(August 13, 2009)
The global supply of grain is more vulnerable than most of us realize.
Knowledgeable reader L.K. recently sent me this disturbing report:
I just read your article
The Royal Scam.
I wanted to tell you about something that 99%
of America does not realize but which could cause more problems than any of the things in
that article. Nobody realizes that only 1% of the US population are real farmers. 70%+ of
our food supply is grown by them in a relatively small area of the Midwest between Southern
Minnesota to Texas and Eastern Nebraska to Ohio. So most of our food, the only thing we
need every day to survive, is grown by 1% of the population in the middle of the country
whereas most of the rest of the population lives within 20 miles of the coasts.
the crops in that area are not irrigated. So they are unusually susceptible to cyclical
droughts. If a garden-variety drought were to hit that area of the US, that part of the
population that depends on it for survival have no solution and they are armed to the
There used to be a lot of grain stored up courtesy of the government, but that
was all gotten rid of in the '80's so that the money used for it could be spent on
social programs. So now we have no contingency plan for this occurrence. Currently we
are long overdue for a drought in that part of the US. If we get one there you can make
your own conclusions as to what will happen.
An interesting sidelight to this is that Goldman Sachs, the only surviving investment
house in the US with a trillion dollars in assets, just became a bank and is expanding their
operations in Salt Lake City, Utah.
(Goldman growing in Utah.)
Many people wonder why they would do that. However,
all the cropland in that area is irrigated making that region drought-proof. Also there's
not much of a population there to freak out as will happen within 20 miles of the coasts.
The way I know about this is that for thirty years I was a grain trader and feed ingredient
buyer for several large US agribusinesses whose business it is to know about and follow
closely these sorts of things. All of the statistics that prove what I said is correct are
freely available on the internet but 99.99% of all people are not interested in where
their food comes from or how much of it is out there. Strange since that's the only thing
they really need to survive.
if this scenario (drought-induced grain shortage) were to occur things would happen
relatively quickly and nobody would warn the public about it until it was too late.
This event is set up like your financial one. The pieces are already in place and there
is no contingency plan to stop it.
One solution I know of is to NOT live in a big city. The bigger the city, the worse it
will be. And, as I mentioned, living in an area where the crops are irrigated will
also be a solution. But getting to that area from a big city when there's no fuel to
get out with and rioting going on there will make it hard to make it to an irrigated
area once the disaster hits. So a prudent person should do that ahead of time, IMHO.
Thank you, L.K. This report fits into a theme many have observed: the global supply
chains for the two necessities of industrialized civilization--oil and grain--are precariously
balanced on a few large suppliers, a situation commonly termed as "systemic risk,"
meaning it is not temporary but an integral feature of the supply chain.
No other alternative supplies are available if, say,
Saudi Arabia stops pumping oil or a severe drought devastates the U.S. wheat crop. Yes,
there are "strategic reserves" but these are not as deep as many seem to think.
The entire U.S. Strategic Oil Reserve is 600 million barrels, or about one month's supply.
(20 million barrels a day X 30 = 600 million barrels). It will be useful in filling a brief gap
in supply (say, 5 MBD) but it is simply not large enough to maintain consumption in the
event of a serious, lengthy disruption.
The canniness of Goldman Sachs seems to know no bounds....
Frequent contributor Albert T. recently sent me these links and comments on the drought
in India. Currently there is a severe drought in grain-producing regions of Australia,
and both Texas and California are suffering from near-drought conditions. Nobody can predict
the weather but to dismiss drought as a threat would seem to be foolhardy.
Here is Albert's report:
Impact of weak monsoon on Kharif
Agriculture Minister Sharad Pawar told parliament the June-September monsoon had been
deficient across India, delaying sowing and planting in key agricultural states like Punjab
"Monsoon this year has been weak and erratic in its progress, resulting in late sowing of
(paddy) crops," Pawar said during a debate on agriculture output.
The minister said rainfall nationwide was down 19 percent on the previous year, with a
shortfall of 38 percent in the northwest and 43 percent in the northeast."
Meager Monsoon Threatens Indian Growth
After India's driest June in 83 years, four of 28 provinces have declared drought, and many
farmers don't have enough water to grow a full crop. More than half of Uttar Pradesh,
the most populous state and a key rice and sugar cane-growing area, is suffering from
A poor crop yield could push up food prices, straining the government's budget and
complicating the central bank's efforts to revive the economy without letting inflation
get out of hand.
"If overall rainfall deficiency falls to 20%-25%, India's gross domestic product growth
could be pared to sub-5% this fiscal year," said Mridul Saggar, chief economist at Kotak
India was sort of improving last week or two but apparently not so. The impact of food
going to a larger % of income from say 10 to 20 is hardly ever mentioned:
1 yr old graph on food % spent by Americans.
Food CPI and Expenditures (USDA)
Basically the supply chain for food processors/producers (bakeries/pastry plants) eats
the manipulated higher prices while the farmers and others who produce or participate
in grain elevators etc. in the market eat the lower price in the cash market for
holding/producing grain. It makes production less attractive for farmers and higher
costs pass through the the food processors to end users (us) due to futures being higher.
So we take it on both ends with risk amplified in the now for lower production and in
the future for higher costs. Thats my take on it. (The first article below tries to
say something similar).
CFTC chief: agency 'seriously considering' index trading limits amid concern over wheat prices
How Commodity Indices Broke the Wheat Futures Market
DJ Kraft Slams CBOT Wheat Plan, Questions Value Of Contract
What will happen is we will pay more and more for bread while farmers get less and less.
(This is all my opinion btw).
Grain markets we've never witnessed before (2/15/08)
However, one key factor makes the current market environment different. That's the influence of the very well-funded index funds, which trade only from the long side and are sold as a hedge against inflation.
This makes farm markets more of a money game. Who has the cash and what do they want to do with it. For now, the supply and demand fundamentals have a lessened impact on prices.
Here's an example of what I'm talking about. As I write this in early February, the index funds hold long positions in corn futures that total nearly 2 billion bushels. That's more bushels than the expected carryover of 1.4 billion bushels.
Their long position in soybeans is just under a billion bushels, compared to an expected carryover of only 175 million bushels!
Their long position in Chicago wheat is approximately 1 billion bushels, which
represents about 270 percent of the entire soft red winter wheat market!
Regulating commodities speculation: normative and fiscal means (Institute for
Agriculture and Trade Policy)
Thank you, Albert, for this wealth of resources on a critically important topic.
Here is a book Albert recommended some time ago which I also recommend:
Merchants of Grain
These titles are also highly relevant:
The Paradox of Plenty: Hunger in a Bountiful World
Paradox of Plenty: A Social History of Eating in Modern America
The Nine Nations of North America
Diet for a Small Planet
The Omnivore's Dilemma: A Natural History of Four Meals
Gardening When It Counts: Growing Food in Hard Times
Storey's Basic Country Skills: A Practical Guide to Self-Reliance
Just in Case
The Urban Homestead: Your Guide to Self-sufficient Living in the Heart of the City
Depletion and Abundance: Life on the New Home Front
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