Yet food stocks in corn, wheat, rice, etc. are dangerously low. We are just one bad weather season from a potential worldwide food disaster. And Dennis Gartman has been pointing out almost daily how far behind US farmers are in getting their corn crops planted, due to bad weather:
“… the corn crop really is behind schedule. Corn is not like wheat. Wheat can survive drought; it can survive cold; wheat, as we were taught by our mentor, Mr. Melvin Ford, many years ago, is a weed. It is an amazing, resilient plant. But corn is temperamental; it needs rain when it needs rain; it needs dry conditions when it needs dry conditions. It needs to not be hit by early season frost, or it will suffer, and it needs a rather archly set number of days to grow. Each day lost at the front end of the planting/growing season puts pressure upon the corn plant to finish its job before the autumn frosts, and puts increased soybean acreage and decreased corn acreage before us.
The maps of the Midwest this morning have it raining once again, with more rain likely over the weekend. There will be some field work done in some areas, of course, but the several straight days of corn planting that everyone had hoped for simply are not going to take place. The ethanol mandates may be in jeopardy in the long run, but in the short run, this year's corn crop is swiftly becoming problematic ... and short.”
I had a note from a reader relating the experience of a member of his family. The gentleman runs a rather large feed lot in West Texas. He's running half the cattle he normally does, as he's losing money on every head he sells. Ranchers are reducing their herds, as they cannot afford to feed them due to high grain prices.
The same thing is happening with chickens. Producers are losing money on every chicken they sell, and they have to reduce inventories; thus meat of all types has not risen as much as the cost of producing it.
This means sometime this fall of supplies of meat of all types are going to be reduced, but demand won't. And that means that meat prices have the potential to rise substantially during an election season. Maybe someone will point out that using corn to produce ethanol has the unwanted and unintended consequence of driving up food prices all over the world. It's not the sole source, but it's significant.
And when we finally experience a year of bad weather (whether too much rain or too little, too cold or too hot, it will be blamed on global warming), food supplies and prices are going to skyrocket. And a developing world will not look kindly on the US and Europe's use of food for fuel when so many are starving. Don says that this is not a matter of if, but when.
Housing Numbers Are Better Than I Wrote
Sometimes I just flat out get things wrong. And last week I blew it. William Helman, among others, pointed out to me that the 974,000 new-home construction number I used includes multi-family dwellings as well. I knew that, and just forgot. So, let me let William give you the real story:
“I am a loyal reader and I enjoy your weekly letters. Now and then there is an interpretation of the data that I fail to agree with. The letter of April 26, 2008 is a case in point.
In the section headed ‘If You Are in a Hole, Stop Digging' you state that the building industry is building over 400,000 more homes than they are selling. You infer this by subtraction new home sales (single-family) for March of 526,000 from housing starts for the month of 947,000.
First, you should note that single-family housing starts for March were 680,000 (annual rate) and 267,000 (annual rate) were multi-family, or apartments/condos, thus totaling 947,000. The comparison with home sales, which are single-family home sales, should be with single family home starts.
Second, single-family home sales exclude the construction of single-family homes by owners – persons who buy a lot and contract to have a house built on the lot to live in and not to sell.”
When you subtract out apparent construction of homes by owners and not builders, William presents data that suggests builders are building less than they are selling, which would make sense.
"… However, when we consider the apparent inventory of existing homes for sale along with newly constructed homes, there is a very large excess supply. That suggests that the excess supply of single-family homes on the market, relative to past norms, is between one and 1.5 million units. This is equal to about one year of ‘trend' single-family home production. At the current rate of new single-family home construction (a 680,000 annual rate, or about 400,000 to 500,000 below ‘trend demand'), it would take at least two years and possibly three years or more to work off the excess.
Of course there is a lot of uncertainty in trying to estimate future home construction in this way. The demand and the supply are not necessarily, and probably not, at the same places. Thus some of the inventory may remain in excess for a much extended period, while in other places the excess may become exhausted quickly, thus spurring increased new construction more quickly.
On balance it seems clear that housing starts are likely to remain subdued and well below trend for an extended period. But this is because of the large inventory of new and existing homes for sale. It is not, as you indicated, because builders are currently building more homes than they are selling. Builders are building less than they are selling. Still, this is not to say that sales will not decline further, causing an even further decline of starts before leveling or beginning a gradual recovery.”
I stand corrected.
South Africa, Canada, and La Jolla
I leave for South Africa soon. While not looking forward to the 16-hour flight (plus the flight to Dulles and a long layover), I'm really looking forward to once again being in the country. Cape Town gets my vote for the most beautiful city in the world. I've never been to Sun City Resorts, but I hear they're magnificent. I will get to spend a few days there at a conference where I will be speaking. As always, partner and fellow Minyanville Professor Prieur du Plessis makes sure my week is packed, but I will sneak in some time for a few game runs and some sight-seeing. If you want to attend one of my presentations, just drop a note to Prieur.
After I get back from South Africa, I will head out the next Monday for a quick trip to La Jolla to meet with my partners at Altegris Investments and Thomas Fischer of Jyske Bank, and then back the next day. And it seems that in the second week of June I will be traveling with my daughter Tiffani in Canada, crisscrossing the country starting in Vancouver. I'll end up in Montreal where I'll speak for my friends at Canaccord. But what a pleasant time of the year to do so. There's just so much opportunity that I feel I simply must take the time and travel needed to develop it. And that is, as they say, a good thing. I am a very happy man and realize how blessed I am.
And speaking of travel, International Living remains one of my very favorite newletters. You can get your own subscription by going to the website.
I'm going to sign off, as my young son wants to see me before I get away. I think Iron Man is in our future. And maybe a visit to the bookstore.
Have a great week!
Your looking forward to South African wines and lions analyst,
John Mauldin
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