Trend: Rising Food Prices

(wikipedia: picture of a farm in Hebei, China)

Over here in Australia, the two blockbuster trading bets are on a rise and continued rise of mineral ores, oil & gas and grains commodity. Australia stands to benefit quite a fair bit as an old world economy rich in mineral resources and arable land with a relatively tiny population.

In a recent media release from the Reserve Bank of Australia dated 1 April 2008, Governor Glenn Stevens, expresses the RBAs view that they expect a further rise in Australia's terms of trade. (Terms of Trade = Prices of Exports / Prices of Imports, hence Australia being a large exporter of commodities to hungry, growing nations, they expect a rise in the terms of trade.)

What's scary about this is that supply for iron or oil in the form of new iron ore mineral deposits or easily extractable oil wells are not in the pipeline, so to speak. In fact they're not even anywhere near the pipeline. Apparently, back when prices were low, we did not go exploring for these things, now that there's a demand again, exploration companies big and small are scrambling to find a lucrative node. Much of what's extractable however is in remote, farflung places. Sometimes located below nice pristine rainforests for example.

The same thing is apparently going on with food prices. We're now witnessing a market in disequilibrium as suppliers scramble to shift supply in response to a larger than anticipated demand.

Reuters.com is doing a special feature on rising food prices: "Agflation: The Real costs of Rising Food Prices"

The UN fears that if food prices continue to escalate, we're going to see more civil unrest. So where's the demand coming from? China and India mostly. But let's not forget to mention that farming isn't instantaneous, it takes time to produce that grain of rice, wheat, sorghum. It takes time to grow that chicken, sheep, cow. There's always a lag in supply response.

Also, let's not forget the market inefficiencies that government rules and taxes impose on prices. Prices are not going to smoothly adjust, they'll be sticky.

I got to thinking about the kind of trends that we can invest and trade on: I'm long emerging markets, so with the rise in incomes and wealth of the average citizen, then we can expect them to consume more meat, vegetables, milk, consumer food products etc. With the need to feed more people, basic inputs have to be increased as well. Stuff like fertilizer, feedstock, feedgrains, acreages etc. 

In the mean time, I guess we as consumers have to put up with higher prices. Nothing comes for free, that's the price of progress. 

From Slashdot.org: HighWizard posts "Oil Deposit Could Increase US Reserves 10x"

Occasionally you'll get a gem of a piece posted on Slashdot.org that has academic/trading/investment merit. This article is about the release of a report on the Bakkan Formation. There's lots of good stuff in the following Slashdot story thread.

HighWizard notes the upcoming release, on Thursday, of a report by the US Geological Survey on the Bakken Formation. This is an oil field covering 200,000 square miles and underlying parts of North and South Dakota, Montana, and Saskatchewan. A geologist who began surveying the field, before dying in 2000, believed it may hold as much as 1 billion barrels of recoverable oil. Later estimates have ranged to the hundreds of billions of barrels. Such a reserve would go a long way toward securing US energy independence.

Read more at Slashdot.org: http://hardware.slashdot.org/article.pl?sid=08/04/08/2111201&from=rss

If this is true, which companies are at the Bakkan formation?

Reader Itchyeyes (908311) contributes:

The people that have interests in the Bakken in North Dakota are not the majors. They are companies like EOG, Marathon, Kodiak, and Questar. These companies do not have refineries. They sell at the market price, they have no say in what their product goes for. They do not have enough reserves to make any impact on market prices even if they wanted to.

Also, he gives reasons as to why oil extraction from Bakkan formation is becoming a viable economic alternative due to high oil prices.

Of note is the following rant by Reader iq_in_binary (305246):

You, sir, are a complete fucking moron.

The big oil companies haven't been making their profit by virtue of artificially controlling the supply, they've been doing it by selling more than they've ever sold before. The profits reaped last year and the year previous wasn't because of raising their profit margins (I.E. raising prices to increase their profit margin), they've been doing it by selling more petrol than in any years previous.

Big Oil has has the same business infrastructure, organizational structure, and sales methods as they've had for 50 fucking years. They held a razor thin profit margin on gasoline for going on 25 years now. For every dollar on gas, you spend maybe 3 pennies giving them profit. So quit bitching about oil companies gouging the public, because they aren't. You want to know the real culprit for gas prices these days? Our own fucking government, they make about a dollar per gallon on taxes.

Where does that money go? Who knows any more. Just quit bitching about a company actually doing good business, because for the most part the petrol companies are. They have to deal with literally thousands of different mixtures of gasoline being shipped among this country, the different ways to refine them, and finally the shipping, and they're only pulling 3% profit. Fuck you for thinking that's out of line. Learn your economics, and then learn how the real world works. The price of gas being as high as it is is MORE the gov's fault for spending so much money on pork that it has to rape us on gas to compensate. Bitch at your governments for taxing gas so much, then bitch at them for making good companies spend twice as much as they have to for making a good product, THEN bitch at the gas companies for not making things cheap enough when they're only pulling a 3% margin.

This is a capitalist economy, damnit, it's what is responsible for this country's well-being. Think about the business first, then bitch.

To which, I say, AMEN to that!

Oil Prices: Huge Demand, Not Enough Supply; means Big Future Oil Prices!

This is so obvious its scary. In the next few years we can only expect higher oil prices because there's no new major oilfields left for easy extraction. Most of it is locked up in 'difficult' countries. The uncertainty in supply as well as the world's rapacious hunger for oil has created this huge jump in oil price expections.

Dr Michael Smith of energyfiles.com argues that not only are OPEC producers overstating their reserves, he also claims that the data is highly suspect. Link to page [here]; Link to PDF article [here]. In this 2 year old paper he claims that assumptions of future oil demand of 12omillion barrels a day is 'untenable'.

Quoting from article:

"Predictions that oil demand will increase to up to 120 million barrels per day by 2020 allied to automobile and airline traffic growing at extraordinary rates are futile and damaging to policy makers."

Even 95 million barrels are untenable, he writes.

The primary implication is that we're likely to see a switch to Gas (will require more infrastructure to be built) and alternative fuels as higher prices results in a substitution effect.

A couple of trading ideas:
I thought of buying Coal and other alternative energy companies in anticipation of an increase in demand for their services. The more immediate goal is figuring out which Oil & Gas co.s are likely takeover targets considering that its easier to buy a company and its proven petroleum reserves rather than look for the stuff itself.