The Yellow Brick Road

Couple of weeks ago fredw asked me to create a discussion thread to share investment ideas related to world’s food and resource shortages. Right away, I want to refute potential accusations that we want to make money on someone starvation. It would be immoral to buy and hide food from starving people, but investments help the market to move capital where it’s needed. This is how capitalism works.

Some background

We’ve already discussed the basic reasons of food shortages, price and supply dislocations. Basically, it’s all supply and demand, while sometimes supply is artificially constrained and demand is artificially inflated. Let’s enumerate some root problems:

• The world consumption of food and resources increased with wealth
• Food of better quality takes more efforts and resources to produce and can feed less people
• Investments in futures if often forcing crude consumers or speculators themselves to stockpile goods
• The dislocations (real or in perception) of currencies values are forcing the hoarding

Hoarding

I want to discuss the last point in detail. The huge deflation pressure coming from unwinding Kondratieff Winter in US is making US relatively immune to the world inflation problems. I’m saying “relatively” because we are still running 4%-4.5% inflation with 2% Fed funds rate, while many other countries are running 12%-17% inflation with 7%-12% interest rates. The good chunk of the world financial system is pegged to dollar and the difference in Kondratieff Wave phase is killing them. They are in Summer (except Japan in Spring and Europe in Autumn) and their interest rates and currencies are disrupted because politics is killing the economics.

To prevent the mass famine those countries resort to price regulations and export restrictions, this is only preventing the market forces from helping. The natural reaction is that population is losing fate into money and increasingly using staples as currency. Instead of saving in the bank account those people are saving rice.

Investment ideas

So what the investor can do in that environment? Is there anything that the rest of the market is still missing, i.e. it’s not too late to jump in?

The malaise is mostly miring the Far East countries and developing world where hoarding is mostly restricted to rice and some local basic staples. The question is, will it spread toward the more westernized population in middle class neighborhoods of India and China, Eastern Europe, maybe even the West itself? In that case the hoarding will spread toward staples produced by publicly traded Procter and Gamble, J&J and firms like that.

Maybe we should focus directly on some agricultural commodities, rice, and livestock? Or look into the corporate world offering the cure in increased supply, like fertilizers, pesticides, machinery?

And finally, maybe the best choice for us is not investment but hoarding? Should we just go to Sam’s Club and buy everything that we like and can practically stored, from pasta to razor blades? Later on, we could be surprised in soap returns