|Home||About Us||Resources||Archive||Free Reports||Market Window|
Friday, February 9, 2007
The price of food is skyrocketing... and it's starting to cause problems.
"China orders crackdown on food hoarding," says a headline in last month'sInternational Herald Tribune.
In December, the Chinese prime minister ordered the sale of huge emergency supplies of rice and wheat in order to put downward pressure on food prices.
Not only are rising food prices causing China's inflation rate to ramp up to the fastest pace in almost two years, they're also causing social unrest. Some 150 million people in China still live on less then $1 a day...
When food prices rise, these people starve.
Mexico is facing similar problems. If you believe the official line, tortilla prices rose 14% last year. The real situation could be much worse. In one northern Mexican state, a kilo of tortillas has risen from six pesos to 30 pesos since November. That's a 400% increase in two months!
Corn tortillas are a staple food in Mexico... in other words, tortillas are a significant daily expense for more than half of the Mexican population who live in poverty.
The problem here is simple. The United States is the world's largest exporter of corn, and many nations rely on U.S. corn for food... Japan, Mexico, Taiwan, Canada, Egypt and Colombia are all big corn importers. According to statistics at the National Corn Growers Association, the United States grew 42% of the world's total corn crop last year.
World Corn Production 2004/05
Here's the thing: According to BusinessWeek, ethanol production will consume half of the United States annual corn harvest by 2008.
In other words, the craze for biofuels is about to chew up 20% of the world's corn harvest.
Corn is up 14% already this year... and up 100% in the last six months. Given how important corn is, it's not surprising all the major newspapers and magazines are writing about it.
THE CONTRARIAN'S STARTING POINT
We read every newspaper we could find this week, and we couldn't find a shred of good news coming from the subprime lending industry.
To simplify the term, "subprime lending" is the business of making home loans to shaky borrowers and earning a bit more in interest payments for the extra risk of default.
During the huge bull run in home prices, this kind of lending worked like a charm... as a homeowner could sell his house for an appreciated price if he couldn't make loan payments. Now that prices have stagnated, subprime lenders, like New Century Financial (NEW), are sporting big loan losses and plunging share prices.
After announcing trouble with its bookkeeping, NEW plunged 36% yesterday... and now sits 62% off its high. Naturally, Wall Street arrived 10 months late to the party and finally slapped "sell" recommendations on the stock. Terrible news, "sell" recommendations, and hated stocks? We're getting interested...