Call it yet another exhibit in the chain of evidence that points to the continued likelihood of rising inflation and commodities prices, notwithstanding the broad-based commodity correction currently underway. As global emerging markets continue to industrialize at a rapid pace, surging demand for commodities around the world (and especially in emerging Asia and Africa) continues to put upward pressure on prices, in spite of increased supplies.
This is a secular (as opposed to cyclical) trend that’s likely to play out over the next several decades – rather than the next several days. Regarding myself as an investors who considers long-term as being an investment view that extends somewhat beyond the next six-months, a story I heard recently on National Public Radio piqued my interest.
The Skyrocketing Cost of Tortillas
It seems that the good citizens of Mexico find themselves under siege by signs of creeping inflation in the agricultural-commodity sector, which is hitting a bit too close to home. The price of tortillas – a mainstay of the country’s diet – has increased dramatically in recent weeks – jumping more than 50% in some areas of the country. According to the story, tortillas are not merely a staple of the Mexican diet, but are more like a cultural icon of gastronomic proportions – think rice in Asia, potatoes in Ireland, or Starbucks in the US.
Mexicans consume an average of 10 tortillas per person per day – a staggering sum. So a 50% jump in price in a matter of weeks really puts a dent in the family food budget (and perhaps in the waistline as well). Mexicans are understandably outraged, and the government has ended tariffs on imported corn in response. Officials in Mexico City were quick to blame “speculation and hoarding by unscrupulous traders” as being at least partly to blame for the recent sharp rise in the spot price of corn. But the real reason is a more familiar one – rising supplies just aren’t keeping up with surging demand.
Record Corn Crops … But Even Stronger Appetites
The US is still the world’s number-one corn producer and exporter, harvesting a bumper-crop last year – the third largest ever at 10.5 billion bushels. In spite of this, exports of American maize still won’t be enough to prevent global supplies from falling to the lowest levels since Jimmy Carter occupied the White House.
Meanwhile China, the world’s second largest corn grower and another key global exporter (especially to its neighbors in Asia), should harvest its largest crop ever this year. In fact, Chinese farmers are expected to bring at least 141 million tons of corn to market. Ah, but surging domestic consumption is likely to eat-up all of it – leaving global supplies as tight as a drum. This supply-demand imbalance, even in the face of record corn production, is keeping steady upward pressure on corn … and tortilla prices. Beside a growing global appetite for corn, this agricultural staple has found another handy use that’s adding to demand, alternative energy.
Also, the world is growing more concerned about global warming, not to mention the still high price of crude oil imports. Ethanol production is surging on a global basis as a result, and one of the key ingredients used to brew this cleaner-burning fuel is corn (as well as sugar cane). After the result of last year’s mid-term elections here in the US, Congress is finally beginning to come around too, proclaiming that the true path to domestic energy independence runs through the cornfields of the Midwest. Even with the price of crude falling back near $50 a barrel, corn-based ethanol production is still profitable. The additional fact of ethanol being embraced as a “greener” alternative to crude oil only adds fuel to the fire; stoking increased demand for corn.
The national energy bill passed last August mandates production of 7.5 billion gallons of ethanol in the US by 2012. None other than the chief economist of the US Department of Agriculture recently said that demand for domestic corn for use in ethanol production would rise nearly 50% in the year ahead, to more than 3 billion bushels. As such, the domestic ethanol industry will account for about 30% of total US corn crop demand this year, and growing fast. Yet another indication of creeping inflation, and higher commodity prices to come.
Bottom line: “headline” commodities such as crude oil, base- and precious metals are undergoing a sharp (if not way overdue) correction at present. In fact, the commodity slump now underway has seen both crude oil and copper plunge by almost one-third from their 2006 highs. But while energy traders wring their hands almost daily on CNBC, the game goes on for investors in agricultural commodities like corn and wheat futures.
But brace yourself … we’re all likely to pay a lot more for popcorn and nachos at this year’s Super Bowl party.
