"Financial Armageddon: The 2010 Food Crisis"
A Comment: Folks, I really had a hard time posting this article. I had to think long and hard about doing so, because of the nature of the article, and finally decided to do so because, in the end, you need to know the truth, however unpleasant that may be. This might be the worst of the lot. Anyone familiar with the posts here will know that there's always been an optimistic undercurrent, a sense of encouragement to celebrate our common humanity, to hope for the future. The mainstream media will not tell you the truth, that has to be dug out from frequently obscure sources and assembled into an objectively rational "picture," verifiable whenever possible, of the real circumstances of reality, not the nonsense and lies those in authority shower us with daily. There's a quote on the side bar from Morpheus, "I didn't say it would be easy. I just said it would be the truth." I've tried my best to make every post here the best version of "truth" possible. I WANT , desperately, to say everything's going to be alright; but I won't lie to you. I also don't want to be a "Dr. Doom" character, always crying that the sky is falling, which is why I maintain such a strict level of non-personal input. The articles and information must speak for themselves. You alone must decide the validity and value, if any, of what you read here. The following article has been abridged, many charts and footnotes do not appear here. Please see the original article for references and supporting data, and decide for yourself. That said, reluctantly I offer this post."Financial Armageddon: The 2010 Food Crisis"
by Eric deCarbonnel
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. 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.
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.
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 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. 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.
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 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. Since the United States is the leading exporter of corn and soybeans, producing 40 percent of the global corn crop and 38 percent of all soybeans, the USDA's production numbers have an enormous impact on the global supply/demand picture.
A Reality of Agricultural Devastation and Ruin: In this reality, the US farmers have suffered the worst harvest season ever seen. 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:
1) 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.
2) 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).
3) 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.
4) 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.
5) 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.
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.
US Soybeans Supply and Demand: Analyzing U.S. soybeans supply and demand reveals how bad the situation is. The US is the biggest producer and exporter of soybeans, and, when America runns out of soybeans, it will create panic. 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 (ie: 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.
Finally, at the end of 2008/09, these was a huge of amount of soybean sales outstanding, 2,216,016 MT, which were rolled over into the 2009/10 crop year. This means the exporters couldn't find enough soybeans to make good on the 36,069,606 MT of soybeans they sold last year. Basically, the US ran out of soybeans in August 2009, and the beginning stock of US soybeans should be considered zero for 2009/10.
The true financial crisis begins when the world realizes that there are a couple of 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 nations will begin export bans (India has already banned food exports). Producers, middlemen, And households will rush the 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:
1) Continue subsidizing US food consumptions as triple digit food inflation ravages their economy and their people starve.
2) 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 a 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. “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.
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 choose 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 US 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 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. 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. There is no such thing as liquidity of investment for the community as a whole.
The derivatives 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 (ie: 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.
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. 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.
US 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 (ie: 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. Given the food shortage in 2010, there is also the potential for famine in the US
The US will not fall alone: With the free falling dollar spreading doubt about all paper currencies, and 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.
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 the economic, financial, and political order of the world, and those who aren’t prepared will suffer terribly."
Charts, graphics and references are at the original article here:
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