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Mad Hedge Fund Trader

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Is Food the New Distressed Asset?

After my entertaining repast with the head of our nation’s intelligence service, (See: Lunch with the CIA) I had to ask myself this question. During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050.

Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Australia, Africa, and China, soil is exhausted, and global warming is shriveling yields.  Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring.

Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork demand rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. To produce one pound of beef, you need 16 pounds of grain and over 2,000 gallons of water. I won’t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply.

It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver.

The amount of arable land per person has fallen precipitously since 1960, from 1.1 acres to 0.6 acres, and that could halve again by 2050. Water is about to become even more scarce than land. Productivity gains from new seed types are hitting a wall.

China, especially, is in a pickle because it has 20% of the world’s population, but only 7% of the arable land. It has committed $5 billion to agricultural land in Africa. There are now thought to be over one million Chinese agricultural workers on the Dark Continent. Similarly, South Korea has leased half the arable land in Madagascar to insure their own food supplies.

An impending global famine has not escaped the notice of major hedge funds. George Soros has snatched up 650,000 acres of land in Argentina and Brazil on the cheap, an area half the size of Rhode Island, Others are getting into the game, quietly building portfolios of farms in the Midwest and the South. 

In 2009 one of the greatest crop yields in history, brought on by perfect summer weather, delivered one of the largest grain crops in history. Fall rains and an early frost meant that much of this bounty ended up rotting in the field, providing the backdrop for price rises of 30% across the board. The US Dept. of Agricultural January crop report then predicted that we are going to see a replay of record production this year, slamming prices once again, and delivering limit down moves in the futures markets. But the weather may not cooperate, as it did last year.

The net net of all of this is that food prices are going up, a lot. Use this year’s expected weakness in prices to build core long positions in corn, wheat, and soybeans, as well as in the second derivative plays like Agrium (AGU) and Monsanto (MON). You might also look at the PowerShares Multi Sector Agricultural ETF (DBA) and the Market Vectors Agribusiness ETF (MOO).


By. Mad Hedge Fund Trader

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  • Anonymous on December 06 2010 said:
    "South Korea has leased half the arable land in Madagascar" -- this is not true. It is rumoured that Korea *wanted* to do this in 2008, but it never happened, and the fact that Madagascar's previous government were reportedly in favour of the plan led in part to their collapse last year.
  • Anonymous on December 06 2010 said:
    Interesting and important article. Obviously people like Paul Ehrlich were right on target, while the work of Julian Simon was insane. The more people the better was his ignorant opinion. I hope that you told your friends at Langley to keep an eye on this issue
  • Anonymous on December 07 2010 said:
    You can take your GM products and leave this country thank you kindly. These monstrosities are so pathetically tested the EU has banned them outright and for 30 years if I remember correctly. But by all means, allow your kids to be Monsanto's guinea-pig, but not mine. One reason I bought 100 acres, grow my own unbastardized food. And not, its not the sure, they're finding it is creating stronger weeds our chemicals don't kill anymore. So yields are going down. Thankfully the Federal judge forced them to destroy all the GM sugar beet crops.
  • Anonymous on December 08 2010 said:
    Clearly everyone on Earth has died long since, as Paul Ehrlich and friends predicted. Anyone who considers himself alive at this time is, like Mr. Banks says of Julian Simon, insane.
  • Anonymous on December 08 2010 said:
    Paul Ehrlich came to my university once, and most of his lecture consisted of bad mouthing economists. I don't mind this, but he got a laugh out of the unteachables when he identified me as a member of the economics faculty.I dont know what he stands for, and actually I found him uninteresting, but if he thinks that population is going to be a big problem, he is exactly correct.Of course it's not the biggest problem. The biggest problem is dumb voters and party functionaries who put dumb people in position to make dumb decisions that impact on the rest of us.
  • Anonymous on December 09 2010 said:
    Here is an interesting quote by Paul Ehrlich from a 1970 interview:"Population will inevitably and completely outstrip whatever small increases in food supplies we make, ... The death rate will increase until at least 100-200 million people per year will be starving to death during the next ten years." Paul Ehrlich in an interview with Peter Collier in the April 1970 of the magazine Mademoiselle.So as you can clearly see, at a rate of 100-200 million starving dead per year, on top of pre-existing deaths, over 40 years, almost 8 billion excess deaths would have occurred. Clearly birth rates would have plummeted in that environment, so that virtually no humans would be alive by the end of 2010.In other words, you are all dead. Sorry about that.
  • Anonymous on December 10 2010 said:
    Excessive population is nothing to make jokes about,Alfonso. You'll find that out at the New Year's eve party you attend in 2050, because that is what all of those well dressed gentlemen and attractive ladies will be talking about. As for your skepticism about inadequate food, I can only say 'Wake up and read the label on your champagne bottles'.
  • Anonymous on December 13 2010 said:
    Mike L Knows that GMO foods will not and do not create higher yields. Monsanto can keep their cancer causing foods. They are destroying the diverse foods we have left. Like locus they are contaminating the globe killing off species in the name of higher yields, which is a proven lie.

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