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Uproar Over Food Inflation


High commodity prices lead to civil unrest.

Inflation concerns continue to mount. You can feel the civil unrest percolating and it looks as if full blown strikes and riots will become a norm.

Countries, such as, Mexico, Russia, South Africa and Yemen are all experiencing unrest as the very staples of life have become unaffordable.

Food prices in South Africa are now up 70% from a year ago. At the same time the rand is down 15%. And with the recent power outages, it looks as if electricity costs are set to explode, adding fuel to the fire. Some say electricity prices could increase as much as 50-60% in 2008-09. This would be a double whammy and will be sure to maintain inflation in the double figures.

Soaring export taxes on the crops in Argentina have lead to rebellious strikes by the farmers. As a consequence, produce and beef are missing from the shelves in the grocery store. Empty shelves make people angry.

The upshot of rising food prices is already being felt in China. Rice is a staple in China and most of Asia and prices have more than doubled. In fact, a quick glance at the Chicago Board of Trade rice chart shows rice prices making new high as I write (see below). Just in a week, rice prices are up another 11.5%.

Click to enlarge image

Civil unrest is possible as people in China are eating more rice than is being produced. To counter the effects of higher inflation the government continues to raise the cost of borrowing and imposing price controls on food.

Folks in Mexico are in an uproar as the price of corn tortillas goes up. Corn prices are tickling the $6 per bushel level. And the chart is wildly bullish.

Click to enlarge image

We've had a series of higher lows on the monthly chart since August 2007. At the same time, world stocks continue to dwindle. The stocks-to-usage ratio is currently at 13.5%, the lowest since 1973-74. That's considered a tight market. Remember too, the crop is not even in the ground. A hot, dry summer could be devastating.

World Bank
President Robert Zoellick addressed the issue of high food prices on Wednesday, saying:

"The global food crisis now required the attention of political leaders in every country, since higher prices and price volatility were likely to stay for some time. We need a new deal for global food policy. This new deal should focus not only on hunger and malnutrition, access to food and its supply, but also the interconnections with energy, yields, climate change, investment, the marginalization of women and others, and economic resiliency and growth."

Meanwhile, Singapore registered a 25 year high in inflation. Saudi Arabia is now at 16 year highs and Switzerland is not far behind, at 14 year highs.

While commodity prices may consolidate and trade in big ranges for the next few months, the big picture still looks supportive for natural resource plays.
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