Friday, January 14, 2011

Today Tunisia, Tomorrow Egypt?

High food prices have been getting a lot of attention lately, and they may have actually claimed a government. While it might be simplistic to tie the populist revolt in Tunisia (the president of 23 years has fled the country) to food, it certainly played a role. After all, the proximate cause of the protests that ultimately forced the president from power was the self-immolation of an unemployed college graduate upset that Tunisian police were blocking him from selling vegetables without a permit.

Now, Tunisia had plenty of other problems and it may well have been only a matter of time before “something” set off the powder keg. But that doesn't mean that there isn't a lot of potential trouble stirring because of food. The Indonesian president is encouraging citizens to grow their own chilli peppers, the Indian cabinet is supposedly having high-level meetings about the price of onions, and South Korea has released some emergency stores of cabbage, pork, fish, and vegetables according to the Financial Times.

Please Sir, I Want Some More”
Why all the fuss over food? After all, Americans spend only about 7% of their budget on food. Well, in Thailand percentage is 26%, in Nigeria the number is about 50%, and in Tanzania its 71%. Consequently, a 10% rise in food prices is an annoyance to Americans, but a crisis to a large percentage of the world's inhabitants.

Unfortunately, trouble is stirring. Bad weather has wreaked havoc on crops in countries as diverse as Australia, Russia, and Pakistan this year, and there may be many more countries that have problems (or problem areas) that just don't crack the international news. On top of that, crop yields in South America have been disappointing in many recent years, so even a high-producing area cannot always be relied upon.

That has translated into sky-high prices for corn, soybeans, and wheat, and rice is on the way up. That, in turn, is wreaking havoc in a lot of countries. China is resorting to odd ploys like allowing trucks carrying vegetables to avoid tolls in the hopes of getting more produce to city markets. Other countries face a tough choice – try to fight inflation with higher rates and risk killing economic growth, or let food prices rise even higher and threaten the stability of the country. Making matters worse, it's unclear whether raising interest rates will help fight food price inflation – food prices are high because there is too little of it and interest rates don't change people's basic daily nutrition needs or produce sacks of wheat.

No Crisis Goes Wasted...
Of course, some folks cannot let a good crisis go to waste. One of the sillier notions is that these higher food prices are a direct consequence of the Fed's latest round of quantitative easing.

Uh … right.

Okay, I'm willing to go along with the idea that QE in the U.S. has led to some global inflation. But I'll need one of these demagogues to explain to me how Bernanke's moves lead to bad weather in Russia or Australia. Likewise, I'll need to see a Glen Beck-style flowchart for me to understand how easy money in the U.S. is perpetuating the La Nina weather phenomenon or the volcanic activity in eastern Russia that is messing with global weather patterns.

If the weather stays bad (and I don't know anywhere near enough meteorological science to figure that one out), the food situation will get even worse. That could be potentially explosive news for the leadership in Egypt, Indonesia, India, Algeria, Pakistan, Venezuela, and a host of African countries. It could even cause trouble in relatively stable countries like Turkey or Indonesia – if people are starving (or facing serious budget problems because of food prices), it is a lot easier for radicals to capture hearts and minds, particularly if they promise to feed their new converts.

Simply put, a lot of countries are going to face the reality that food security and national security are one in the same at the margins.

Solutions In The Seeds?
Maybe this doesn't reach the level of a Malthusian nightmare, but this latest bout of food insecurity might just lead some countries to some very difficult decisions. In the United States we have the luxury of fretting about organic foods, shopping at Whole Foods (Nasdaq: WFMI), and manufacturing fears about the hybrid seeds sold by Monsanto (NYSE: MON), Syngenta (NYSE: SYT), and DuPont (NYSE: DD).

But can Egypt or Pakistan afford the same luxury? If Monsanto seeds can boost yields by 10%, you could argue there is a moral obligation to use them. Sure, there are plenty of other problems with agriculture in much of the developing world – depleted soils, inadequate roads and logistics, lack of access to credit and advanced farming techniques – but hybrid seeds offer at least one potential solution.

So, what does all of this mean for investors?

If you're playing the commodity markets, these are wild times. Likewise, a lot of food companies, particularly those leveraged to emerging economies, have gotten a lot of attention. Zhongpin (Nasdaq: HOGS) and Cresud (Nasdaq: CRESY) are near their highs, as are the stocks of companies that hold the promise of improving food production. Here I'm thinking of names like Potash (NYSE: POT), Yara (Nasdaq: YARIY), Deere (NYSE: DE), and the until-recently-under-performing Monsanto.

In point of fact, a lot of these stocks are already near their highs. That doesn't mean that they won't go higher, though. I would be a little careful about owning meat producers, as many are vulnerable to higher feed costs (corn and soybeans), but it looks like a good time to be in grains, seeds, fertilizer, and processing/storage.

Beyond the food stocks, investors may want to keep a cautious eye on certain parts of the emerging markets. For countries like Brazil, China, and Turkey, these higher food prices are likely just a massive headache for the respective governments and will complicate their efforts to balance growth, inflation, and domestic harmony. For countries like Pakistan and Egypt, though, the consequences could be quite a bit higher and investors may want to tread carefully with the stocks and bonds of these countries.

History says that weather and crop yields will bounce back. Eventually the weather will settle down, crop yields will soar, and people will talk again about record-low prices for corn and soybeans. I have no idea “when”, though, and high food prices (and the resulting chaos) could be in the news for a while longer, perhaps even years. In the meantime, this is just another factor for investors to digest and discount – there is clearly an opportunity to play food stocks, but there is also the potential political chaos in the emerging markets to consider, as well as lower-growth and political/economic fallout in many of the most attractive emerging markets. 

Disclosure - I own shares of Monsanto
(apologies for not realizing  for a couple of days that I had failed to include this disclaimer...)  

No comments: