Sunday, April 27, 2008

"The New Politics of Hunger"

This was the lead article on the front page of MSNBC today.  

Look, you know I have been ranting and raving about "food and energy", "food and energy", "food and energy" (G-d help me, I sound like a tin hat economist with their "supply and demand" mantra")...  but give that article a close read. Beyond the obvious, there are some serious implications for world TRADE in the middle of all of this, not least of which the value of the U.S. $.

If the U.S. continues its ethanol mandates it is very likely that the country will no longer be a corn exporter sometime between 2010 and 2012.  On the other hand, if the U.S. does not continue its ethanol program the country will not have enough transportation fuel (Please!  I am well aware that ethanol is probably not even energy positive, or slightly so.  I am talking transportation fuel - I will get to how Natural Gas fits in all of this shortly).  Now that's a conundrum!!

But wait! It gets better... U.S. Natural Gas ("NG") inventories are at their lowest in terms of "days of supply" in at least 6 years, hence the recent run up in the price of NG.  However, said recent run up in price leaves U.S. domestic NG prices at about 60% of what Japan is paying for Liquified Natural Gas ("LNG") imports.  At some point in the next year or 2, baring a MIRACLE, the U.S. will have to compete in the market place for those LNG tankers to deliver their cargo HERE, in the U.S.  

So let me ask you a couple of questions:

Does any rational person think that those LNG tankers are going to show up here unless we out bid the other guy?  And isn't the price of NG in the U.S. going to be set by the MARGINAL supply?  Wouldn't you define the LNG tankers product as the MARGINAL supply?  Won't the addition of another wealthy bidder (the U.S.) in the world LNG market increase the price of LNG (all else being equal)?  Won't this raise LNG, and hence NG prices in ALL importing nations (again, relative to market conditions as then exist absent the new U.S. participation in the LNG market)?

Now let us connect a few dots, shall we?

We have rice and grain shortages the world over, some of it spreading to wealthy nations like the U.S.

T0 grow rice, corn, wheat, and soy beans at the quantity we have become accustomed to (now I sound like a divorce lawyer), farmer's need fertilizer.

Natural Gas is the primary feedstock in the manufacture of fertilizer, and Natural Gas prices have risen substantially since the Northern Hemisphere's LAST GROWING SEASON.  So the recent price increases DO NOT REFLECT the recent hike in production costs for food.  Not to muck this up with too much data, but diesel prices and pesticides (made from oil) have increased by over 50% since the last growing season

I have laid out the case as to why NG prices, and hence fertilizer prices, could move much, much higher, and I have already tied much higher fertilizer prices into higher food prices, and perhaps LESS FOOD.

Of all the grains CORN requires the most nitrogen fertilizer (ammonium nitrate), and the U.S. is the LARGEST PRODUCER AND EXPORTER OF CORN in the world (forget the dubious moniker "The Saudi Arabia of Coal", the U.S. is certainly "The Saudi Arabia of Corn").  However, as I stated earlier, the U.S. is expected to consume all of the corn it now exports to make ethanol.

28 million Americans are already on some form of governmental food assistance program.

The current rice shortage is small potatoes (no pun intended) compared to what's to come as NG, fertilizer, and diesel prices move higher, and the corn normally exported to other nations by the U.S. is consumed in its domestic ethanol production program.  Of course, the nations that sell us our fertilizer might not be happy about getting U.S. $ for their valuable product rather than food to feed their people, so there might be a couple of kinks that need to be worked out of the trade model I am suggesting...  at which point the U.S. might cut back on its ethanol production and trip over a lack of liquid transportation fuels driving up the price of oil and further increasing the trade deficit... and speaking of the Trade Deficit, just where is the money going to come from to purchase that LNG we will be needing?... and won't all of that continue the pressure on the U.S.$ which will cause Oil and LNG import prices to increase in $ terms, and won't those prices increase put further pressure on the $, repeat ad nasseum... a  person could go nuts thinking about this...

Uh-oh... too late,

Yours for a better (their taking me away, haha!) world,

Mentatt (at) yahoo (d0t) com

1 comment:

Anonymous said...

Excellent points, good sir!