Intersection

The regime in Egypt probably has about 24 hours before forced to flee.  The president has already sent away his family.  Live coverage from the Egyptian street via CNN International, Al Jazeera, and others, shows two very important aspects of this revolt that makes a leadership change inevitable.  First, the protesters have been taking time to say their prayers in the middle of the protests.  One might think that means the protesters are religious extremists.  Quite the opposite.  These people are mostly unarmed and praying as usual, they are regular people.  Extremists see injuring riot police during prayer time as a better way to praise God than praying.  Of course so do labor leaders, who have been unsuccessful in their efforts at revolt throughout the region over the past two weeks.  Like in Tunisia, this is a revolution, characterized by the participation of the general population, and not a revolt organized by extremists on either side.  The second important aspect is the behavior of the country's highly respected military.  They are out among the people, doing nothing.  The riot police, completely loyal to the regime, are on their own.  Either the regime is unwilling to ask the military for help, or the military has been asked and declined.  Whichever is the case, this signals the beginning of the end.

The rapid development of the revolution in Tunisia was a huge surprise, and caused quite a bit of angst in France, where support of the monarchy was designed to support stability and repression of extremists. The United States has long been in a similar position respecting Egypt.  Three days ago when he expressed support of the movement in Tunisia, could the president have possibly known that we would be here today, dealing with an Egyptian revolution?

Most of the reporting on this issue deals with the political repression in these countries.  But then we must ask the question: "If political repression has actually lessened over many years (especially in Egypt), why are the people rising up now?"  The answer is that economics has triggered this revolution, the same way economics triggered riots in Greece last year, and large protests in Jordan last week, on and on.  The opening lines of "All Quiet on the Western Front" are instructive:

Yesterday we were relieved, and now our bellies are full of beef and haricot beans. We are satisfied and at peace. Each man has another mess-tin full for the evening; and, what is more, there is a double ration of sausage and bread. That puts a man in fine trim.

In this scene the narrator's German army unit has returned from a fortnight of battle at the front, with half their men left dead on the field.  The cook was shocked at the heavy losses, and had prepared rations for twice the number, which means the survivors enjoyed double.

Staple commodities like wheat have doubled since last June, and many countries like Algeria and Jordan allowed their supplies to tighten to wait for the prices to decline.  Where the average person pays half their income for food (contrasted with around 10% in the US and Canada), governments must play this dangerous game.  They naively believed that prices must retreat since world food supplies are tightening but still plentiful, and demand cannot increase where 20% of the population is unemployed.  They didn't learn the lesson of 2008: The Banksters are in charge, and the only number that matters is their profit margin.  Prices have surged in the past two weeks as several governments have placed huge grain orders from U.S. exporters in order to build their stocks.

The U.S. GDP number reported today was largely influenced by agricultural exports.  The saving grace of our economy in the past quarter was capitalizing on the rising prices of commodities, which has led to revolution in places where the government has encouraged stability for decades.

Where bellies are full, a few will rule.

Actions Have Consequences

According to this Reuters article, the FAO report of record food prices that I wrote about yesterday is no big deal.  The article notes that in Kenya the population has changed its diet from corn and wheat products to rice, potatoes, and amaranth.  This was inevitable, and a phenomenon that I don't think western traders will understand.  When I was in Brazil this past month I heard the same thing, locally grown cassava flour is being blended with bread products due to the high wheat price.  Some African countries are now mandating a 10% cassava blend in bread.

The current food commodities bubble is able to account for some varying inventories reports, because there is always a short-term future fear to counter with, like this year's La Nina weather pattern.  If production in the wheat market, for example, outstrips demand by 10-15% more than what is already priced into the desired trading range, because millions of people have shifted their diets since the last bubble, hold onto your hat.

Wheat plantings are up 10% in the US since last year.  A 10-15% supply-demand difference could turn out to be extremely conservative.  The USDA is likely selling its insurance at somewhere around the $7.50 per bushel range.  This market has the potential to freefall by late summer, which would nearly bankrupt the crop insurance program.

The Dynamic Duo: Sarko and Dilma

Most of the work conducted during the G20 summit of the most powerful twenty economies in the world takes place behind the scenes.  The actual meeting marks more of a deadline for identifying major topics and assembling coalitions.  It appears that food insecurity is so far dominating the agenda for the next summit.  However, there are a few worrying signs that we may not get to June before this issue reaches crisis levels.

As this Marketwatch article reports, the UN's Food and Agricultural Organization (FAO) says world food prices reached a record in December.  The relevant comparison here is the price shock of 2008, which saw $12/bushel wheat (recently $8), for example.  One worrying aspect of this story is the nugget that the previous record of 2008 was partially influenced by crude oil commodities prices (a component of the FAO's agricultural commodities price index), which peaked at around $140 per barrel.  Crude oil has risen recently and has been trading for the past few weeks around $90 per barrel.  It should be noted that the US Dollar has strengthened against the Euro since that time.

This Washington Post article suggests that there is room for prices to rise further.  Looking at the charts presented in this Globe and Mail investor article, that is absolutely true.  It appears that in 2011 continuing price rises will be supported by a combination of fear about the weather and previous market highs that were outrageously unsupported outliers, with lip service given to supply and demand fundamentals, just like last year and 2008.

This issue may reach crisis levels far ahead of the summit, in part as food riots spread from North Africa to other third world countries, and also due to the influence of two powerful G20 players.  French President Nicolas Sarkozy, as head of the G20 in 2011 has put this issue front and center.  Meanwhile, newly installed Brazilian President Dilma Rouseff's administration has warned of a looming trade war over currency manipulation, which hurts Brazilian agricultural exports.

Rouseff (pron. Hoo-SEFF-ee) is an economist, whose domestic agenda is to continue former president Lula's efforts to increase economic opportunities for the roughly 40% of the Brazilian population that lives in poverty.  Despite her past affiliations with radical leftists, she is also a pragmatist who knows that this agenda will halt if the relative gains being enjoyed by the new Brazilian middle class are wiped out by external financial pressures.

In addition, Dilma campaigned on maintaining Lula's economic agenda in total, which is very popular with the Brazilian people.  It is generally viewed as pro-free market.  However, as the first female Brazilian president, Dilma must be able to lead on the economic issues which are her strength, or risk her legacy being only symbolic.  Lula was a social politician who wisely embraced economic pragmatism.  Dilma is an economic pragmatist who will become a social politician only if she is successful at managing a looming financial crisis.  Trade war saber-rattling is her first shot across the bow (even though this language is similar to recent pronouncements by Lula).  How her administration handles this issue in the coming months may well define her presidency.

Sarkozy is extremely ambitious, and a legacy that includes solving the world's food insecurity issue would suit him.  He is a controversial figure in France for many things other than the financial expertise that has characterized his long career.  The G20 summit of 2011 is for Sarko a great opportunity.

Brazil and France have enjoyed a healthy relationship in recent years.  While Brazil's membership in the BRIC (Brazil-Russia-India-China) trade and security coalition has been the western media's focus of late, the dynamic duo of Sarko and Dilma may be the big story of 2011.

Farm Aid 25

This Saturday in Milwaukee is the twenty-fifth annual Farm Aid concert.  Farm Aid has become much more than just a concert.  It is now an organization that promotes sustainable family farming, serving as a resource to link local and family farming organizations throughout the country.

The lineup looks great.  Old standbys Willie Nelson and Mellencamp will be there, as will headliners Dave Mathews and Norah O'Donnell.  Further down the line, Jeff Tweedy does excellent solo sets, and Band of Horses has been a favorite since I saw them at the Granada in Lawrence, KS, when me and about nine other people knew they existed.  Two years later they opened for The Killers in a much bigger venue in Kansas City.  That was an odd pairing.

You can catch the concert on DirectTV or stream it from the Farm Aid website.

The Short Answer: Ethics

"When you are young, ethics is what happens after you get caught.  But when you get older, ethics is what passes for forethought to make sure you don't have to get caught."

As I read this article entitled "The Fairway Test" in the September issue of the Rotarian, its relevance to the topics I discuss in this blog was very apparent.  Author Jack Hitt recounts the time he and his siblings were caught hiding the peas in dinner napkins.  His father caught on and their sister, as the mastermind of the plan, was forced to eat five servings.  They eventually came to realize that had they suggested a vegetable other than peas their father would have compromised.

Most of us can probably remember trying to hide the peas at dinner.  Much work has been done to improve the quality of the peas that we eat in this country, but the negative image no doubt holds.  I'll bet every day I think about something Pete Klaiber, marketing director of the Pea & Lentil Council, said last year in a class.  As I mentioned in the first post to this blog, the industry is now competing on quality.  Surely that is not only a response to global market mechanics, but also due to the realization that they must confront their image problem directly.  Trying to compete with third world countries in the bulk pea market is probably a loser, but changing a long-held perception about your product can't be easy either.

Competing on quality necessarily leads to a shift in how you interact with your customers.  In a need-based market, the buyer-beware ethic is more commonplace.  There is no expectation of reasonableness, honesty, or compromise.  Proponents of the need-based marketing outlook are correct to point out that in the marketplace, trade is always need-based.  

There are two reasons that the need-based outlook doesn't completely hold sway.  First, smaller competitors, or those at some other disadvantage must bring something else to the table.  A senior partner at a big New York law firm is probably not any better than one in Kansas City.  That won't counter the perception held by corporate executives that a New York lawyer is better.  Often times they are willing to pay a premium for that perception.  So how does the Kansas City lawyer compete?  Sometimes luck, sometimes a corporate counsel is a friend from college.  Or they can focus very heavily on their relationship with their client, never take anything for granted, and work every day to renew their client's trust in them.  

For five years I had the pleasure of working for one of the best lawyers around at relationship marketing.  As a proponent of the need-based strategy, it took me a while to come around.  Eventually I realized that it wasn't just a strategy this Kansas City lawyer employed to compete with New York lawyers.  It's not just his living, it's what he does for most of his waking hours.  He chooses the personal relationship marketing strategy because that is how he wants to do business.  There are companies here in Moscow, Idaho that employ the same strategy.  It would probably be easier to just move, but they choose the "hard way" because they choose a different way to live.

Pete Klaiber and the Pea & Lentil Council have identified an essential reality that will eventually pervade the U.S. agricultural industry.  It is exemplified in a Newsweek article  about why China will never be the world economic superpower.  The article describes a number of instances where China's need-based strategy has alienated countries like Angola and South Africa.  It is no coincidence that Angola, with its rich oil reserves, is embracing U.S. efforts to rebuild the long war-torn country.  

What the Newsweek article says in essence is that the U.S. economic position in the world is not just about resource domination.  It's about culture and dare I say... ethics.  The Pea & Lentil Council and the rest of the U.S. agricultural sector will succeed because when you compete on quality, you make a promise that is not required in the need-based paradigm.  A promise is not a contract, it's a bond of trust between people who have expectations of one another.

The Pea & Lentil Council's marketing strategy is largely focused internationally, but it may be the local foods initiative that leads this ethical revolution (with all due respect to Pete).  Some very important American companies are thriving by taking a stand for quality and sustainability.  Chipotle's slogan is "Food With Integrity".  Watch this Nightline segment as founder Steve Ells explains his philosophy.

Jack Hitt finishes his Rotarian article with some advice from his brother to a reader who inquires about playing golf with a friend who likes to take do-overs.  "I wouldn't do business with him," his brother said.  He then recounted something Ben Hogan said about  the game:

... golf is a game of recovery.  It's about what you're going to do when you get into trouble.  It's about shooting out of the woods or a sand trap. 

Hitt adds, "If one cheats over the very essence of the game, what does that say about your friend?"

A game of recovery.  So ethics is about not just not getting caught, it's about demonstrating to yourself that you can recover.  It's also about demonstrating to those around you that you welcome the challenge, when the chips are down you won't take the easy way out.

So when a client is really looking at trouble, do you think they call the New York lawyer, who relies on superficial marketing characteristics, or the Kansas City lawyer, who he or she knows will respond the same way that they live?  Take a deep breath, relax, and punch it back into the fairway, walk straight to your ball and be ready to make the next shot when you get there.

In international agricultural trade or local food production, it's about gaining and keeping the trust of your customers.  That's the point for Steve Ells, and I predict it will be for most agricultural trade groups in the future, not just the Pea & Lentil Council.

This ethical, personal relationship strategy is not something we employ just to compete, it's a way of life.  Let the re-set begin.

On Speculation

In last week's issue of The Economist, Sir Richard Branson and others wrote to the Letters section with their take on speculation in commodities markets.  They rebut two main points from the original article.  Here is the second, most salient point:

... the article shares the common misconception that futures prices cannot affect spot prices because speculators do not take delivery of physical commodities, and therefore do not "hoard" in the traditional sense.  The reality, however, is that spot prices of many consumable commodities, including oil, and corn, are set by long-term contracts that are based on futures prices, allowing the tail to wag the dog.

Essentially what they are saying is that disinterested parties who only care about a price distort the market.  The Economist article Branson, et al. are responding to suggests that those who "hoard" commodities are the ones who affect the price and should therefore be held to account for any problems that occur within that market.

Hoarding is a component of the producer's ability to impact supply in order to achieve a better price, but this is essentially a longer-term position than speculation.  So is taking land out of production, which is what an influential group of potato producers did last year.  Speculators are doing no such thing.  They have no place whatsoever in the supply chain.  They are not "investing" in farmers or processors.  With globalization, food demand is going to remain relatively strong, and parties who are part of the supply chain will continue to find usefulness in commodities markets.  Speculator involvement in this market is absolutely unnecessary.  Branson summarizes it best:

There is strong evidence that speculation exacerbated the last oil and food bubble.  Speculation will fuel the next one too, unless meaningful speculative position limits are established.

Commoditization and futures contracts are meant to allow farmers to reduce risk.  Reduced risk and a long-term outlook encourage better, more environmentally friendly practices, development of alternative food markets, economically stable communities.  That's not what is happening here.  Let us hope change is not forced upon us by what Branson alludes to.

Commodity Supply "Scares"

This week a new fallacy showed up in the commodities markets.  Having taken their profits by creating a wheat supply shortage "scare" from thin air, hedge funds and brokerages houses decided to jump to coffee, driving the futures price to near a 13-year high.  Somehow they have convinced the folks at Marketwatch and a number of other mainstream publications that the "perception" of a supply problem is the exact same thing as an actual supply problem.  Actually, in principle their logic is good, since we're talking about the futures price, which can only be estimated and therefore perceptions are reasonably taken into account.  The problem is that futures prices for two, three, or even six months down the road are not going up.

This is a transparent policy of pumping commodities for short term gain in a flight to safety.  If there was real fear of an actual worldwide commodity shortage, which some have predicted will cause food riots, wouldn't savvy investors like those who run hedge funds have long positions in March wheat contracts, for example?  I guess we'll never know, because today they took their coffee profits, a week or so after taking their wheat profits, as noted in a previous post.

Meanwhile, some brilliant analysis over at Marketwatch suggests that the recent wheat supply scare-that-wasn't should cause thinking folks to realize "just how fragile the global grain market really is."  This article is a true classic and you should take the time to read all of it.  One of the main reasons cited for "fragility" in the global grain markets: weather.  Of course, weather is always in play in pricing commodities futures, and it was cited as one of the main reasons for the run-up in coffee futures.  But here they are grasping at straws.

After writing last week that the hedge funds drove up the futures price based on nothing but their need for a safe haven, Marketwatch has trotted out a straw man.  Even though there wasn't a supply problem, the futures price rose, and there was "fear"... and so that means the market is fragile... so next time there is "fear", or weather "issues"... the price might rise again... because the market it fragile.  So much for supply and demand.  This is  fantasyland.  Feel free to play, but only if somebody gives you free tokens.

Here's the bottom line.  There is no wheat shortage.  The very same article that rationalizes a market response to pretend supply shortages notes that the USDA claims U.S. ending stocks are "three times larger than a few years ago."  The U.S. has more than enough wheat to cover what was not that big of a shortage caused by the Russian drought.

You will be paying higher prices for coffee very soon.  How will it feel when you see an article breathlessly reporting that Brazil's harvest was just dandy, despite all the "fear"?

Egg Recall

I had intended to write something much different today, but I'm in the Quiet Bar waiting for the Rotary meeting to start since the Jeep was just towed away for service.

The director of Food, Inc. was on CNN to talk about the egg recall/salmonella scare.  He took the opportunity to pump local food production, which is the major theme of his film.  This could be opportunism, or the film could just be prophetic.  I think the director of the film would say it was a matter of time.  Follow the link to watch the trailer.

Getting Local in Illinois

One of the themes of this blog is local food production.  This is not necessarily a philosophical position, but rather a recognition that commoditization of agriculture and long-chain distribution practices go hand-in-hand, and that both are vulnerable to niche market insurgencies.  As economic sanity is restored, a large percentage of the population will demand that their food be locally produced to a much greater extent.  People may not be willing to pay $75.00 for a toy truck made in America, but many more will pay a 25% premium for locally produced food.  This is not all about dollars and cents, it's about a re-setting of priorities.


Local food production is a pretty hot topic, but few people actually believe that this movement could impact the current food distribution paradigm to any significant degree.  An organization called FamilyFarmed.org has been involved in the movement in the Midwest.  Recently it produced a report which estimates that in Illinois many corporate consumers would spend up to $23 million annually on locally produced fruits and vegetables.  Those corporate entities include Whole Foods and Chipotle.


From an article about the report in Medill Reports:

In the past, “commodity pricing of fruits and vegetables made it very difficult [to compete] with warm weather farmers,” said Slama. But the picture has changed. “Transportation costs being what they are, consumer and trade buyers all want local food, which is opening up the market, particularly in Illinois,” he said. That means opportunity for family farms to connect with the wholesale market, according to the report.

Realistically, local food distribution, including traditional commodities, is unlikely to impact the market to a very large extent anytime soon (unless fuel energy interests are able to keep current prices stable or push them higher).  However, this report gives some credence to the belief that more small farmers will be able to make a living in the future by marketing their products locally.  Eventually the movement could provide a growing number of traditional commodity farmers better wholesale market exposure, and the freedom to leave Wall Street to its own devices.


Read the full report here.

Buckwheat News

I chose to conduct field research on buckwheat in part because of its potential in the marketplace.  The following news items support the view that food items containing buckwheat will be commonplace in the next decade or so, and that there will be a viable market for buckwheat as a cash crop.

Here is a report on a study where jet-dried buckwheat flour was effectively used to replace fat in cakes, not completely but to a significant extent.

A New York Times blog hi-lighted the expanded use of buckwheat by top chefs.

The Wall Street Journal profiles a famous New York City restaurant serving fresh buckwheat soba noodles daily.  The owner grows the buckwheat on his farm.

This study showed buckwheat and quinoa provide the best nutrition among gluten free options.  The study also highlights troubling problems with foods typically classified as "gluten free".  It indicates that using "alternative grains" like buckwheat is a better option.

Pravda predicts food riots due to the grain shortage resulting from the Russian drought.  Now where have we seen this before?  Buckwheat prices are up 35%.  Guess whose buckwheat-dry pea market price comparison in their study is going to favor buckwheat this year?