Hedge Funds Get Into the Act By LAUREN ETTER Wall Street Journal December 15, 2007; Page B1
The global commodities boom that has lifted prices of everything from gasoline to gold is now elevating rice -- a staple food for half of the world -- to its highest level in nearly 20 years.
Rice's surge has complex consequences for the global economy. Used in everything from sushi to burritos to Rice Krispies, the ubiquitous grain is suffering poor harvests and tight supplies in some of the biggest rice-exporting and rice-consuming nations, just as demand grows in places like India and the Philippines.
The higher price is a boon for some farmers and investors. But at the same time, it is expected to contribute to a protracted bout of food-price inflation for the foreseeable future, which could widen the rift between the world's haves and have-nots.
"At the end of the day, the fight will be between the industrialized world and the developing world," says Michael Lewis, managing director at Deutsche Bank.
A particular humanitarian concern is that the world's poorest consumers, many dependent on rice, often have little or no voice. "When they suffer food shortages, they starve in silence," says Joachim von Braun, director general at the International Food Policy Research Institute.
Soaring prices are drawing myriad investors into the market. On the Chicago Board of Trade, the number of bets outstanding on rice futures contracts recently reached a high -- a basic sign that more traders see a chance to make money on rising prices.
Nontraditional players, such as hedge funds, are now trading in rice, according to Fred Seamon, associate director of commodity research at the CBOT, and new exchange-traded investment products aimed at individual investors are also being rolled out. Two months ago, Jim Rogers, founder of the Rogers International Commodities Index, launched the Rogers Agricultural Exchange Traded Note.
While prices for other commodities like oil have been flirting with records in recent months, in inflation-adjusted terms, agriculture commodities still have room to rise before reaching that point. For example, the price of wheat will have to increase by 106% before it reaches its record high in real terms, according to Mr. Lewis at Deutsche Bank.
CRACKLING GAINS
• The News: Futures prices for rice are at 20-year highs, which may have implications for the global economy. • Background: Most commodity prices have been booming world-wide. • What's Next: There could be general food-price inflation, increasing the gap between rich and poor nations. Many of the poorest consumers depend on rice.As rice prices rise, food aid for developing countries is becoming scarcer. And the international price for broken rice, an affordable grade favored in many African countries, has increased 40% since last year, according to the United Nations Food and Agriculture Organization.
On the CBOT Friday, rice futures contracts settled at $13.1250 per 100 pounds, down 5.5 cents. That is up from $9.87 a year ago and just shy of the previous record price of $13.40, set in January 1988 when rice was traded at the Mid-America Exchange.
While prices like these aren't at record levels in inflation-adjusted terms, they nevertheless threaten to exacerbate poverty in large areas of the world.
Senegal Riot
One risk is that, in some cases, rising prices lead to food shortages and social unrest. Indeed, in November a riot that broke out in Senegal was in part attributed to higher prices for rice, a staple there. Protesters, throwing rocks and burning tires, were met with police firing tear gas.
The story of rice echoes that of nearly all commodities, whether petroleum, copper or wheat. Prices for many commodities are surging thanks to booming demand from emerging economies like China. It is having broad ripple effects: Steel prices make it costlier to construct buildings; the rising cost of oil helps to drive up the cost of world shipping rates.
Rising oil prices also make it costlier to grow and ship rice and other grains -- which, in turn, drives up food prices.
Human Impact
Agricultural commodities, of course, tend to have a more direct human impact than, say, oil or steel. Grains have been trading at or near historic highs partly because of a combination of growing demand for biofuels -- such as ethanol made from grain -- as well as a rising global population, which means more mouths to feed in the developing world.
In addition, the weaker dollar has helped to boost global rice prices, as most rice is traded in dollars. In Thailand, the world's largest rice exporter, the price of long-grain rice has increased nearly 20% since last year, according to Nathan Childs, senior economist at the Department of Agriculture.
All these factors have depleted global grain stocks to levels not seen in decades. Wheat stocks are at their lowest level in 60 years. Rice stocks are at 24-year lows.
Complicating matters: Historically, rice has been a thinly traded market. Only about 7% of global rice production is traded on the world market, according to Mr. Childs. This means that, in the event of a supply shock, rice importers have to scour the globe for available supplies, driving up the price even further. For comparison, about 16% of other grains, like wheat and corn, are traded globally.
Permanent Trend
Increased demand and tightening supplies are likely to persist. The Agriculture Department estimates that food prices will increase about 4.5% this year over last, compared with a 2.4% annual increase last year. In the developing world, food prices have increased about 9% over last year, according to the International Monetary Fund.
Higher food costs tend to hit people in poor countries harder than those in developed countries as households in developing countries spend a larger percentage of their income on food. In the U.S., food makes up about 18% of the overall consumer-price-index basket, compared with as much as 40% in some emerging economies, according to a report by Deutsche Bank.
For countries that rely on donations or aid to feed the hungry, higher prices can mean less food. At the United Nations World Food Program, rice is the third-most-frequently purchased commodity, and it supplies more than 70% of caloric intake in poor countries like Cambodia.
"If prices go up we'll be getting less of that particular commodity," says WFP spokeswoman Jennifer Parmelee. She says the price of procuring food has increased 50% over the past five years.
Since 2000, global rice consumption has increased 7.5%, while production increased about 5.4%. As supplies run short, the risk for the world market is that big rice exporters start keeping the food for themselves rather than selling it on the market, further driving up prices.
In July, Vietnam -- the world's second-largest rice exporter after Thailand -- said it would restrict rice exports in order to meet domestic needs first. India, another large exporter, announced similar export restrictions in October.
The U.S. accounts for only about 1.5% to 2% of global rice production, but it is the fourth-largest exporter, behind Thailand, Vietnam and India.
This year, U.S. rice acreage was 3% smaller than last year because of strong prices for competing crops, like corn and soybeans. However the crop is estimated to be 2% bigger because of higher yields. U.S. exports are expected to be nearly 20% higher than last year.
Let's not make ethanol the scapegoat for higher food prices
Friday, August 17, 2007 1:30 PM CDT
Our Views
We've all seen the headlines in the last few months blaming higher food prices on the surge in ethanol production in the U.S. and the resulting shifting in acreage to corn to fuel these plants. It seems like everything ranging from breakfast cereal to wheat flour, soda beverages to popcorn, and even beer and livestock products are claiming prices increases due to the ethanol craze.
In a speech on July 27 to the National Press Club in Washington, D.C., U.S. Ag Secretary Mike Johanns was asked a question on ethanol driving up food prices, not only here in the U.S., but throughout the world. Johann's response was very insightful and should put some of the rumors to rest regarding the argument of food versus fuel and the resulting bump in food prices.
Johanns told the group that, historically, food prices will go up two to three percent each year, based on inflationary pressures. Some years that hike may be a little more and in others a little less. This year the USDA expects food prices to rise from two to four percent, which Johanns termed “about average, maybe a little higher.” But those who claim the increase is due to ethanol and because the price of corn got high, aren't looking at the whole picture.
“They leave out a whole big piece of the analysis ... the farmer doesn't get all of that. I'm sure they wish they did,” Johanns said. “But they actually get about 20 cents of the retail dollar. Actually the price of energy to ship that food can have as much or more of a profound impact on the price of that food than the corn you feed to the animal.”
Johanns went on to explain to the gathered journalists that the food chain is a very, very complicated supply chain. “And if you have reached the conclusion that because food is up three percent this year, or four or two or whatever it is, and because it's because of ethanol...you're not telling the full story. And you are not telling an accurate story, in all due respect.”
Earlier in July, the Denver Post took on the beer industry which had reported the price of beer in the U.S. had climbed three percent over last year and the cost of pounding one down at the local tavern had gone up by 3.8 percent. The beer industry claimed that at least part of the reason for this increase was due to the fact the price of barley had shot up 48 percent over the last 11 months. And, of course the reason for the higher barley prices was due to the fact that farmers were planting more corn for the ethanol market and devoting more acres to corn, causing the supply of other grains such as barley and wheat to decrease, thus increasing those commodity prices.
The Post reported that Colorado Commissioner of Agriculture John Stump pointed to the fact that the price of raw agricultural materials is just a small fraction of the price of most processed foods. Using barley as an example, he noted that the price per bushel now is around $4 for a 46-pound bushel and it typically takes one pound of barley to produce a gallon of beer. Even with today's higher grain prices, this figures out to only about nine cents worth of barley in that gallon of beer for a six-pack of beer that normally sells in the neighborhood of $3 to $5 in a package store.
Stump went on to say that instead of the American farmer, a more obvious villain is the tax collector. The federal government collects $18 on a 31-gallon keg of beer, or about 58 cents a gallon. And the state of Colorado also collects an alcohol tax as well as a sales tax, bringing the total taxes on a gallon of beer to 66 cents compared to just eight cents worth of barley.
And what about those staples at the movie theater - popcorn and a soda? It was recently announced that one theater chain would increase the price of popcorn 25 cents per bag because of higher popcorn prices related to more acres going to regular corn production as a result of ethanol.
But Monte Shaw of the Iowa Renewable Fuels Association pointed out that there is only .15-pounds of popcorn in a typical $5 bucket of popcorn. Based on last year's prices of about nine cents per pound that bucket of popcorn contained just slightly over a penny's worth of popcorn. With today's higher prices that figure is approaching two cents worth of popcorn.
“It just shows that there's no say that that small increase in the price of popcorn that the farmer gets justifies the large increases they are talking about at the movie theater,” Shaw said.
And about that soda, Craig Floss of the Iowa Corn Promotion Board said the average can of soda contains about a penny per can worth of corn sweetener or six cents per six-pack.
“So if your six-pack of soda is going up any more than about six cents in this food-versus-fuel debate, then somebody else is profiting, and it certainly isn't the huge profits going to the corn growers.”
As Johanns told the National Press Club, “We have the accurate story at USDA...and (for) anybody who wants to write an in-depth article or a series on food prices, we'd love to provide you with the information on just how complex the food chain is and how fuel to transport it, or promotion costs, or whatever it is, can actually have a more important impact on the cost of that food than the price of a bushel of corn.”
Too many Americans today hold the concept that their food comes from a grocery store and the only time they seem to think of the U.S. farmer is when they are looking for someone to blame for the higher prices for the products on those grocery store shelves. Maybe it's time for a new labeling law on the grocery shelves. A label that would not only give the total price of an item and break down that price in so much per unit of measure by weight, but also would indicate the share of the total price the farmer actually received, based on nationwide commodity prices. That would surely be an eye-opening experience!
Comments »
Gary Neitzke-Yutan, NE wrote on Nov 5, 2007 4:46 PM:
" We are still very early in the development of ethanol. I suspect corn was initially chosen because of its abundant availability. In the future we will see movement towards more cost effective bio-mass produced ethanol. Hopefully even the ROW fields along every highway can be developed instead of just using up fuel and man-power to cut the grass and let it lay to waste. We could even use low maintenance Hemp if our government wasn't so damn paranoid about it (much of the plastic used in Mercedes Benz automobiles are fabricate from hemp!). As we reach into the future, automobiles will be developed that use ethanol efficiently, hopefully even better than we get from gasoline now. As for comments about writing in All Caps, it is a proper and accepted email protocal to show expression (email has no body language!). Besides, only 18% of what I originally posted was CAPS "
Bob Skilnik wrote on Sep 30, 2007 3:08 PM:
" Right Gary; And we really need to quit WRITING IN CAPS! "
The Founder of UPGS Robert L Neitzke - Omaha NE wrote on Sep 18, 2007 4:33 PM:
" We need to play a new game. We can not take this ethanol production direction on a scale it seams to be going. Sure we should have Hybrid multi-fuel vehicle but they need to be electric and have the capability of mounting a Glideway system. We as a Nation need to make Electricity the energy center point; not oil. We Need a high speed Electric Glideway for our personal vehicle to travel on and tied to our next step in Internet technology. Our Interstate system is built for trucks. Anymore expansion of the Interstate for truck traffic needs to go on the back of the Railroads; (The railroad can widen to 4 tracks wide within their existing right-a-way). With a Glideway system we can kill a flock of birds with one stone. The high cost of expanding our road system to 18 wheel live load specification, Gridlock, Commuter wasted time, Energy wasted, The high cost we pay for freedom to travel all of America plus much more. The Glideway would also be used as our conduit for our power grid system. This will give away to Collect farm made energy from wind and C grade farm products & waste. The A&B grade food produces need to remain in our food supply to keep our cost low and our windfall blessing from God to feed part of the world. The fuel saving will bring down the cost of transporting our food and air travel. By 2025 ever roof should be solar electric. Then We need to store our daylight energy by use of Hydrogen fuel station. We can easily change our economy by the way we invest And what we say our needs are to our congress man. The Founder of UPGS Robert L Neitzke "
Anonymous wrote on Aug 20, 2007 1:00 PM:
" Gary I agree with you we do need to reduce our dependence on foreign oil. At home we can reduce the price of oil by not paying some of the roughnecks 6 figures. I belive for a couple of guys just out of high school to be earning upwards of 50k a year is pretty ridiculous if you ask me. Just by lessening the pay of each oil worker just a bit (leaving them with plenty of money still) would greatly reduce oil prices. This in turn would make transportation costs of our food lower. Life is a vicious circle but we can use it to our advantage. "
Michael Virga wrote on Aug 20, 2007 12:35 PM:
" While popcorn and beer producers may not feel the corn crunch caused by ethanol production, a few other, slightly more important food producers certainly do: the Livestock and Dairy Industries. Corn is the mainstay of livestock feed, and ultimately a component of any meat or dairy products we purchase at the store. Of course, this article fails to include that meat and milk prices have skyrocketed this year, as America's ethanol industry is poised to consume 20% of our total corn crop. http://www.cwt.org/blog/articles/2007/06/15/an-ethanol-policy-that-hurts-consumers "
Bob Skilnik wrote on Aug 18, 2007 9:03 AM:
" " Maybe it's time for a new labeling law on the grocery shelves. A label that would not only give the total price of an item and break down that price in so much per unit of measure by weight, but also would indicate the share of the total price the farmer actually received, based on nationwide commodity prices." Yeah, that would be a big help. More government labeling requirements. "
Gary Neitzke-Yutan NE wrote on Aug 17, 2007 10:01 PM:
" I would venture to say that scapegoating Ethanol for higher food prices seems to be the "swiftboating" of those whose warp n' woof is intertwined with the petroleum world. Geesh, get a clue! Look at how much gas and diesel prices have climbed in recent history...that's what is causing food price increases. (and what about the unbelievable profits the oilmen have pocketed...WOW! Historically most corn has been used to feed livestock. Has that change with the production of ethanol which leaves as a saleable by-product a protein rich livestock feed...Look, folks, ethanol probably isn't the final solution, but WE MUST END OUR DEPENDENCE ON FOREIGN OIL and WE MUST STOP BUYING SO MUCH CHINESE PRODUCED PRODUCT FOR THE SAKE OF "LOWER PRICES"! "
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