The following editorial was published in Price Perceptions issue #1044 on February 25, 1995
A Different Drummer…
In the Sixties, when I was a grain buyer for a large milling firm, the corn surplus was so large that futures seldom moved more than ten cents from low to high during an entire season. In fact, foods of all types were in such surplus, they were considered a burden rather than a blessing.
By the early Seventies, food surpluses were taken for granted. If any nation experienced crop failure, they could always depend on surplus US stocks to tide them over. However, little was known about Soviet food supplies. When they began buying huge quantities of American grains, it was viewed sarcastically as saving the US billions in storage costs. By the late Seventies, however, the UN and other world organizations were forecasting world famine… Grain production had failed to keep pace with an exploding world population.
President Carter called on farmers to plant fence row to fence row and billions were invested in new technologies that would improve yields and expand world food production. The investments paid off… New higher yielding crops were developed and virgin land was brought into production in South America, Africa, and Europe. By the early Eighties, the world was awash once again in surplus foods.
Today, food supplies are again taken for granted. Its not because the US maintains huge surpluses… Its our technological ability to provide whats needed. For instance; hardly a ripple was felt when the US experienced a crop failure in 1993 - South America stepped up soybean production and the US imported Canadian feed grains and wheat.
Has technology and new computer efficiencies replaced the need to stockpile against potential crop failure? Can governments manage food production efficiently by manipulating farm subsidies?
Lester Brown, of the Worldwatch Institute, warns that world food production per capita has fallen to critically low levels. He points out that world grain production per capita increased nearly every year from 1950 to 1984. However, between 1984 and 1993, production per capita fell twelve percent. He also worries that irrigation water is becoming scarce. Water tables in India, China, and the Plains States of the US have fallen dramatically. In addition, food production has fallen sharply in nations experiencing economic and political chaos, like former states of the Soviet Union.
Most economists view predictions of food shortages as doomsaying. David Nygaard, Chief Economist of the International Food Policy Research Institute, states: If we keep funding smart people, theres no reason we won't be able to increase crop yields as much as demand increases.
Economists attending the 1972 World Food Conference had a similar outlook. They stated: The era of food and raw material shortage ended with World War II. Our real problem is what to do with the surplus.
Arguments over potential food shortages are as old as history. However, every major bull market in food commodities contained two critical elements…
1. Overconfidence in the ability to manage supply
2. Underestimation of demand
There is little doubt todays marketplace contains an element of supply overconfidence - Prices are barely above those of twenty years ago. However, the obvious element that markets have ignored is rapidly expanding Chinese demand.
In the early Seventies, the marketplace severely underestimated implications of Russian demand. It dwelled on supply surpluses of the past while ignoring potential demand of the future. That oversight provided the opportunity of a lifetime for those willing to recognize complacency in the marketplace.
Today, the marketplace is underestimating the implications of Chinese demand… Its dwelling on large supplies of the past. This oversight may provide an opportunity of equal magnitude to the Seventies… But, it can only be realized by those willing to march to the beat of a different drummer.
TRADING IN COMMODITY FUTURES OR OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
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