the IGC says, “production is likely to fall sharply.”

McLornan says that global yields for wheat hit a plateau in the 1980s and “gene modification technology has been unable to improve what natural selection has achieved over the past centuries.” So we already have tight supplies. And they look to get tighter.

The financial crisis also threatens to reduce supplies. Farmers who cannot gain access to credit cannot put seeds in the ground. Thus, the twin forces of drought and financial crisis seem likely to exert a growing influence over the grain markets – depressing supplies and therefore, boosting prices.

We’ve seen this movie before…

In 1933, in the pit of the Great Depression, writer Sherwood Anderson took to America’s back roads to see how the country was making out. He wandered into coal towns and mill towns, farms and factories.

His account, published in 1935 as Puzzled America, gives us a peek at Depression-era days. As the title lets on, most Americans seemed not to know quite what to make of the Great Depression. “Puzzled” seems just the right word.

It was puzzling because a man was prosperous and then suddenly was not any longer. A common story in farm country during the Great Depression began something like this: There was a prosperous farmer with lots of land who grew wheat. He then went into debt to buy more land and plant more wheat. The price of wheat suddenly fell like a shot quail. And the farm went under. Just like that, our man was broke.

If the financial crisis didn’t take the farm, Mother Nature did. “It was a farm until he plowed it,” Anderson quotes one man as saying of his uncle’s place. Then the drought came. The dry soil swirled around like snow in a blizzard. The farm simply “blew away.”

The hot winds tore the bark right off the trees and burned crops to ash. Fences lay buried under dust drifts. Dust storms blackened the sky. Topsoil of thousands of acres blew away. Anderson describes a little church in North Dakota:

The boards of the church cracking and curling under the dry heat, the paint on the boards frying in the hot winds… and the dust of the fields sifting in through the cracks. Dust in the mouths of the people as they prayed for rain.

Commodity prices took a big tumble after the crash of 1929. That’s what bankrupted the once-prosperous farmers. Then you had fewer farmers farming. Then you also had drought. Supply fell and prices soon rallied hard off their bottoms. By 1937, most food commodities – corn, wheat, sugar – were as high, or higher, than their ’29 highs.

Today, we also have the dual threat of drought and financial crisis. Farmers across the southern plains report poor crop conditions, thanks to dry weather. We also have drought in many places in the world that usually grow a lot of food.

One example: China’s Ministry of Agriculture said that a third of its crop faces drought issues. The country’s stocks-to-use ratio will fall below 30% for the first time since 1971. As AgCapita, an investment fund specializing in farmland, notes in a recent letter, China will be a net importer of 12 million metric tons of wheat. By way of comparison, Canada’s entire annual wheat exports average around 15 million metric tons.

We also have cutbacks in supply, as farmers have a harder time getting financing to buy seed, fertilizer and machinery. As The Wall Street Journal reported recently:

Across the nation, farmers are making plans to cut their production of corn, wheat, rice, peanuts, beef, pork, poultry and milk… Also, some farmers plan to grow just one crop on land that normally produces two each year, and to let some land lie fallow throughout the year.

Production of meat in every category will fall for the first time since 1973. Meanwhile, consumption of grains keeps rising. Globally, wheat demand should rise 6% this year. No surprise that retail food prices rose nearly 6% last year. I think they could rise as much this year.

Ultimately, we’ll have to grow more food…somehow. So a forward- looking investor will want to invest in the ideas that help that process along. Fertilizers are one such idea. Like a prizefighter with a tough chin, fertilizer demand doesn’t stay down for long. The reasons are simple. Lower fertilizer use means lower crop yields. Lower crop yields tend to raise prices for food. These higher prices then provide an incentive to plant more, so fertilizer demand comes back.

I’m a fan of PotashCorp (POT:nyse), which benefits from these trends. It also owns more potash, a key fertilizer, than anybody else. As Barron’s recently noted: “Longer-term investors can take comfort in the knowledge that many crop-planting, potash-guzzling countries – like China, India, Brazil – all have growing economies.” And they have growing populations as well.

There are other ways to invest too. You can buy other ag-related businesses. You can also invest in the actual food commodities. I expect good moves on this stuff in the back half of the year after the fall harvest disappoints.

What about demand?

I think we’re getting close to the moment when the world’s meager supplies of grains become front-page news. We have another few months before the reality of a lousy fall harvest sets in. Agriculture investments should do very well from that point – for everything from fertilizer stocks to agricultural equipment makers to the grains themselves.

As always, I recommend buying assets like these before the crowd sees it on the 6:00 news.

Money Creation at the State Level

BUT GOVERNOR, YOU CAN CREATE MONEY!  JUST FORM YOUR OWN BANK.

Ellen Brown
May 26th, 2009

“I understand that these cuts are very painful and they affect real lives. This is the harsh reality and the reality that we face. Sacramento is not Washington – we cannot print our own money. We can only spend what we have.”
– Governor Arnold Schwarzenegger quoted in Time, May 22, 2009

Christmas comes early, Governor. You CAN print your own money. Fiscally solvent North Dakota is doing it . . . and so can California. Now!!!

In a May 22 article in Time titled “Billions in the Red: Fiscal Reckoning in CA,” Juliet Williams reports that since California voters have now vetoed higher taxes and further state government borrowing, Gov. Arnold Schwarzenegger has indicated that he intends to close the budget gap almost entirely through drastic spending cuts. The cutbacks could include laying off thousands of state workers and teachers, ending the state’s main welfare program for the poor, eliminating health coverage for about 1.5 million poor children, halting cash grants for about 77,000 college students, slashing money for state parks, and releasing thousands of prisoners before their sentences are finished. Schwarzenegger bemoaned the fact that the state could not print its own money but said it could only spend what it had.

But the state can create its own money. After all, banks do this every day. Certified, card-carrying bankers are allowed to do something nobody else can do: they can create “credit” with accounting entries on their books. As the Federal Reserve Bank of Dallas explains on its website:

“Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank . . . holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.”

President Obama has also acknowledged that banks create money, through what he calls the “multiplier effect.” In a speech at Georgetown University on April 14, he said:

“[A]lthough there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask – the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.”

Money in a government-owned bank could give us the best of both worlds. We could have all the credit-generating advantages of private banks, without the baggage cluttering up the books of the Wall Street giants, including bad derivatives bets, unmarketable collateralized debt obligations, mark to market accounting issues, oversized CEO salaries and bonuses, and shareholders expecting a sizeable cut of the profits. A state could deposit its vast revenues in its own state-owned bank and proceed to fan them into 8 to 10 times their face value in loans. Not only would it have its own credit machine, but it would control the loan terms. The state could lend at ½% interest to itself and to municipal governments, rolling the loans over as needed until the revenues had been generated to pay them off. According to Professor Margrit Kennedy in her 1995 book Interest and Inflation-free Money, interest composes, on average, fully half the cost of every public project. Cutting costs by 50% could make currently-unsustainable projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable but actually profitable for the government.

If all this seems too radical and unprecedented to venture into, consider that one state has had its own bank for 90 years; and it has not only escaped the credit crunch but is doing remarkably well . . . .

THE INNOVATIVE BANK OF NORTH DAKOTA

Only three of fifty states are now solvent, meaning they have the revenues to meet their state budgets; and one of them is North Dakota. It is an unlikely candidate for the distinction. It is a sparsely populated state of less than 700,000 people, largely located in isolated farming communities afflicted with cold weather. Yet since 2000, the state’s GNP has grown 56%, personal income has grown 43%, and wages have grown 34%. The state not only has no funding issues, but this year it actually has a budget surplus of $1.2 billion, the largest it has ever had.

North Dakota boasts the only state-owned bank in the nation. The Bank of North Dakota (BND) was established by the state legislature in 1919 specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank’s stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. By law, the state must deposit all its funds in the bank, which pays a competitive interest rate to the state treasurer. The state rather than the FDIC guarantees the bank’s deposits, which are plowed back into the state in the form of loans. The bank’s return on equity is about 25%, and it pays a hefty dividend to the state, which is expected to exceed $60 million this year. In the last decade, the BND has turned back a third of a trillion dollars to the state’s general fund, offsetting taxes. The former president of the BND is now the state’s governor.

The BND avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk, and buy down the interest rate. The BND provides a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. Guarantees are also provided for entrepreneurial startups, and the BND has ample money to lend to students (over 184,000 outstanding loans). It purchases municipal bonds from public institutions, and it backs loans made to new farmers at 1% interest. The BND also has a well-funded disaster loan program, which helps explain how Fargo, when struck by a disastrous flood recently, managed to avoid the devastation suffered by New Orleans in similar circumstances.

North Dakota has also managed to avoid the credit freeze, through the simple expedient of creating its own credit. It has led the nation in establishing state economic sovereignty. In California and other states, workers and factories are sitting idle because the private credit system has failed. An injection of new money from a system of publicly-owned banks on the model of the Bank of North Dakota could thaw the credit freeze and bring spring to the markets once again.

Economic/Investment Focus – Tanzania

Tanzanian President seeks US economic cooperation
He meets with several IT companies: Google, IBM, CISCO…

Tanzania’s President Mr. Jakaya Kikwete is outsourcing in the United States in order to secure tangible tools for the development of Tanzania. He is scheduled to visit international organizations and international financial institutions to discuss the way forward for Tanzania’s economy.

 

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Saturday 23 May 2009, by Konye Obaji Ori

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President Kikwete has visited Silicon Valley to meet with technology giants (CISCO, IBM, Google) to discuss technology growth in Tanzania, he has visited Stanford University to discuss clean drinking water for rural Tanzania, and he has met with president Obama to discuss ways of improving development policy in the fields of health, education, and agriculture, and ways of solving some of the most pressing conflicts on the African continent. Reports claim that he is scheduled to visit international organizations and international financial institutions to discuss the way forward for Tanzania’s economy.

According to reports, the active Tanzanian leader was scheduled to discuss the proposed building of an Information Technology college at the University of Dodoma in Tanzania and the possible laying of a fibre-optic cable in Tanzania with Cisco and IBM. He also met with Google to find ways to speed up development and promote efficiency in Tanzania. In three months from now, Tanzania is expected to establish Seacom, the first of three undersea fiber optic cables which will connect East Africa with Europe.

President Kikwete who is a former military officer and an unswerving supporter of Tanzania’s founding president, Julius Nyerere, on Wednesday recieved an award in Los Angeles for his efforts to improve health on the African continent, and for pushing his administration into increasing the country’s health budget to 11 percent.

The Tanzanian president is the first African Head of State to visit the White House under President Obama’s regime. He sat with president Obama at the white House to discuss the Democratic Republic of the Congo, Darfur, Somalia, the current political situation in Kenya and the ongoing tension between mainland Tanzania and Zanzibar were discussed in the meeting.

Tanzania has not had the type of internal strife that has plagued many African countries, though it remains one of the poorest countries in the world, with many of its people living below the World Bank poverty line, it has had some success in wooing donors and investors. Unlike many African countries, whose potential wealth contrast with their actual poverty, Tanzania has few exportable minerals and a primitive agricultural system.

The Tanzanian President is however commended by observers as doing his bid to continue the good work started by his predecessor (former President, Mr. Benjamin Mkapa) who is credited by the IMF and World Bank as being the driving force behind Tanzania’s extensive economic liberalization, which contributed to the country’s economic growth as well as a considerable drop in inflation