A big food crisis could rock the world soon! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

A big food crisis could rock the world soon! 

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In this issue:
» The value of keeping cash...
» The 7 trillion dollar danger in Asia
» Is demand for oil about to peak?
» Artificial boom in global asset prices
» ...and more!

If you thought the financial crisis of 2008 was the worst that could have ever happened in the world economy, you could soon be proved wrong. The global crisis is nowhere close to its end. In fact, there are a series of crises brewing around the world, waiting to pop up.

One of the major impending crises that we must really worry about is related to our most basic necessity- food. And the man who has rung the alarm is none other than maverick commodity guru Jim Rogers. Let's understand why he thinks that the world is going to see a very big food crisis.

In the last 10 years, the world has consumed more than it has produced. As a result of this mismatch, agricultural inventories are now at historical lows. The real thing to worry about is the probability that global food production could be on a terminal decline.

Mr Rogers provides a very solid reasoning for this. The big problem is that there are very few people who are ready to join farming. For instance, in the US more students study public relations than agriculture.

Take a look at these numbers. The average age of a farmer in the US is 58 years. In Australia too it is the same. In Korea and Japan, it's even higher at 65 and 66 years respectively. And in Canada the average farmer age is the highest in recorded history.

On one hand, the old farmers are retiring or dying. On the other hand, very few young people are entering the field. And let us tell you that this trend is not pertaining to the developed world alone. Young workers in Africa and India too are migrating to cities to find better work.

So why are not many people not getting into agriculture? The reason is that farmers are not making enough money. Millions of Indian farmers have committed suicide in the last half century. Even in UK, the highest rate of suicide is in agriculture.

No wonder people are so averse to getting into farming. It's plain old economics. People will go where they see high returns. Putting it the other way round, people will enter farming when they see the scope for higher returns. This means that prices of agricultural commodities have to go up substantially. This would effectively cause food costs to shoot up.

In India, we have already seen how increasing food prices have caused inflationary pressures over the last few years. Given the structural problems in the global farming industry, we believe the food crisis could get worse in the coming years.

Do you think the world could witness a major food crisis in the next few years? Please share your comments or post them on our Facebook page / Google+ page

-------------------------------------- Something good amidst all the bad news... --------------------------------------

Rupee depreciation, asset quality concerns of banks, slower sales growth of FMCG companies and a cut in FY14 GDP forecast by the RBI...

Looks like it could be quite some time before the bad news stops and everything turns positive again.

But should you stop investing in stocks completely until that happens? Absolutely not!

We have prepared a short video revealing an investment approach for uncertain times just like these. Follow this approach and you'll be way ahead of your fellow investors by the time the markets turn positive.

However, this video will be available for a short time only. So you should see it immediately to avoid missing out.

Click here to watch the video right now.


01:30  Chart of the day
The Indian economy is in a mess. We have serious problems on multiple fronts. The economy is slowing down. Investments are not pouring in. Inflation is persistently high. And then there is the big problem on the current account front. The rupee has been on a falling binge. Our dollar reserves are shrinking. This has put policymakers in a very tight spot.

A move by Indian corporates could give some aid in lower the current account deficit. Several Indian companies are planning to raise funds from overseas markets over the next few weeks. The rationale behind this is to take advantage of the depreciating rupee and prepay high-cost rupee loans especially for companies that have a natural hedge in the form of high percentage of export earnings. Some of the major Indian companies that are planning to raise foreign-currency loans in the coming weeks are Reliance Industries, Adani Enterprises, JSW Steel and Essar Steel. The chart of the day shows the international debt capital deals of Indian companies over the last five years.

Data Source: Business Standard

In a world of negative real interest rates, cash is the last thing one would want to own. Since equities have a long term track record of generating positive real rates of return, this is the asset class where everyone should flock to, isn't it? Not if a situation arises where return on capital is risked at the expense of return of capital. In other words, if stocks don't offer compelling value and if prices are likely to fall, then equities should certainly be a strict no-no. This is exactly the kind of thoughts going through the minds of some prominent value investors in the US. Little wonder, some of them have up to 30% of their assets under management in cash currently.

Indeed, the simple rule that works in investing is being fearful when others are greedy and greedy when others are fearful. However, to take advantage of other's fearfulness, one needs to have cash in hand. Thus, by piling up their cash reserves, these value investors seem to be waiting for an opportunity to pounce upon. And if history is any indication, such opportunities are not a matter of if but when. Thus, while cash could be trash for most, there are some astute investors out there who know how to put the same to maximum use.

Amongst its many achievements, China takes the maximum pride in this. Holding billions of US dollars in its reserves. As per Bloomberg, Asian economies have almost US$ 7 trillion in currency reserves, much of it in US dollars. Ever since the 1997 crisis, Asian economies have been stockpiling dollars as a defence against economic turmoil. But that the sanctity of the dollar itself has gone for a toss is not acknowledged by the Asian giants. Asia has therefore come to be America's banker, with China and Japan being the biggest lenders. While one would expect the Americans to be non critical about it, Nixon-era Treasury Secretary John Connally proves to be different. The gentleman believes that Asia has unintentionally set a trap for itself. It now has more weapons against market unrest than it knows what to do with. Hence, instead of priding itself over it, it's time Asia devised an escape. We cannot agree more with Connally's view. Dollar may or may not be replaced as reserve currency in the foreseeable future. But keeping a large part of reserves in US dollars can be a fatal mistake for Asian economies.

We all have heard of peak oil theory. It refers to a point when oil supply will peak and then taper off leading to demand surpassing the supply thus sending oil prices rocketing. However, as per an article in the Economist, the peak oil theory might be a thing of the past. Surprisingly, it is the demand of oil and not its supply that will peak sometime in future. So what could threaten the demand of oil? At the core of the proposition is the technological revolution. The shale gas revolution in US is already displacing oil. Further, the demand for higher engine efficiency, improving engine design and technology and thrust on environmental protection is likely to favour use of natural gas over oil.

We believe that the new theory is a little over the top, especially in India and other economies that seem to be in a permanent state of struggle to procure more barrels of oil. Further, the demand of other fuels over oil will depend on relative supplies and cost advantage. Shale gas extraction is not yet viable in many regions. Not to mention the flak it is getting for the risks it poses to environment. Last but not the least; we should not forget that oil demand and supply is highly subject to manipulation. It is unlikely that oil rich countries will let their empires tumble and not act to restrict this theory to paper. Nonetheless, if the new theory does come true, it will be a welcome change.

We are no experts on the global economy. But the mess that the world is in now is so obvious that no expertise is required to understand it. What happens when you print a lot of money? There is a flood of money. But does more money mean more wealth? Not at all! It only reduces the purchasing power of the currency. It's an indirect form of taxation.

In the aftermath of the financial crisis, major global central banks have been printing money. They were hoping that the flood of cheap money would revive investments and demand in the economy. And in turn, pull their respective economies out of the financial turmoil.

But that never happened. The central bankers made grand miscalculations. The money hardly went into the real economy. On the contrary, it created artificial asset bubbles across the globe. Look at the world stock markets. What has been driving up the stocks of US, Japan, etc? Have these economies recovered? Are corporate earnings on the rise?

What is really worrying is that never before in history have major central banks printed so much money together. And this cannot go on endlessly. It has to end sometime. And the end will not be easy. It will shake up the entire world economy. We have seen how the fortunes of most emerging economies are in some way tied to developed economies. So if the US and the Eurozone get into deep trouble, the entire world would have to bear its consequences.

All in all, these are very risky times for investors. The principles of value investing become all the more important and relevant now than ever before. Don't follow trends or 'hot' money. Learn to differentiate value from price. And invest in only what you understand.

In the meanwhile Indian equity markets were trading below the dotted line. At the time of writing, the benchmark BSE-Sensex was down by 138 points (0.7%). The stock indices were trading mixed with power andrealty stocks being the biggest losers. However, consumer durables stocks were trading firm. All the Asian stocks were trading firm led by Japan. The European markets opened on a mixed note.

04:50  Today's investing mantra
"Risk comes from not knowing what you're doing." - Warren Buffett
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17 Responses to "A big food crisis could rock the world soon!"


Aug 20, 2013

I agree with the reason but more so it is also declining agricultural land due to rapid urbanization . In the Indian context , it is the population growth which is responsible for fragmentation of land and urbanization which will mean reduction in farm output.



Aug 5, 2013

While the state made by the Guru of shortfall of human capital is true for US, it is not so for India..Underemployed would be a better word. Our demographic dividend would payoff here too.. We would have the Indian (like the Aryans of history) with their tractors bullocks tilling equipment move to these countries humming the song "USA ki desh ki dharti sona ugle ugle here moti"!!!

BTW less food means no obesity.. and unemployment for the slimming business !!!!



Aug 4, 2013

I beg to differ from the views expressed by Jim Roger. What he has missed is the difference in the percentage of people employed in US and India. In US, the area under cultivation is far more than India and the persons involved in farming are hardly 3-4 per cent of population which is one fourth of India.

On the other hand, in India, the population involved in agriculture is so large that in reality, millions of people are in fact hiding in the name of farming. They are under employed or unemployed in agri sector. If they leave farming, the productivity would not be effected at all.
The biggest threat that the world faces in agricultural sector is not people leaving agriculture but the area under cultivation getting reduced. Indias growing need for housing and land rates rising to such an extent that farmers getting lured to selling their land instead of cultivating land is the biggest threat to agriculture

Like (1)

swapan kumar saha

Aug 4, 2013

The sector is not profitable.The employees of Farming sector do not get their due wages there is no job security no retirement benefit as available in case of organised sectors.Farmers don't know at what price they would be in a position to sell their produces.Frequent flood and drought are the major setback.
In stead of providing subsidized fertilizer,seeds and other amenities let the Government come forward and fix the price by the Regulator as is done in case of Electricity .
Importance of food is more than electricity.Can we live without food ?

Like (2)

Ramashankar sah

Aug 4, 2013

I agree that no young man want to join agriculture as his career.

Like (2)

Seshagiri Rao

Aug 3, 2013

Yes it is true. Farming is highly affected by Natural calamities, no govt support in retaining the price by avoiding the brokers. To control the inflation no export allowed to generate foreign currency to the country. Giving support in these areas people are ready to do farming, generate food as well as revenue to the country though it is not a glamorous profession

Like (2)


Aug 3, 2013

Unfortunate that farmers still commit suicide when consumers are made to pay a few times more price than last year. The only solution is eliminating middlemen. But unfortunately that will not happen since that is not in the interest of political powers who have the ultimate say in these matters.Remember a national party loosing an election because such political powers could manipulate Onion prices.

Like (2)

ramesh surati

Aug 3, 2013

Food is essecial for every human .Like Roti,Kapada,Makan.( food,clothes,selter.)
What is the best way to get more younger people in the works of cultivation / farming ?
so we can avoid food problem in near future.
Thanks and all the best.

Like (2)

Sundaravaradan S

Aug 2, 2013

(What I an going to write may be difficult to implement by current Govt. but, I tossing my thought).
For every Negative issue there is some +ve Option. I have read that the efficiency of agriculture in India is around 10 to 12% of developed countries? Now,India has ALL types of Weather & Soil. When the World has shortage of Food, what should we do? Exactly! Make agreements with India to improve Agriculture. Invest in Indian Agriculture (Input, Seeds, Process, Storage, Output, distribution etc.) The new Govt. should allow this new Agriculture revolution to happen in India. World fights for Oil; now it will fight for Food!

Nature will balance itself!

Like (2)

chandra khandelwal

Aug 2, 2013

Present generation is getting away from agriculture for various reasons.Besides that the agricultural land availability is decreasing everyday in favour of residential ,commercial projects and infrastructures.Agriculture is more risk prone due to number of factors.Agriculture life is rural ,tough,lacks urban amenities and comforts.Urban occupations commands more respect than agriculture.

Like (2)
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