Two stories attached. You would think that with wheat selling at record high prices, farmers would cheer. American farmers are finding that high prices are useless if you have little to sell.

    The second story will make you glad we live in a society where food costs are not much of an issue (yet) but they are causing deadly riots world-wide. If droughts or floods (you can’t seed under water) continue this summer, expect the situation to get worse. Many countries have already banned rice exports – a global food staple. This will increase shortages in importing countries. With the climate changing and weather getting more severe …….

    Several more items (I’m trying to keep this brief) about the stock market:

A)   John Mauldin, a very knowledgeable and level-headed analyst (exceedingly rare) outlined Vitaliy Katsenelson’s latest book Active Value Investing: Making Money in Range-Bound Markets (Wiley, 2007), wherein the author exhorted investors to fasten their seat belts and lower expectations for the next decade or so. He also provided a strategy for improving returns in this environment, what he calls range-bound or cowardly lion markets. The general stock market is in a phase that is neither bullish nor bearish. It is going sideways with great volatility. In other words you won’t make money with the traditional “buy and hold” approach.

Several traditional approaches are required. First, wait for P/E (price / earnings) ratios to drop drastically below 15. In other words, cheap and they are NOT cheap right now. Then, buy only quality stocks i.e. competitive advantage, strong balance sheet, great management, high return on capital, etc. then sell when everyone else is buying and buy when everyone else is selling during mini bear markets. The only thing different than traditional approaches is not to hold for the long term because you’ll ride a rollercoaster up and down and not make any money in the end. Discipline is required to sit on cash until bargains appear.

B)   Don Coxe of BMO’s Friday webcast recommended agricultural stocks i.e. companies that serve the ag market such as fertilizer. He says they have a long run ahead of them because the commodity bull has legs. However, he warned you must do due diligence as some companies have money in ABCP (Asset Backed Commercial Paper i.e. toxic paper) which will hurt their stock price once investors find out about it.

C)   After following financial news for some time now (I know you find this hard to believe) I’m convinced that the Central Banks will continue     to keep a lid on Gold and Silver prices. They’ll keep hammering gold whenever it’s close to $1,000. As a result I’m not expecting gold to go to the moon any time soon. Governments (especially American) have shown they will do everything possible to keep the lid on the financial melt-down and they have abandoned their traditional mandate of protecting the dollar and fighting inflation. However, until inflation rears its ugly head, the price of Gold and Silver will be suppressed.

For the last 9 months I’ve abandoned my active trading approach and tried a longer term buy and hold. Overall, my stocks have gone nowhere. So, with item A) in mind, I will resume my short term trading rather than ride the rollercoaster. Perhaps when I start doing this, Gold WILL go to the moon. We shall see.

Stay tuned.

Gerold  –  Apr. 12, 2008

The stench of fear in the wheat industry

Apr 10, 2008 10:03 AM, By Kim Anderson
Oklahoma State University

At this writing, some Oklahoma and Texas elevators are offering to forward contract wheat for a minus 75 cents basis the Kansas City Board of Trade July wheat futures contract price. The KCBT July wheat contract price is $11.40, and wheat may be forward contracted for $10.65.

With wheat prices above $10, you would expect producers and elevator managers to be feeling good about the wheat market. What I have observed is that many are scared, worried or some other adjective that means, “They just do not know what to expect, and what happens may not be good.”

Fear comes from the fact that Oklahoma producers have had three below-average crops in a row and two total disasters. Texas producers have experienced two disasters out of the last three crops and are facing a potential disaster this year. Three out of the last four Kansas wheat crops have been below average and two were disasters.

Crop insurance and disaster payments may cover part of producers’ lost income. Elevators, however, have no government help. They depend on wheat bushels (volume) to make money and the bushels have not been there.

Producers are experiencing high prices for both inputs and wheat. It costs at least twice as much per acre to produce wheat compared to two years ago. Producers must borrow more operating capital or invest more savings to produce a crop and if something happens to the crop, their savings and equity disappear relatively fast.

Elevators and farm supply stores must borrow more to buy higher priced inputs for producers to use. This necessity adds risk and drives up operating expenses. Inputs on the shelf or in the warehouse tie up operating capital, and interest must be paid on the unpaid loans.

Producers are concerned about the high prices. Given the experience of the last three or four years, producers are afraid to forward contract or hedge too much production. Producers that hedged wheat last fall and early winter, when the KCBT July wheat contract was about $7, have made margin call payments of $25,000 per contract.

Many producers “rolled over” 2007, $4.50, forward contracts to 2008. These producers will deliver $8 to $10 wheat for $4.50.

Elevators have the “rolled over” contracts hedged with KCBT July 2008 contracts at about $5. The elevators borrowed money to make $35,000 margin call payments for each 5,000-bushel contract. One Oklahoma local elevator obtained a $10,000,000 line of credit one week and in three days had paid nearly $5.5 million in margin calls. Interest costs are adding financial stress.

Elevator managers are afraid that producers will be unable to deliver forward contacted wheat. After 2007, elevator managers will be less likely to “roll over” any forward contacts.

Producers are afraid that wheat prices will decline between now and harvest. If they do not price wheat now, they may have to sell it for $2 to $3 less. Even if the wheat price is $7 or $8, $2 is important.

Elevator managers must obtain operating loans that are two to two-and-one-half times larger than three years ago. Managers use a line of credit to pay producers for the wheat for which it may take the elevator 30 days to receive payment. Nine-dollar wheat requires significantly more credit and results in higher interest costs.

Markets are volatile. From the time a producer sells wheat until the elevator can get it sold, the market price may change dramatically. Some elevators may be establishing a policy to buy wheat only when the KCBT commodity exchange is trading contracts, which is between 9:30 a.m. and 1:15 p.m.

Higher prices come with new opportunities and higher risks. Not discussed is the stress on lenders of extending the larger loans and taking more risk. With higher risks comes the opportunity for higher returns.

The wheat industry will adapt. More attention to detail is required. Producers must concentrate on producing and delivering high quality wheat and managing their finances.

Global food riots turn deadly
Washington Times
April 10, 2008
By David R. Sands – Anger over spiraling world food prices is becoming increasingly violent.

Deadly clashes over higher costs for staple foods have broken out in Egypt, Haiti and several African states, and an international food expert yesterday warned of more clashes with no short-term relief in sight.

“World food prices have risen 45 percent in the last nine months and there are serious shortages of rice, wheat and [corn],” Jacques Diouf, head of the Rome-based U.N. Food and Agriculture Organization (FAO), said at a major conference in New Delhi yesterday.

“There is a risk that this unrest will spread in countries where 50 to 60 percent of income goes to food,” he said.

U.N. Secretary-General Ban Ki-moon issued a personal appeal for calm in Haiti yesterday. U.N. peacekeepers were called to protect the residence of President Rene Preval from rioters protesting sharp increases in the prices of food and fuel. At least five people have been reported killed in disturbances since last week after the cost of rice doubled and gas prices rose a third time since February.

A supermarket, several gas station marts and a government rice warehouse were looted, the Associated Press reported.

Egyptian Prime Minister Ahmed Nazif this week promised concessions to workers in the industrial city of Mahalla al-Kobra after two days of rioting over rising food prices left one protester dead.

The clashes were described as the most serious anti-government demonstrations since 1977 riots erupted over soaring bread prices.

The FAO has reported popular unrest over rising food prices in Burkina Faso, Cameroon, Indonesia, Ivory Coast, Mauritania, Mozambique, Bolivia and Uzbekistan, among other countries.

The Philippines, the world’s biggest rice importer, moved to head off protests after global prices doubled in a year. Financial giant Credit Suisse yesterday reported that higher rice prices would cut the country’s gross domestic product this year by at least 1 percent.

The government of President Gloria Macapagal Arroyo tightened controls of domestic rice sales and strengthened security at government storehouses to prevent hoarding. Anyone convicted of “stealing rice from the people” will be thrown in jail, she warned.

U.S. Ambassador Kristie Kenney yesterday said the Bush administration would offset any rice shortfall with cuts from other exporters.

World Bank President Robert B. Zoellick said earlier this month that nearly three dozen countries face social unrest because of surging food and fuel prices. For the countries most at risk, “there is no margin for survival,” he said.

Josette Sheeran, executive director of the U.N. World Food Program, was in Washington last month making an urgent appeal for funds to compensate for rising prices.

“We’re asking for the world to really think through how we meet the emergency needs of the hungry,” Ms. Sheeran told The Washington Times.

Even the most repressive regimes are not immune to popular unrest. The spark for rioting against the military junta in Burma last year was a rise in food and fuel prices after the government abruptly removed subsidies.

International agricultural analysts have seen the crisis building for months, spurred by an unusual combination of forces that John Holmes, the chief U.N. humanitarian official, this week called a “perfect storm” of trends fueling demand, cutting supply and producing higher global grocery bills.

Among them: higher fuel prices that make transporting food more expensive and encourage farmers to shift from crop production to biofuels; rising food demand as China, India and other Asian countries grow wealthier; drought in major producers such as Australia; and speculation on major commodities markets that staple prices will stay high.

Mr. Holmes predicted at a conference in Dubai, United Arab Emirates, that the situation will spill into the political arena.

“The security implications [of the food crisis] should not be underestimated, as food riots are already being reported across the globe,” he said. “Current food prices are likely to increase sharply both the incidence and depth of food insecurity.”

Ms. Sheeran told The Times that her agency was $500 million short for the current fiscal year in meeting needs to relieve the global food and fuel crises.

“We don’t have the buffering space” to cover such sharp increases in the cost of basic staples, she said.

Analysts say the price increases are across the board, not focused on one crop or market as in past commodity patterns.

A survey released by the Washington-based International Food Policy Research Institute found that the price of staple food has risen by 80 percent since 2005, including a 40 percent surge last year alone. The real price of rice is at a 19-year high and the price of wheat on world markets is at a 28-year high.

“The realities of demography, changing diets, energy prices and biofuels, and climate change suggest that high — and volatile — food prices will be with us for years to come,” said study author Joachim von Braun.

It is not just the poor who have taken to the streets over rising food prices.

Workers at the U.N. Relief and Works Agency in Jordan staged a one-day strike Monday to demand higher pay to cover rising food and gas prices. The action closed 177 schools for Palestinian refugees.

The U.N. staffers say they are prepared to walk off the job again next week if they do not get a pay raise.

Surging prices have led to food riots and protests around the globe.

EGYPT — Violent protests this week over soaring food prices left one dead and 15 injured.

HAITI — Five people were killed and about 20 injured in a week of protests, including an attack on U.N. peacekeepers.

CAMEROON — Violent food riots in February claimed 40 lives, and protests continue this month.

BURKINA FASO — A general strike is called this week over rising food prices, after protests earlier this year led to hundreds of arrests.

PHILIPPINES — The government beefs up security at rice warehouses to prevent theft and hoarding.

JORDAN — U.N. aid workers stage a one-day strike for more pay to cover food and fuel price increases.

BURMA — Cuts in fuel and food subsidies sparked massive anti-government protests last summer.

• This article is based in part on wire service reports.

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