I know in advance I’ll draw some laughs (the ‘at’ kind, not the ‘with’ kind) due to this post but I do think it’s relevant. Today I am telling people to learn a bit about gardening, specifically, market gardening, in order to avoid getting hit by ag-flation. Agflation/Ag-flation (because it’s not an official word yet I don’t know if requires a hyphen or not) describes the current phase of world food commodity prices, the inflation is being driven on agricultural products, rice, corn, wheat, meat etc. So expect to be paying more at the till for every kind of food, in fact there have been riots in Mexico and Indonesia already because of food prices, in Haiti they stormed the presidential palace in Port au Prince and dethroned a leader.
Egypt has suspended rice exports and is trying to organise a rice for wheat swap with Syria, Ukraine is in talks with Libya, and the Philippines are in talks with Vietnam, this is as a result of Agflation, or inflation that is linked to agriculture. Wheat has risen in price 130% in the last year.
There have been actual riots in Jakarta, and ‘tortilla‘ riots in Mexico, in Haiti demonstrators stormed the presidential palace over food prices. There have been public protests in Niger, Senegal, Mauritania, The Ivory Coast, Burkina Faso, Egypt, Morocco and Cameroon. In Yemen hungry children took to the streets in protest. Philippines there are huge queues as people wait in line to buy government stocks of rice.
Commodities reach a historic low in 2001, but since then prices have been rising and in the last year they have literally shot through the roof. No other investment is even close to the performance we have seen in commodities over the last six years, not stocks, not bonds, not property (not even Irish Property), not India/China funds, or any other emerging market or BRIC fund. In fact, even during the worst financial meltdown in the last 60 years commodities are hitting new all time highs.
It may be that we are returning to the things that were once held dear in history, in a previous blog I wrote ‘Finance returns to the year 1400’ and by that I am talking about a world where food, raw materials, and gold are the precious supplies of the day. In financial circles we are hearing a lot about the ‘new world’ versus the ‘old world’ and literally it is a brand new world, although maybe not a brave new world (Aldous Huxley might even balk at the mess we are currently in). The ‘New world’ is everything from 2008 (really Q3 2007 but rounded dates like 2008 are easier to remember than 29th August 2007) onwards, because we are going to see monumental changes in not only Irish finance but international finance.
Food was the main topic on the bill for the recent G7 meeting, the credit crunch was second. Why has food suddenly gone so high in price? There are many reasons, biofuels, heralded as the global solution to oil supply issues and energy shortages are being partially blamed, biofuel is certainly not efficient when creating it with Corn Ethanol because it takes 8 litres of fuel to create 9 litres of biofuel ethanol, that’s only a 12.5% gain, not enough to solve world fuel issues but the reduction in corn supplies is certainly enough to wreak havoc on global corn markets, especially as farmers in the USA are subsidised for their actions, protected markets are largely behind the world food crisis.
Why for instance is Brazilian sugar not getting into American markets? Sugar can be used to create a very high grade biofuel, with Brazil’s virtually untapped ability to grow sugar cane it would make sense that they become biofuel makers and let the USA be corn growers right? Wrong, because of the way that international trade tariffs are set up this is not happening, and its governmental meddling in what should be free markets that is causing a massive amount of the food shortages.
The food shortages are being compounded by desperate and inflation driving Fed interest rate cuts, so many of the goods traded in Dollars will continue to rise in price. The ECB has thus far held out on an interest rate cut but we still have inflation and a quickly reducing output, inflation is coming from energy and basic foods, the reduction in output is part of the worldwide slowdown.
So get a packet of seeds and start to grow your own food, sometimes solutions come from the strangest places because the ‘grow your own’ movement originally came from drug culture. However, letting a plant grow – assuming you have the land to plant something in – costs virtually nothing, but if you were to do this you could save yourself (if food prices double which is what many pundits are predicting by 2010) about €100 per month, maybe more depending on how green your thumbs are. If you were to put this extra €100 against your mortgage then over time you could save tens of thousands of euros. If you had a balance of €250,000 over 25 years and you paid an extra €100 per month the difference at the end would amount to almost €30,000.
If even one person does this I would be amazed but it doesn’t mean that the figures don’t stack. The thing about food is that you can’t do without it, you can fast for a day, you can even cut back on your calorie intake, but you can’t ‘cut’ it from your budget. You can cut out nights on the tiles, you can choose to use public transport instead of a car, or turn on your heating less, but the biggest area of inflation, and it has already reared its head on the markets is something that you simply cannot do without. And for that reason you will start to see a rush towards food company and food processing stocks, as well as any supplier firms that make things more efficient – for instance certain types of farm machinery, because as food prices soar efficient machinery will become affordable for many farmers.
Stay on the look out for signs of Agflation, it will show up on the supermarket shelf, it will show up in restaurants and every facet of your life because unless you plan to stop eating altogether.