Financial Speculation on Food and Energy Contributing to Rise in Prices

Commodity Futures Modernization Act of 2000

We may never know for sure the combination of circumstances that brought on energy crisis of 2008. But one factor was almost certainly the Commodity Futures Modernization Act of 2000, which allowed unprecedented levels of speculation in oil futures by investment banks and pension funds, bringing the familiar boom-bust cycle home to the gas pump. [Drill Now? Try Regulate Now., Wall Street Journal, April 7, 2010]

To lower international food prices and protect our social interests, the Commodities Futures Trading Commission must use its authority to curb excessive speculation in commodities futures and re-establish strict position limits on speculators (which were successful until removed by the Commodity Futures Modernization Act of 2000). We must regulate and bring transparency to all trading. We can also removing damaging speculative influence on commodities prices by prohibiting participation in commodities markets by those who do not produce, manufacture, or take physical delivery of the commodities. We must create a solidarity economy that puts compassion and care for one another ahead of short-term profits, in the United States and around the world. [The world food crisis: what is behind it and what we can do, WorldHunger.org, October 23, 2008]

The surge in world food prices can be attributed to the “financialisation” of commodities due to the Commodities Futures Modernization Act of 2000. The game changed for commodities the minute the legislation passed -- ten years ago. That doesn't explain the surge this year but it does explain the increased volatility of the last decade. [Don't Blame Bernanke: Here's Who's REALLY To Blame For Surging Food Prices, Business Insider, October 12, 2010]

And what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical-commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed. [Matt Taibbi, The Great American Bubble Machine, Rolling Stone, July 2, 2009]

The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. [F. William Engdahl, ‘Perhaps 60% of today’s oil price is pure speculation’, Global Research, May 2, 2008]

Food Commodities Speculation Causing Rise in Food Prices

Guardian News
September 24, 2010

The world may be on the brink of a major new food crisis caused by environmental disasters and rampant market speculators, the UN was warned today at an emergency meeting on food price inflation.

The UN's Food and Agriculture Organisation (FAO) meeting in Rome today was called last month after a heatwave and wildfires in Russia led to a draconian wheat export ban and food riots broke out in Mozambique, killing 13 people.

But UN experts heard that pension and hedge funds, sovereign wealth funds and large banks who speculate on commodity markets may also be responsible for inflation in food prices being seen across all continents.

In a new paper released this week, Olivier De Schutter, the UN's special rapporteur on food, says that the increases in price and the volatility of food commodities can only be explained by the emergence of a "speculative bubble" which he traces back to the early noughties [a cooler way of saying 2000s].

"[Beginning in] 2001, food commodities derivatives markets, and commodities indexes began to see an influx of non-traditional investors," De Schutter writes. "The reason for this was because other markets dried up one by one: the dotcoms vanished at the end of 2001, the stock market soon after, and the US housing market in August 2007. As each bubble burst, these large institutional investors moved into other markets, each traditionally considered more stable than the last. Strong similarities can be seen between the price behaviour of food commodities and other refuge values, such as gold."

He continues:

"A significant contributory cause of the price spike [has been] speculation by institutional investors who did not have any expertise or interest in agricultural commodities, and who invested in commodities index funds or in order to hedge speculative bets."

A near doubling of many staple food prices in 2007 and 2008 led to riots in more than 30 countries and an estimated 150 million extra people going hungry. While some commodity prices have since reduced, the majority are well over 50% higher than pre-2007 figures – and are now rising quickly upwards again.

"Once again we find ourselves in a situation where basic food commodities are undergoing supply shocks. World wheat futures and spot prices climbed steadily until the beginning of August 2010, when Russia – faced with massive wildfires that destroyed its wheat harvest – imposed an export ban on that commodity. In addition, other markets such as sugar and oilseeds are witnessing significant price increases," said De Schutter, who spoke today at The UK Food Group's conference in London.

Gregory Barrow of the UN World Food Program said:

"What we have seen over the past few weeks is a period of volatility driven partly by the announcement from Russia of an export ban on grain food until next year, and this has driven prices up. They have fallen back again, but this has had an impact."

Sergei Sukhov, from Russia's agriculture ministry, told the Associated Press during a break in the meeting in Rome that the market for grains "should be stable and predictable for all participants." He said no efforts should be spared "to the effect that the production of food be sufficient."

"The emergency UN meeting in Rome is a clear warning sign that we could be on the brink of another food price crisis unless swift action is taken. Already, nearly a billion people go to bed hungry every night – another food crisis would be catastrophic for millions of poor people," said Alex Wijeratna, ActionAid's hunger campaigner.

An ActionAid report released last week revealed that hunger could be costing poor nations $450bn a year – more than 10 times the amount needed to halve hunger by 2015 and meet Millennium Development Goal One.

Food prices are rising around 15% a year in India and Nepal, and similarly in Latin America and China. US maize prices this week broke through the $5-a-bushel level for the first time since September 2008, fueled by reports from US farmers of disappointing yields in the early stages of their harvests. The surge in the corn price also pushed up European wheat prices to a two-year high of €238 a tonne.

Elsewhere, the threat of civil unrest led Egypt this week to announce measures to increase food self-sufficiency to 70%. Partly as a result of food price rises, many middle eastern and other water-scarce countries have begun to invest heavily in farmland in Africa and elsewhere to guarantee supplies.

Although the FAO has rejected the notion of a food crisis on the scale of 2007-2008, it this week warned of greater volatility in food commodities markets in the years ahead.

At the meeting in London today, De Schutter said the only long term way to resolve the crisis would be to shift to "agro-ecological" ways of growing food. This farming, which does not depend on fossil fuels, pesticides or heavy machinery has been shown to protect soils and use less water.

"A growing number of experts are calling for a major shift in food security policies, and support the development of agroecology approaches, which have shown very promising results where implemented," he said.

Green MP Caroline Lucas called for tighter regulation of the food trade.

"Food has become a commodity to be traded. The only thing that matters under the current system is profit. Trading in food must not be treated as simply another form of business as usual: for many people it is a matter of life and death. We must insist on the complete removal of agriculture from the remit of the World Trade Organisation," she said.

• Food Commodities Speculation and Food Price Crises (September 2010)
• Speculation and the New Commodity Price Crisis: Separating the Wheat From the Chaff (August 2010)
  Agricultural swaps are per se violations even of the deregulatory Commodity Futures Modernization Act. If OTC wheat trading collapses as the result of a new rule on agricultural swaps, wheat and other agricultural commodity price volatility caused by so-called dark markets will greatly diminish. But the CFTC faces a tough fight to implement the Dodd Frank legislation, not only because of the massive Wall Street lobby against enforced regulation, but because of continued efforts to deny that financial speculation played a role in price volatility and to argue therefore that Bush administration rules suffice. The latest denialist gambit, by the Organization for Economic Cooperation and Development, to dismiss excessive financial speculation as a major commodity price driver in 2007-2008 has recently been demolished by a Better Markets Inc. study.
• Citizen Coalition Scores Victory Against Food Speculation (April 2010)
  Deregulation of the commodities markets in the 1990s and especially through the Commodity Futures Modernization Act of 2000 (passed by Congress after midnight of the last day of work) removed many of the common-sense laws established in 1936. The limits on speculation were lifted, allowing massive inflows of speculative money into the relatively small commodity markets. Speculation, per se, is not bad, but when speculators dominate the market instead of businesses hedging for legitimate business purposes, the excessive speculation damages the underlying purpose of the market. After investors lost money in the stock bubble in 2000 and real estate bubble in 2005/6, many decided to shift part of their investments into commodities. They were encouraged by an AIG-sponsored study that said commodities were a good long-term investment to help diversify an investment portfolio. The result was an explosion in speculation on basic goods. According to hedge fund manager Michael Masters, institutional investors (pension funds, university endowments, etc.) increased their investments in commodities futures from $13 billion in 2003 to $260 billion in March 2008, and the price of 25 commodities rose by an average of 183 percent in those five years.
• A Nation of Village Idiots (September 2008)
  A few days after the Supreme Court made George W. Bush president in 2000, Phil Gramm stuck something called the Commodity Futures Modernization Act into the budget bill. Nobody knew that the Texas senator was slipping America a 262 page poison pill. The Gramm Guts America Act was designed to keep regulators from controlling new financial tools described as credit "swaps." These are instruments like sub-prime mortgages bundled up and sold as securities. Under the Gramm law, neither the SEC nor the Commodities Futures Trading Commission (CFTC) were able to examine financial institutions like hedge funds or investment banks to guarantee they had the assets necessary to cover losses they were guaranteeing.

Closing Enron Loophole Would Drop Oil Prices 25% – 50% Overnight

Here’s the transcript of the video (above) for the report on the June 18, 2008, edition of “Countdown.”

Pensito Review
June 22, 2008

The way Republicans tell it, the minute we start drilling off the coasts of California, Florida and elsewhere, the price of gas will go down. In fact, it would take five years after the ban on offshore drilling was lifted for oil production to start, and, if it were lifted right now, in 22 years domestic oil production would have increased by only 7 percent, according to the Energy Information Administration. Even so, because oil prices are determined on the international market, any impact on average wellhead prices is expected to be insignificant. (Source: Center for American Progress.)

On the other hand, Congress and George Bush could take a step tomorrow that would create a drop in oil prices of between 25 and 50 percent overnight, simply by closing the Enron Loophole.

This is according to testimony before a Senate Committee two weeks ago by Michael Greenberger, the former director of Trading & Markets for the Commodities Future Trading Commission (CFTC), the government board that oversees commodities markets:

“Yes, overnight [closing the Enron Loophole] will bring down the price of crude oil to get at least a 25 percent drop in the cost of oil and a corresponding drop in the cost of gasoline. Some people estimate 50 percent.”

Greenberger’s testimony was brought to light by an investigation into the Enron Loophole by Keith Olbermann on MSNBC’s “Countdown” last week. (A transcript of Olbermann’s report follows.)

The Enron Loophole is the nickname for a provision written into the Commodity Futures Modernization Act (CFMA) of 2000 that was drafted by lobbyists for Enron and inserted in the bill by then Sen. Phil Gramm (R-Texas) that deregulated an aspect of the market Enron sought to exploit with its “Enron On-Line” trading program, the first Internet-based commodities transaction system. Phil Gramm is now a key economic adviser for the John McCain campaign.

While it was a technical success, Enron On-Line was based on a flawed business model that drained corporate revenues — even while the company was manipulating the rates consumers paid for electricity in California. Enron On-Line eventually drove the company into bankruptcy, and the cooking of the books to hide its losses led to charges of conspiracy and fraud against Enron executives.

The Republicans’ sudden rollout of the campaign to lift the ban on offshore drilling is really meant to shift the blame from Bush and the GOP to the Democrats and their opposition to offshore drilling. To their credit, they have done a masterful job — and it has only cost them the credibility of Florida Gov. Charlie Crist, who broke tradition in the state and came out in favor of lifting the ban. (It also sapped whatever meager credibility Crist’s predecessor, Jeb Bush, had left. Bush opposed lifting the ban when he was in office but came out wholeheartedly in favor of lifting it this weekend.)

Phil Gramm's Part in the Global Financial Collapse

The alternative press leads on the policy roots of the credit crisis

Columbia Journalism Review
September 24, 2008

The alternative press has led the way on the story of Phil Gramm [who served as a Democratic Congressman (1978–1983), a Republican Congressman (1983–1985) and a Republican Senator from Texas (1985–2002)] and the policy roots of the financial crisis, beating the mainstream business and other media rather badly about the face and neck.

Why this would be so is a subject for group psychologists, anthropologists, social workers, ethnographers, drug counselors, and media critics like us, and certainly another day. But with an election around the corner, we would suggest only that it is as much a mistake for journalists as it is for voters to assume that past policy decisions are unrelated to our current predicament.

So, let’s accentuate the positive and offer an Audit Credit to Mother Jones for more excellent reporting on the ever-widening ripples from the deregulation of the American financial system, which allowed, as it invariably does, the bad money to drive out the good.

James K. Galbraith examines the bubble effects of this deregulation, looking beyond the obvious one in housing, already burst, to the other ones in energy and food. As his colleague David Corn did last summer, Galbraith lays considerable responsibility for financial deregulation at the feet of former Senator Phil Gramm. But, unlike Corn’s also Credit-worthy piece, Galbraith shifts his focus to a specific result of that deregulation: the speculation that has resulted in high commodities prices.

Galbraith’s analysis is nuanced. He does not blame high energy and food prices solely on speculation, but he does expose as a myth the idea that high prices are the result of tight supply and high demand alone. He states bluntly:

Yes, Virginia, speculators can affect the price—if they are large and relentless enough to dominate a market, and especially if they can store the commodity and keep it off the market as the price rises.

Here is where deregulation comes in, because it has given speculators their outsized power. Deregulation has meant that speculation is not a fringe activity, but has rather become a mainstream investment strategy. Here is Galbraith:

Thus today, when officials like Treasury Secretary Henry Paulson say that speculation is not a factor in the commodity markets, they’re not counting hedge funds and investment banks as speculators—even though that’s what they really are.

Galbraith is hardly the only one to raise the issue of speculation and high oil prices, but he distinguishes himself by looking at the larger picture: energy speculation as one facet of broader, and disastrous, deregulation.

In Galbraith’s and Corn’s pieces, Mother Jones makes it clear that if you are looking for someone to thank for this situation, you wouldn’t be wrong to send your regards to Phil Gramm.

Gramm threw his weight behind the Commodity Futures Modernization Act of 2000, which, among other things, paved the way for a boom in those nasty credit default swaps that are coming back to haunt us all. Writes Galbraith:

This, combined with other deregulatory moves by the CFTC [Commodity Futures Trading Commission], broadened the ‘swaps loophole,’ an enormous backdoor into the commodities markets, basically permitting speculators making bets off the commodities exchanges to be treated as ‘commercial interests’—like say, farmers—and hence avoid the scrutiny (including limits on the size of their bets) normally applied to financial players.

And, as is better known, Gramm also co-sponsored 1999 legislation—backed by the Clinton Administration—[the Gramm-Leach-Bliley Act, which repealed portions of the Glass-Steagall Act] that collapsed the distinction between investment and commercial banks.

For a view of where both pieces of legislation fit into the financial crisis, take a look at this clear timeline that appeared in Mother Jones last summer.

In the interest of credit where credit is due, we note that Mother Jones, while notable for its force and persistence, was not the first publication to have looked closely at Gramm’s history. Credit also goes to The Texas Observer, where a rigorous article by Patricia Kilday Hart, from last May, pinpoints Gramm as an architect of the financial crisis. Here is Hart on the circumstances of the 2000 legislation:

In the early evening of Friday, December 15, 2000, with Christmas break only hours away, the U.S. Senate rushed to pass an essential, 11,000-page government reauthorization bill. In what one legal textbook would later call ‘a stunning departure from normal legislative practice,’ the Senate tacked on a complex, 262-page amendment at the urging of Texas Sen. Phil Gramm.

There was little debate on the floor. According to the Congressional Record, Gramm promised that the amendment—also known as the Commodity Futures Modernization Act—along with other landmark legislation he had authored, would usher in a new era for the U.S. financial services industry.

And did it ever.

In a reminder that the core circle of Gramm critics is a somewhat select bunch, the Texas Observer quotes both Galbraith and former government regulator Michael Greenberger, another name that appears prominently in what there is of Gramm coverage. (We’ve flagged an interview with him further down.)

But we can also see the widening influence of these ideas in pieces like this one from last July. Dave Davies, of the Philadelphia Daily News, chose to spend his “few minutes with McCain” asking about the fact that:

His campaign co-chair and economic advisor, former Texas Sen. Phil Gramm, was co-sponsor of the 1999 law that allowed commercial banks to get into investment banking. And the fact that Gramm was a prime architect of a 2000 bill that kept regulators’ hands off ‘credit default swaps.’

McCain’s answers are unenlightening. But what is important is that this local reporter asked the question. What inspired him? Well, he didn’t mention any publication by name, but he appeared to give Mother Jones and The Texas Observer a nod when he explained,

“Liberal writers raised this issue a month ago.”

The fact is, both the Mother Jones pieces and the Texas Observer piece are part of a small but important batch of articles appearing over the past several months that examine Gramm’s place in financial deregulation, and the resulting effects of that deregulation on the economy. Mother Jones and the Observer stand out for their depth and focus, but other pieces that at least place Gramm in context include an excellent April 2008 interview on Fresh Air with Greenberger, and a March 2008 New York Times piece that focuses on deregulation more broadly but does mention the former senator.

As a side note, press criticism of Gramm has not gone unnoticed in Washington. On Sept. 17, Vermont’s Bernie Sanders demonstrated that politicians—or at least their aides—do scan the press. He went to the trouble of reading to Congress a Sept. 15 post by blogger Peter Cohan criticizing Gramm’s deregulatory schemes, and he also mentioned The Texas Observer. In addition, Democrats have compiled an information sheet on Gramm that is based in substantial part on press coverage.

In other words, information is out there for those with the motivation to look for it.

The effect of these articles in the political arena remains to be seen. But it is worth noting that the current crisis is not the first time the press has focused on Gramm and deregulation.

To bring in recent history: Gramm and his wife, Wendy, did get some high-profile attention—from an eagle-eyed Public Citizen, then The New York Times, The Chicago Tribune (“Sen. Gramm and Wife Deregulated Enron, Benefited from Ties,” Jan. 18, 2002, Robert Manor), The Washington Post (“For Gramms, Enron Is Hard to Escape,” Jan. 25, 2002, Dan Morgan and Kathleen Day)—several years ago, after the Enron debacle and California energy crisis, for their roles in energy deregulation. But, as will happen, the hubbub died down.

Before it did, some reporters—in the NYT and the WSJ (“Out of Reach: The Enron Debacle Spotlights Huge Void In Financial Regulation,” Michael Schroeder and Greg Ip, Dec. 13, 2001), for example—widened their view, to address the problem of deregulation beyond the energy market. But the job of piecing together Gramm’s role in broader financial deregulation would largely fall to later reporters. Like Hart in The Texas Observer and Galbraith and Corn in Mother Jones.

All this is to say that while Gramm’s role in deregulation has not received the attention it deserves, neither has it gone away. Rather, it forms an undercurrent to the press’s effort to present the larger story of financial collapse.

And lastly, we come full circle: Another place the story has popped up again in recent days is on Mother Jones’s website, where David Corn returned to the topic September 15. He elaborated on suspicions about an ongoing connection between Gramm and McCain:

Gramm is responsible for the rise of the wild and wooly $62 trillion swaps market. And he was chairman of the McCain campaign and a top economic adviser for McCain—until he dismissed Americans worried about the economy as ‘whiners.’ After that comment, McCain dumped Gramm. But was Gramm truly excommunicated from McCain land?

This is pretty much a rhetorical question. And to back up his point, Corn goes on to offer evidence that Gramm appears to be “back in the good graces of the McCain campaign.”

All the more reason why the press needs to keep Gramm in its sights.

Oil is Traded as a Commodity Which Causes Fluctuation in Prices

Oil and gas are commodities, and their prices can change every second at the New York Mercantile Exchange and other trading hubs. Those far-off changes affect the cost of the next day's commute.

WikiInvest

Few inputs impact the world economy like the price of oil. As oil prices rise, costs go up for transportation companies, squeezing their profit margins and forcing them to raise prices, similarly affecting all the other companies that rely on them to transport products and people.

By contrast, most energy companies benefit from higher oil prices, either from higher revenues for oil, or because of increased demand for substitute energy sources such as ethanol and natural gas. 2007 and the first half of 2008 were good times for many energy companies; futures prices rose tremendously, peaking on July 3rd, 2008, at a record high of $145.85.

By early December 2008, futures prices plummeted, dropping below $50 per barrel, mostly in response to the recession caused by the 2007 Credit Crunch and 2008 Financial Crisis. The extreme volatility of this important economic input has piqued interest in issues like peak oil, speculation, and the world's rising energy appetite, and is leading to greater investment in renewable energy.

Spot Prices versus Futures Prices

Spot prices are the prices paid for oil here and now -- as in, the amount of money you would hand a producer in exchange for their tossing a barrel of oil into the back of your truck. Futures prices, on the other hand, are the prices paid for contracts promising the delivery of oil at a future date. Whether or not the prices of oil futures affect spot prices is one of energy economics' most prevalent modern debates.

Moreover, there really is no "true" spot market for oil, in the sense of that there is a "true" spot market for stock or other financial assets. A "true" spot market requires, as described above, the actual physical transfer of the goods, to the purchaser, directly at the time of purchase, and there simply are no large scale sellers of crude oil, that operate in such a fashion. The "spot" prices that are quoted, involve the transfer of 1000 barrels of crude oil, not one or two. That would require literally 5 of 6 tractor-trailer rigs to carry off back to your house: the transportation costs would approach the value of the oil itself. When one speaks of a "spot" price for crude oil, one is meaning the current trading price, of the next future contract that will come due.

Those that claim that futures prices (and, therefore, speculation) do not affect spot prices argue that people who purchase futures contracts do not actually purchase any real oil. When a fund purchases a futures contract and that contract comes due, it must sell the oil to someone who will actually use it, because that fund has no way of actually keeping the physical product. This means the oil must come to market -- no matter what the price.

If a firm buys a $150/barrel futures contract in June for July and the spot price in July is $140, the firm must buy the oil at $150, and then it MUST sell the oil at $140 as well, because it can't actually hold the oil. This means there is no accumulation of oil -- firms can't hoard oil, so they can't actually affect the present market. Therefore, it is argued, the prices of futures contracts have no affect on spot prices.

Those that believe futures speculation has an effect on spot prices (at least, those with a sound understanding of economics) argue that when oil futures are traded, oil purchasers, like refiners, try to buy oil at prices that will benefit their margins in both the short and long term. If it is believed that oil prices will rise in the future (indicated by futures prices being higher than present prices), purchasers will want to stock up on oil at lower prices today and put it in inventory; this drives up demand for crude in the present, forcing oil prices up in the present. Thus, it is argued, high prices for oil futures leads to high prices for oil in the present.

What Does the Oil Price Depend On

This is Money
April 19, 2011

The price of a barrel of oil is the result of a number of competing factors: How much oil is available, how much oil is demanded by consumers, how much it costs to get oil from the ground to the consumer, the price of dollars and the potential that oil speculators see for the price to rise and fall.

Many of the long-term global trends point to steady increases in the price of oil. Reserves are finite so the commodity is slowly becoming scarcer ' something that pushes the price up.

The explosion of development in countries like China and India has created more demand as those and other developing regions industrialise. They build more roads and increase manufacturing ' it all requires oil.

The bearish argument is that technological new energy developments - solar, wind, etc - should begin to reduce the world's dependence on the black stuff.

Supply is fettered by the countries that export it. The Organisation of the Petroleum Exporting Countries (Opec) meets regularly to set the amount they are willing to release onto the market. Opec oil accounts for approximately 35m of the 80m barrels released onto the global market each day.

Opec can reduce output as a means to push prices higher and can increase it to meet greater demand. It is tempting to think that all the producers are motivated simply by a high price. In fact, for some countries it may be beneficial to have a lower price if it means they can maintain, or increase, the volumes they sell.

Oil is priced in dollars so movements in that currency also impacts on crude. The weaker the dollar, the higher the dollar price of oil because it takes more dollars to buy a barrel.

There is one more factor that is thought to influence the price of oil. It is possible for investors to speculate on the price of oil by purchasing futures contracts. Investors ' they could include investment banks, hedge funds or pension funds ' will buy a quantity of oil to be delivered at a future date. If the price of oil has risen by the time the contract is delivered, the investor makes money. It became a contentious issue in 2008 when critics alleged that this type of speculation helped to push the price of a barrel to a record $147.

However, investors have defended the process, arguing that speculation does nothing to reduce the actual amount of oil on the market, which would push the price up, and that other commodity markets have shown greater increases than the oil market with no price speculation.

Investors Add Spice to Rising Food Prices

By Arthur Sim, The Business Times
January 6, 2010

Global food prices are rising again with the United Nations Food and Agriculture Organisation (FAO) food price index hitting 168 points in November, the fourth consecutive month of increase and the highest since September 2008.

While this is still about 21 per cent lower than the most recent peak in June 2008 when the index hit 213.5 points, FAO does note that the index has never exceeded 120 points prior to the price spike between 2007/2008.

Several reasons have been highlighted for the rising prices. However, FAO has, possibly for the first time, highlighted the 'growing appetite by speculators and index funds for a wider commodity portfolio investments on the back of enormous global excess liquidity,' as exacerbating the situation.

This mirrors the view of World Bank president Robert Zoellick who said recently that with so much liquidity in global markets, 'you could see additional moves towards the agricultural commodities sector if there were perceptions of market shortages.'

Speculation in agricultural commodities may not have reached fever pitch yet, but with food shortages expected in 2010, it could.

Jim Rogers, one of the world's most astute investors has been bullish on commodities in general for several years. On agricultural (or soft) commodities, he says:

"Food inventories worldwide are at the lowest in decades as the world continues to consume more than it produces. We even have a shortage of farmers now since agriculture has been such a terrible business for three decades. We should all hope prices go higher or there may soon be a time when there will be little or no food at any price.'"

Mr Rogers, who created his own commodities indices, has put his name to several index funds. The Elements Jim Rogers International Commodity Index Agriculture Total Return which is listed on the New York Stock Exchange has, for instance, risen by about 6 per cent since the start of 2009.

Interest in soft commodities has had an impact on prices.

"Whenever there are buyers of anything, it affects the prices. For example, if you live in an apartment or house, you are affecting the price of housing in Singapore," adds Mr Rogers.

There are several ways to invest in soft commodities including the futures contracts on commodities exchanges like the Chicago Board of Trade (CBOT).

The index funds alluded to by the FAO include the more rarefied market of exchange traded funds (ETFs) that typically attract institutional investors.

There are more prosaic ways as well.

In China, the bubble people are talking about now is not in real estate but in garlic.

Worries about persistent swine flu prompted a spike in garlic consumption in 2009, and soon everyone was hoarding it in hopes of making a quick buck. Prices are said to have gone up by 50 per cent in the last few months.

Rice could be next. Barclays Capital Research economist Leong Wai Ho says:

"The bigger problem for food prices is an old one -- physical hoarding that can limit physical availability, unlike derivative trading."

"Rice prices are now at levels that are likely to induce physical hoarding in Vietnam and Thailand. And also in stricken countries -- authorities in Southern Guangdong have introduced anti-hoarding measures in the wake of the ongoing drought."

And Mr Leong also believes the significance of food prices may not have been factored into inflation either.

For 2010, the Singapore government's inflation forecast has been revised from 1-2 per cent to 2.5-3.5 per cent. Citing rising Thai fragrant rice prices, the prospect of El Nino weather conditions, higher import demand from Asian countries, Barclays' 2010 inflation forecast for Singapore is higher at 4 per cent, up from 1.5 per cent previously.

Still, the verdict is out on how this will impact the economic recovery.

"I don't think there will be a meaningful impact on growth," says Mr Leong. "While the monetary policy stance will be tightened from where it was before, the overall policy stance will still be largely accommodative in 2010. The exchange rate will be used to lean into imported inflation, while liquidity will still remain flush and fiscal policy still expansionary," he added.

Economists will nevertheless be 'keeping an eye' on food prices.

CIMB-GK regional economist Song Seng Wun said:

"A combination of both fundamental factors and speculation may drive prices higher -- just as we saw in the energy market which drove crude oil prices to US$150 per barrel. But of course the speculation in energy market is much bigger because there are lots more energy desks in many banks."

2010 Food Crisis for Dummies (Excerpt)

By Eric deCarbonnel, Market Skeptics
December 18, 2009

If you read any economic, financial, or political analysis for 2010 that doesn’t mention the food shortage looming next year, throw it in the trash, as it is worthless.

There is overwhelming, undeniable evidence that the world will run out of food next year. When this happens, the resulting triple digit food inflation will lead panicking central banks around the world to dump their foreign reserves to appreciate their currencies and lower the cost of food imports, causing the collapse of the dollar, the treasury market, derivative markets, and the global financial system. The US will experience economic disintegration.

The 2010 Food Crisis Means Financial Armageddon

Over the last two years, the world has faced a series of unprecedented financial crises: the collapse of the housing market, the freezing of the credit markets, the failure of Wall Street brokerage firms (Bear Stearns/Lehman Brothers), the failure of Freddie Mac and Fannie Mae, the failure of AIG, Iceland’s economic collapse, the bankruptcy of the major auto manufacturers (General Motors, Ford, and Chrysler), etc.

In the face of all these challenges, the demise of the dollar, derivative markets, and the modern international system of credit has been repeatedly forecasted and feared. However, all these doomsday scenarios have so far been proved false, and, despite tremendous chaos and losses, the global financial system has held together.

The 2010 Food Crisis is different. It is THE CRISIS. The one that makes all doomsday scenarios come true. The government bailouts and central bank interventions, which have held the financial world together during the last two years, will be powerless to prevent the 2010 Food Crisis from bringing the global financial system to its knees.

Financial Crisis Will Kick into High Gear

So far the crisis has been driven by the slow and steady increase in defaults on mortgages and other loans. This is about to change. What will drive the financial crisis in 2010 will be panic about food supplies and the dollar’s plunging value. Things will start moving fast.

Dynamics Behind 2010 Food Crisis

Early in 2009, the supply and demand in agricultural markets went badly out of balance. The world experienced a catastrophic fall in food production as a result of the financial crisis (low commodity prices and lack of credit) and adverse weather on a global scale.

Meanwhile, China and other Asian exporters, in an effort to preserve their economic growth, were unleashing domestic consumption long constrained by inflation fears, and demand for raw materials, especially food staples, exploded as Chinese consumers worked their way towards American-style overconsumption, prodded on by a flood of cheap credit and easy loans from the government.

Normally food prices should have already shot higher months ago, leading to lower food consumption and bringing the global food supply/demand situation back into balance. This never happened because the United States Department of Agriculture (USDA), instead of adjusting production estimates down to reflect decreased production, adjusted estimates upwards to match increasing demand from China. In this way, the USDA has brought supply and demand back into balance (on paper) and temporarily delayed a rise in food prices by ensuring a catastrophe in 2010.

Overconsumption is Leading to Disaster

It is absolutely key to understand that the production of agricultural goods is a fixed, once a year cycle (or twice a year in the case of double crops). The wheat, corn, soybeans and other food staples are harvested in the fall/spring and then that is it for production. It doesn’t matter how high prices go or how desperate people get, no new supply can be brought online until the next harvest at the earliest. The supply must last until the next harvest, which is why it is critical that food is correctly priced to avoid overconsumption, otherwise food shortages occur.

The USDA—by manufacturing the data needed to keep supply and demand in balance—has ensured that agricultural commodities are incorrectly priced, which has lead to overconsumption and has guaranteed disaster next year when supplies run out.

An Astounding Lack of Awareness

The world is blissful unaware that the greatest economic/financial/political crisis ever is a few months away. While it is understandable that general public has no knowledge of what is headed their way, that same ignorance on the part of professional analysts, economists, and other highly paid financial "experts” is mind boggling, as it takes only the tiniest bit of research to realize something is going critically wrong in agricultural market.

USDA Estimates for 2009/2010 Make No Sense

All someone needs to do to know the world is headed is for food crisis is to stop reading USDA’s crop reports predicting a record soybean and corn harvests and listen to what else the USDA saying.

Specifically, the USDA has declared half the counties in the Midwest to be primary disaster areas, including 274 counties in the last 30 days alone. These designations are based on the criteria of a minimum of 30 percent loss in the value of at least one crop in the county.

The chart below shows counties declared primary disaster areas by the secretary of Agriculture and the president of the United States.



For a list of Secretarial disaster declarations, see here.
For a list of Presidential disaster declarations, see here.

The same USDA that is predicting record harvests is also declaring disaster areas across half the Midwest because of catastrophic crop losses! To eliminate any doubt that this might be an innocent mistake, the USDA is even predicting record soybean harvests in the same states (Oklahoma, Louisiana, Arkansas, and Alabama) where it has declared virtually all counties to have experienced 30 percent production losses. It isn’t rocket scientist to realize something is horribly wrong.

USDA Motivated by Fear of Higher Food Prices

The USDA is terrorized by the implications of higher food prices for the US economy, most likely because it knows the immediate consequence of sharply higher food will be the collapse of the US Treasury market and the dollar, as desperate governments and central banks dump their foreign reserves to appreciate their currencies and lower the cost of food imports. Fictitious USDA estimates should be seen as proof of the dire threat posed by higher food prices, as the USDA would not have turned its production estimates into a grotesque mockery of reality if it didn't believe the alternative to be apocalyptic.

While the USDA may be the worst offender, the United States isn’t the only government trying to downplay the food situation out of fear. As one Indian reporter writes, governments are lying about the looming food crisis.

… some experts and governments, in full cognizance of the facts, want us not to create panic and paint a picture of parched crops and a looming food crisis. This, they say, would push up food prices unnaturally, lead to hoarding and ultimately result in a situation where many more millions across the world would go hungry. And whether it is the developing world or the developed, it is those at the bottom of the pyramid who are the most affected in such scenarios.

This leads to a confusing divide between reality and government pronouncements, or even between the perspectives of government departments.

While overall inflation is just 3 per cent, food prices are rising at unforgivable 17.7 per cent. Prices of rice and wheat have gone up in double digits in one year (10 per cent)...

Confusing Divide Between Reality and Government Estimates

For months now, the media has been reporting two distinctly, contradicting realities. One of these realities is filled with record crops and plentiful supply, and the other is filled agricultural devastation and ruin. It has been a mad, frustrating experience to read about agricultural disasters and horrendous crop losses in virtually every state combined with predictions of a US record harvest, sometimes in the same article.

A Reality of Record Crops and Plentiful Supply

The accepted, “official” reality is found in USDA crop and WASDE reports. Here, the United States Department of Agriculture is projecting the largest US soy crop on record, at 3.3 billion bushels, and the second-largest corn crop at 12.9 billion bushels.

Below [see Market Skeptics blog for details] are the government’s numbers for US soybean production by state. The USDA is expecting record high soybean yields across the Midwest in 2009, leading to production numbers significantly higher than the 5 year average. The large increase estimated between the August and November also indicates that the USDA doesn’t believe crops suffered much damage during the fall harvest.

A Reality of Agricultural Devastation and Ruin

In this reality, the US farmers have suffered the worst harvest season ever seen [see Market Skeptics blog for details].

These Two Realities Can’t Coexist!

Farmers can’t be going bankrupt across the US thanks to the worst harvest season ever seen while at the same time producing the USDA's Biggest Crop Ever! Someone is lying, and evidence supports the farmer’s story.

Adverse Weather Conditions Across the Globe

American farmers weren’t alone in their suffering this year. Abnormal weather has ruined crops around the world in 2009:

• The worst drought in half a century has turned Argentina's once-fertile soil to dust and pushed the country into a state of emergency. The country's wheat yield for 2009 was 8.7 million metric tons, down from 16.3 million in 2008.


• Australia is suffering the longest running and most severe drought on the planet. November temperature records were broken all over eastern Australia, and lower wheat yields than expected were reported, leading to production estimate cuts. Profarmer Australia has cut their Australian wheat production estimate by 1 MMT to 20.9 MMT, and Commonwealth Bank of Australia reduced their estimate by 0.7 MMT to 21.6 MMT (USDA's current estimate is, of course, is an insane 23.5 MMT).


• Northern China was hit by worst drought in 50 years. Chinese wheat production was predicted to be down 10% "In A Best Case Scenario." The sustained drought lead to water and food shortages in June for more than 1.37 million people in northwest China's Ningxia Hui Region. Chinese corn production is expected to shrink at least 10%, with shortages developing by spring-summer of 2010.


• The Middle East and Central Asia are suffering from the worst droughts in recent history, and food grain production has dropped to some of the lowest levels in decades. Total wheat production in the wider drought-affected region is currently estimated to have declined by at least 22 percent in 2009.


• Wind, rain, and hail ruined India’s spring wheat crop. Following failed wheat harvest, India then experienced the driest monsoon in 37 years. In terms of affected area, India’s drought was the worst since 1918. Farmers who could no longer irrigate crops now feared nothing would be left to drink. Millions of poor villagers across southern India are facing an imminent food shortage following months of intense drought and recent devastating floods.


• Etc.

Financial Crisis Worsens Drop in Crop Production

On top of the worldwide abnormal weather, the low commodity prices and lack of credit caused by the financial crisis harmed production. The lack of credit curbed farmers’ ability to buy seeds and fertilizers limiting production, and low prices at the end of 2008 discouraged the planting of new crops in 2009. In Kansas for example, farmers seeded nine million acres, the smallest planting for half a century.

Between the effects of the financial crisis and the abnormal weather experienced across the globe, the idea that 2009/10 saw record harvests of anything is pure fantasy.

U.S. Soybeans Supply and Demand

Analyzing U.S. soybeans supply and demand reveals how bad the situation is [see Market Skeptics blog for details]. The US is the biggest producer and exporter of soybeans, and, when America runs out of soybeans, it will create panic ...

No Beginning Stocks of U.S. Soybean

By the end of August, grain movement in the US came to a virtual standstill, with farmers sold out of soybeans. Those few soybean end-users (i.e. feedmakers and poultry producers), which caught short, were forced to pay prices as high as they paid at the very height of the bull market in 2008.

The struggle to secure quick-delivery soybeans in the US cash markets sent soybean futures into intense backwardation (backwardation is when cash prices are higher than future prices). Desperate Midwest crushers were bidding up to $2.72 a bushel over CBOT September futures contracts to acquire scarce soybean supplies. Some processors in the heart of the Midwest soy belt grew so desperate for soybeans to crush that they paid to transport some of the early harvest from the Mississippi River Delta northward to Illinois ...

Of course a negative ending stock isn’t possible. This just means that the US will run out of soybeans before next September. The process is well under way [see Market Skeptics blog for details] ...

Economic Pandemonium

The true financial crisis begins when the world realizes that there are couple months food supply missing from 2010. The last two years were a gentle, mild preview of the real thing.

Total Panic

The sudden, shocking discovery that food supplies are running out will produce total panic. The reaction will inventory building — hoarding –at all levels. Major food producing nation will export bans (India has already banned food exports). Producers, Middlemen, and Households will rush to acquire supplies. All this hoarding will worsen the crisis by throwing supply and demand further out of balance: export bans cut supply available on international market and inventory building increases demand. Food prices will more than double.

Central Bank Exodus from the Dollar

With one out of eight Americans on food stamps, foreign central banks are subsidizing US food consumption by funding the US government with their treasury purchases. Once the food crisis begins next year, they will be faced with the choice to:

• Continue subsidizing US food consumptions as triple-digit food inflation ravages their economy and their people starve.


• Dump their treasury holdings onto the market to rapidly appreciate their currencies, lowering the cost of food imports and preventing widespread domestic starvation.

Not much of choice. China, for example, will drop the dollar peg without a second thought to prevent triple-digit food inflation from damaging its economy and causing widespread of social unrest. Chinese exporters will be badly hurt, but that will be a small cost if it can keep food prices down.

In India, the government is ALREADY under pressure to sell off the country’s $270 billion in forex reserves.

Food prices are rising faster than any other commodity, and food prices hit the poor the most.

While overall inflation is just 3 per cent, food prices are rising at unforgivable 17.7 per cent. Prices of rice and wheat have gone up in double digits in one year (10 per cent)...

Perhaps the most surprising is that while food prices are rising, the government seems to be doing nothing, although it is fortunate to have many policy options at hand.

One option is to release food grain stocks [which unfortunately, DON’T EXIST], say analysts. They argue why should wheat and rice prices rise when India has near record stocks of food grains ...

The second option that the government has to reduce the inflation in potatoes, onions and pulses is to use some of India's enormous reserves of foreign exchange to import these food items so crucial for the poor.

India today has $270 billion in forex reserves. A small fraction of this could be used to import food and help the poorest.

“But the dollar can’t collapse because there is no alternative to the US dollar for a reserve currency…” I love the "there is no alternative to the US dollar for a reserve currency" argument. Every time I hear it, I imagine someone standing on the deck of the Titanic on the night of April 14, 1912, and declaring, "This boat can't possibly sink because there aren't enough lifeboats!"

The lack of viable alternatives doesn't mean the dollar can't sink, it simply means that when it does go down, it will result in a tragedy of epic proportions which will be remembered for centuries to come.

Political Fallout of 2010 Food Panic

While a food crisis was unavoidable to some extent because of the abnormal weather and financial crisis, the total panic which will soon grip world agricultural markets is a creation of the USDA and its fictitious production estimates. If not for the USDA's interference, food prices would have risen in the first half of 2009 in anticipation of the 2009/10 shortage. The United States Department of Agriculture, has caused incalculable damage to the world economy by encouraging overconsumption of rapidly diminishing food supplies.

Once the 2010 Food Crisis starts, confidence in the US government will be shattered as a result of the USDA’s faulty estimates. The starvation and misery caused by higher food prices will also create a lot of anger …

Insolvent Midwestern Banks

With failed crops, farmers across the Midwest are bankrupt, and so are their banks. This is especially important considering that the FDIC is out of money. Every bank failure is now being financed with the immediate sale of treasuries.

Whether the US chooses to bail out Midwest banks with billions of emergency aid for bankrupt farmers or finances the FDIC takeover of their banks, the outcome will be the same. The enormous quantity of debt which the US will need to sell to finance emergency aid and resolve bank failures in the Midwest will pressure an already collapsing market for US treasuries.

Panic Selling of Distressed Debt

When the dollar starts rapidly losing value, the flaw in the whole “hold to maturity strategy” will be revealed. Financial institutions around the world will realize that the dollar will lose all value years before their toxic assets ever have the chance to mature. They will then begin dumping trillions of toxic US debt at firesale prices, simply to escape the dollar's devaluation.

Self-reinforcing Breakdown of Derivative Markets and U.S. Financial System

Short term treasuries function as the collateral-backing derivative markets and US financial system. When the dollar and treasuries start falling in value with the exit of foreign central banks, investors will lose confidence in that collateral and start withdrawing from derivative markets. This will result in a flood of new treasuries coming onto the market as collateral is liquidated, causing further loss of confidence, and so on.

To image how this damaging dynamic would work, take a look at the Portfolio Allocation of PIMCO Commodity Real Ret Strat C Fund (PCRCX). PCRCX is a commodity fund which uses derivatives to gain its exposure to commodities.

PIMCO Commodity Real Ret Strat C Fund (PCRCX) Portfolio Allocation

Track portfolio allocation change of PIMCO Commodity Real Ret Strat C fund (PCRCX)

Date	Cash	Stock	Bond	Other
06/2009	11.56%	0%	75.75%	12.7%
03/2009	27.7%	0%	62.97%	9.34%
12/2008	34.59%	0%	57.76%	7.64%

Most Recent Top 10 Holdings in PIMCO Commodity Real Ret Strat C Fund (PCRCX)

30-Jun-09
Pimco Cayman Cmdty Fd Ltd Instl	13.41%
US Treasury Note 3%	10.07%
US Treasury Note 2%	10.04%
US Treasury Note 1.875%	9.84%
FNMA	9.70%
US Treasury Note 2.5%	8.68%
US Treasury Note 2.625%	8.29%
US TREASURY NOTE	7.82%
US Treasury Note 2%	6.79%
PIMCO FDS PRIVATE ACCOUNT PORTFOLIO SER	5.63%

It is easy to see why, with the treasury market breaking down, investors will question the wisdom of investing in a fund that has over 76% of its assets in US bonds. Investors will start withdrawing their money from the fund, and PCRCX will have to sell treasuries into a market already filled with only sellers. This “run on the bank” dynamic will gain steam until it leads to the collapse of derivative markets and the US financial system.

The use of a single asset class as collateral for an entire financial system is idiotic here. There is no such thing as liquidity of investment for the community as a whole.

Derivative Casino Will Be Bankrupt

Derivatives are essentially bets (about future value of commodities, currencies, bonds, etc). Like gambling at casinos, to make money in derivative markets requires meeting two conditions:

1. Being on the winning side of the bet.


2. Being able to collect on the bet.

The point here is that it doesn't matter how many chips are won if the casino goes bankrupt before they can be traded in.

There is about $14 Trillion collateral behind listed/OTC derivative markets, and this collateral is invested in short term dollar-denominated debt. As the dollar and credit markets collapse, this collateral will lose all value (the equivalent of a casino going bankrupt). Investors trying to collect on profitable bets (i.e. call options on gold) will find their derivative contracts backed by insolvent counterparties and worthless debt.

Warped Perception of Risk

Right now, the entire commodity derivative market is built on the idea of no default risk. This is to say, investor are now taking default risks very seriously in the credit markets (after experiencing horrible loses due to financial crisis), but these concerns over counterparty solvency are completely absent in commodity derivatives. When the the dollar, treasuries and derative markets start collapsing, concerned investors will start wondering who is on the other side of their commodity investments, and they will be horrified at what they find out.

Deflationary Panic in Commodity Markets

The biggest sellers of commodity IOUs are insolvent institutions desperate for funding. They are taking advantage of the warped perception of risk to raise capital cheaply. For example, investors in commodity derivatives will be thrilled to learn that completely-insolvent, taxpayer-bailed-out AIG Financial Product is a key player in commodity derivatives ...

The Federal Reserve Will Print Trillions

If the treasury market collapses, the government will lose the ability to sell debt to fund itself, which isn’t an option. To preventing such a collapse, the Federal Reserve will have to make purchases in the trillions despite already having run out of room on its balance sheet, which means it will have to print money. A massive expansion of the Fed’s balance sheet at a time of when inflation is spiraling out of control will destroy all confidence in the dollar, worsening the currency crisis.

What Life Looks Like During Hyperinflation

Below is an extract from Paper Money by "Adam Smith," covering Germany's hyperinflation in 1923, which offers a good account of what life looks like during hyperinflation.

The German Hyperinflation, 1923

Before World War I, Germany was a prosperous country with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery. The German Mark, the British shilling, the French franc, and the Italian lira all had about equal value, and all were exchanged four or five to the dollar. That was in 1914. In 1923, at the most fevered moment of the German hyperinflation, the exchange rate between the dollar and the Mark was one trillion Marks to one dollar, and a wheelbarrow full of money would not even buy a newspaper. Most Germans were taken by surprise by the financial tornado.

"My father was a lawyer," says Walter Levy, an internationally known German-born oil consultant in New York, "and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread"...

More than inflation, the Germans feared unemployment. In 1919 Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines -- Krupp, Thyssen, Farben, Stinnes -- condoned the inflation and survived it well. A cheaper Mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad. Inflation kept everyone working.

So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. "If you want to save money," he was told, "and you want two cups of coffee, you should order them both at the same time."

The presses of the Reichsbank could not keep up though they ran through the night. Individual cities and states began to issue their own money…

The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items -- bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren't safe. Gasoline was siphoned from cars. People bought things they didn't need and used them to barter -- a pair of shoes for a shirt, some crockery for coffee. Berlin had a "witches' Sabbath" atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug. In the cabarets, the newly rich and their foreign friends could dance and spend money. Other reports noted that not all the young people had a bad time. Their parents had taught them to work and save, and that was clearly wrong, so they could spend money, enjoy themselves, and flout the old.

The publisher Leopold Ullstein wrote: "People just didn't understand what was happening. All the economic theory they had been taught didn't provide for the phenomenon. There was a feeling of utter dependence on anonymous powers -- almost as a primitive people believed in magic -- that somebody must be in the know, and that this small group of 'somebodies' must be a conspiracy."

When the 1,000-billion Mark note came out, few bothered to collect the change when they spent it. By November 1923, with one dollar equal to one trillion Marks, the breakdown was complete. The currency had lost meaning...

But although the country functioned again, the savings were never restored, nor were the values of hard work and decency that had accompanied the savings. There was a different temper in the country, a temper that Hitler would later exploit with diabolical talent. Thomas Mann wrote: "The market woman who, without batting an eyelash, demanded 100 million for an egg lost the capacity for surprise. And nothing that has happened since has been insane or cruel enough to surprise her."

With the currency went many of the lifetime plans of average citizens. It was the custom for the bride to bring some money to a marriage; many marriages were called off. Widows dependent on insurance found themselves destitute. People who had worked a lifetime found that their pensions would not buy one cup of coffee.

Pearl Buck, the American writer who became famous for her novels of China, was in Germany in 1923. She wrote later: "The cities were still there, the houses not yet bombed and in ruins, but the victims were millions of people. They had lost their fortunes, their savings; they were dazed and inflation-shocked and did not understand how it had happened to them and who the foe was who had defeated them. Yet they had lost their self-assurance, their feeling that they themselves could be the masters of their own lives if only they worked hard enough; and lost, too, were the old values of morals, of ethics, of decency."

The Death of the “U.S. Consumer”

The famous “US consumer” has been the driving force of the global economy for decades. This ends in 2010, as the dollar’s collapse will wipe out America’s purchasing power.

U.S. Economic Disintegration

70% of the US economy is consumer spending, with at least 20% of it directly tied to commercial retail real estate. Less than 10% of our economy is related to the production of basic goods and services. This style of economy cannot handle a pull back in consumer spending.

America is facing a terrifying future. As the dollar loses most of its value, America’s savings will be wiped out. The US service economy will disintegrate as consumer spending in real terms (i.e. gold or other stable currencies) drops like a rock, bringing unemployment to levels exceeding the great depression. Public health services/programs will be cut back, as individuals will have no savings/credit/income to pay for medical care.

What has already happened in the last year offers a good preview of what to expect in the next:

'Tent cities' are growing all around the country
California is experiencing a meltdown
Police cars are being repossessed due to falling tax revenues
Major retailers, hotel chains, and theme parks are going bankrupt
Loan quality at U.S. banks: worst in at least a quarter century, deteriorating at fastest pace ever
The victims of this financial disaster don’t have the money to bury their loved ones
US states have started printing their own currencies
Recession has put a major strain on social security trust fund
U.S. Contract law torn apart

Given the food shortage in 2010, there is also the potential for famine in the U.S.

The U.S. Will Not Fall Alone

With the free-falling dollar spreading doubt about all paper currencies, countries with weak financial health will join the US in hyperinflation. Two countries which will follow the US into economic oblivion are Britain and Japan.

Britain is probably the only country worse off than the US, and they know it. Privately, something close to desperation is starting to develop inside government, with cabinet ministers being quoted as saying things such as. "The banks are f***ed, we're f***ed, the country's f***ed." The last time Britain built up this much debt was when it was fighting half of Europe.

Japan meanwhile is facing a demographic collapse and its debt to GDP is approaching 200%. The dollar’s collapse is going to wipe out the value of Japan's foreign reserves and destroy the country’s largest export market (the US), heavily damaging the economy. The yen, like the pound and dollar, will not survive.

Financially Surviving 2010

Here is some investment advice for surviving the 2010 Food Crisis.

Avoid All Commodity Futures!

DO NOT BUY agricultural futures! While it might be tempting to buy futures contract for soybeans and other agricultural commodities, this is a mistake. Look at the backwardation which happened at the end of August this year: shortage sent cash price of soybeans over $13 while futures contracts hovered around $11. Futures contracts missed out on most of the price spike by nearly 25%.

The 2010 Food Crisis will send futures into permanent backwardation. In other words, shortages will send cash prices into steep backwardation, and then, when the dollar and treasuries collapse, defaults fears will cause that backwardation to grow. Fears that CME might collapse could easily lead futures to trade at a fraction of the commodities they track.

Avoid All Other Derivatives

It is impossible to hedge against the dollar’s fall with derivatives! Since global derivatives markets operate on the assumption of the continued stable value of the dollar and short term US debt, using derivatives to bet against the dollar is NOT a good idea. The panic in 2010 will see the majority of derivatives end up worthless.

Avoid All U.S. Debt

The biggest buyers of US debt, foreign central banks, are about to become the biggest sellers. Get out while you still can!

Avoid All Investments Dependent on U.S. Consumer

The dollar’s collapse will rob US consumers of all purchasing power, and any investment that depends on US consumption will lose most of its value.

Avoid Investments in Oil (at least for the Next Year)

While I am bullish on oil for the long term, there are several reasons to be underweight in oil in the near term:

• There is a supply glut (volumes of oil products stored at sea have risen to more than 90 million barrels.)


• The dollar’s collapse will wipe out a huge amount of demand for oil. While demand from emerging economies like India and China will replace this lost demand, it will take in one to two years.


• Higher food prices will hurt demand for everything else, including oil.


• The entire Strategic Petroleum Reserve will hit the market next year after the treasury market collapses and the US government is desperate for cash.

Investments in oil won’t be a complete disaster as the dollar’s collapse will generate a lot of demand for “real” assets, but I expect oil to be the worst performing commodity in 2010.

Avoid Margin Accounts

If your broker fails, you are virtually guaranteed to be left with nothing ...

Conclusion

There is no precedence for the panic and chaos that will occur next year. The global food supply/demand picture has NEVER been so out of balance. The 2010 food crisis will rearrange economic, financial, and political order of the world, and those who aren’t prepared will suffer terrible losses …

Cold front threatens Florida farms
Drought and conflict in south Sudan
2010 Food Crisis Means Financial Armageddon
Cold from China to Florida Pushing Up Energy Prices
Frozen Britain May Run Short of Gas
Food Costs to Soar as Big Freeze Deepens
Auto Execs Urge Government to Tax Fuel Up to $8/Gallon to Increase Fuel Efficiency
U.S. Inflation to Appear Next in Food and Agriculture
Food Prices to Stay High, Volatile: FAO
Oil Hits 2009 High, Holds Above $75
Fastest Food Inflation Since Riots Means Milk Up 39%

Setting Nogger Strait About US Crop Production
Food Prices Soar in India
Links for Keeping Track of 2010 Food Crisis
Kenya: FAO Raises the Red Flag over Food Situation
The rising cost of food is driving Asian inflation rates higher
Rising milk prices may fuel india inflation
The Great Indian Price Rise
India's food crisis was foretold
The rising cost of food is driving Asian inflation rates higher
Rising milk prices may fuel india inflation
Rapid Rise in Seed Prices Draws U.S. Scrutiny
Federal Regulators Launch Probe of Big Agriculture
China Rushes to Bomb Its Clouds as Rice Prices Spike 10% in A Month

Updated 4/25/11 (Newest Additions at End of List)