"Agriculture has gone crazy," said a farmer we spoke to over the weekend. "We're getting prices that are twice what they were four years ago. Everyone is planting as much as possible. Of course, in our industry, you can't know what will happen. You get a bad harvest in Australia or America and prices can go up - even though a record amount was planted.
"But what is really creating havoc is the switch to biofuels. It's amazing how everyone seems to have grabbed onto that idea as the solution to global warming. But it takes huge amounts of grain to produce significant outputs of fuels. And then, the grain takes huge amounts of inputs - land, water, fertiliser, fuel. I'm not sure that it benefits the earth at all...in terms of the hydrocarbons that it produces, but there is no question that it benefits the farmers. All grain prices are up. If we get a good harvest this year, it will be a very good year for farmers in Europe. We had a lot of water...and now we need some hot, dry days..."
One unintended consequence of all the loose money has been tight farm supplies. Inventories of grains are said to be at their lowest level in 30 years. And an international study said food prices rose 23% in the last 18 months.
This rise in food prices isn't good if you are trying to buy groceries for the week...but if you are positioned properly in the commodities market, you could stand to turn a nice profit.
More dollars in circulation puts more cars on the roads...and more air- conditioners in windows...and more electrons flowing through wires all over the planet. Encouraged to come up with a solution to the energy/global warming crisis, farmers discovered a whole new market for their production - making fuel. They are taking food for humans and turning it into food for machines - just at a time when more and more humans want more and more food themselves. As people get richer, they typically move up the food chain - preferring to get more of their calories from meat, which requires more grains to rise. But now, humans compete with machines for farm output...and farm prices are rising.
"Groceries gobble up budgets," says a headline in the Sun-Sentinel, from sunny South Florida.
And an item in the weekend news tells us that the UN says it can no longer afford its World Food Program, which benefited 90 million of the world's poorest people.
Ben Bernanke is expected to worry about rising food prices when he talks to Congress this week. But the poor Fed chief is in a tight spot. He needs to raise interest rates to head off consumer price inflation. What will that do the housing situation, he must wonder...
Bill Bonner
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
