Eric deCarbonnel from www.marketskeptics.com
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The 2010 Food Crisis Means Financial Armageddon
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.
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 2009/10 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.
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.
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.
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 the acquire supplies. All this hoarding will wrosen 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 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 selloff the country’s $270 billion in forex reserves.
In India, the government is ALREADY under pressure to selloff 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.
"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
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.
The death of the "US 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.
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.
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.
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...
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