Monsanto’s Genetically Modified Wheat Scare

A discovery of an unapproved GM wheat strain in the US triggers a backlash on global wheat markets.

Charts from the Washington Post

The details from Quartz (bold original)

The discovery

Last month an Oregon farmer sprayed one of his fields with Roundup weed killer, only to find that several wheat plants survived the cull. When the US Department of Agriculture investigated, it found out why: the plants were an unapproved genetically modified strain made by the biotech giant Monsanto. So-called “Roundup Ready” modifications allow farmers to apply much higher levels of pesticides without harming crops, and are common in soy and corn—but those crops are mostly used for animal feed. No GM wheat is currently approved for sale or production in the US, or anywhere else in the world. 

Monsanto was authorized to test their GM wheat from 1998 to 2005 in 16 US states. It did, but decided to scrap the variety because there wasn’t much of a market. The crop never received final approval. 

The problem 

The wheat is not probably not harmful to humans—although since testing was never completed, we can’t be sure.  Nevertheless, most of Asia (not to mention Europe and a certain portion of the United States) is firmly opposed to GM crops made for human consumption. Asia consumers around 40 million tonnes of wheat a year—about a third of the global total—and much of it comes from the US, the world’s biggest exporter. 

The reality of GM testing a product in open fields is that it’s quite easy for cross-contamination. It’s like the dinosaurs in “Jurassic Park”—no matter how well-designed the safeguards, life always finds a way to jump the fence. Doug Gurian-Sherman, a scientist with the Union of Concerned Scientists in Washington, told Bloomberg Businessweek he “wouldn’t be at all surprised if there are a number of experimental genes that have contaminated and are happily being passed along at low levels in the food supplies of various crops already, but nobody’s testing. It’s really a ‘don’t look, don’t tell’ situation. We just really don’t know.”

The fallout

Japan has already cancelled its imports of some types of US wheat including white grains and animal feed. China, South Korea and the Philippines have all said that they are monitoring the ongoing US investigation, and the European Union said it was stepping up testing. China, which is expected to need much more imported wheat in the coming years, is expected to import 3.5 million tonnes in the year to June 2014. The Philippines imports around 4 million tonnes each year, according to Reuters. 

But the damage to US exports is only likely to go so far. As the biggest exporter of wheat (around a fifth of global supplies), the US is indispensable for wheat importers, particularly in Asia where the climate is not particularly well-suited to the crop.

The hullaballoo over GM wheat has prompted US wheat futures to close at a three week high

My impression is that this could just be a short term scare. For today's financial markets, which have been bereft of price discovery from sustained interventions, sensational developments like this tends to magnify the emotions of greed or fear.

Will Soaring Agricultural Commodity Prices Bring about Stagflation to Asia?

Over the past few weeks, US dollar prices of key agricultural commodities have soared.

Prices of corn, wheat and grains have reached their highest levels in 3 years.

And this has alarmed economic experts from Africa.

From Reuters, (bold emphasis mine)

Rising food prices could hit commodity producers in Africa with a dangerous "double whammy" when combined with an economic slowdown in Europe and China reducing African exports of oil and raw materials, a leading African economist said on Tuesday.

Mthuli Ncube, Chief Economist and Vice President of the African Development Bank (AfDB), saw the threat of a food price spike casting a shadow over an otherwise positive growth outlook for Africa that will outpace much of the rest of the world.

"Certainly, there is a lot of reason to worry," Ncube told Reuters, recalling a food and fuel prices squeeze in 2008 that touched off social unrest and food riots in several African nations and also directly affected the continent's growth.

Global economic slowdown compounded by surging food prices would mean stagflation.

From the same Reuters article,

Despite Africa's comparatively strong economic expansion rates, the continent was experiencing "jobless growth", particularly in relation to its huge reservoir of unemployed youth, Ncube said.

Youth represented 60 percent of Africa's unemployed, and despite recording world-topping growth rates between 2000 and 2008, the continent was failing to create the number of jobs necessary to absorb the 10-12 million young and increasingly educated people entering the labor market each year.

Ncube said a major obstacle to more job creation was the persistence of what he called "one-sided economies" in Africa that exported oil and raw materials instead of moving decisively to diversify into job-multiplying manufacturing, commercial agriculture or agro-processing.

"It's a painful slog to diversify," he said.

"We need entrepreneurs to do it. We need to spend the time to build that business culture, the entrepreneurs," he added.

While Africa has taken important steps towards embracing liberalization, their hefty dependence on commodity exports remains an impediment to economic freedom which is the reason for the dearth of entrepreneurs.

This serves as more evidence where the supposed blessing from abundant resources can in fact translate to disadvantage—resource curse. Politicians and their cronies who benefit from commodities have little incentive to open their respective economies until forced by economic reality.

Although the bright side is that multilateral experts from Africa, who provide policy recommendations to political leaders, have exhibited increased recognition of the importance of entrepreneurship and of a political friendly business environment to economic development.

Yet while news tell us that drought in the US has mainly been the catalyst for the spike in prices of agri commodities, others share my insight that an integral element of these price surges has been because of central bank actions.

From yesterday’s Bloomberg article, (bold emphasis mine)

For the first time in more than two years, commodities, equities, bonds and the dollar posted gains, as the U.S. drought sent corn prices to a record and European Central Bank President Mario Draghi’s pledge to protect the euro buoyed stocks.

Raw materials led the increase as the Standard & Poor’s GSCI Total Return Index of 24 raw materials rose 6.4 percent in July, the most since October. The MSCI All-Country World Index of equities rallied at the end of the month for a 1.4 percent gain. The Dollar Index, a measure against six currencies, added 1.3 percent. Bonds of all types returned 1.4 percent on average, the most since December, Bank of America Merrill Lynch’s Global Broad Market Index shows.

The last time all four measures rose for a month was in April 2010, when concerns about Greece were heating up and U.S. economic reports were improving. While corn rose the most last month in almost a quarter century and wheat reached a four-year high, financial assets gained as policy makers worked to boost global growth. Federal Reserve Chairman Ben S. Bernanke said he’s prepared to take more steps, and Draghi pledged to do “whatever it takes” to preserve the euro.

“A lot of the rally in everything is central-bank led,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $80 billion. “So now we have a world where central-bank actions are really what people are looking at, and those actions are really positive for all asset prices and negative for savers and folks who are looking to put money in at reasonable levels over a longer period of time.”

And Africa’s stagflation concerns should also haunt Asia, and the Philippines, whom have been major agricultural commodity importers

As Zero Hedge points out, (bold original)

The level of inventories were already low going in and as Bloomberg notes, consumers around the world will feel the effect of higher food prices as the worst drought in 50 years impact the world's largest exporter of corn and wheat (and 3rd largest of soymeal). Within Asia, Korea and Malaysia will be most adversely affected, considering direct effects referenced in per capita and GDP terms. Indonesia and Japan are Asia’s largest importers of wheat, both importing roughly 5.7 million metric tons on average. China is by a wide margin the region’s largest importer of soy, with average imports of 49.9 million in the last five years. The impact on headline inflation in Asia will be stronger for the economies with lower per capita incomes — Vietnam, India, the Philippines and Indonesia — where food and food products account for a larger share of the typical consumption basket. Even in places where incomes are high, such as Singapore, food accounts for 22 percent of the consumer price index.

This only means that high commodity prices will be transmitted to Asia, whom has been inflating too (mostly through negative real interest rates).

And that a prolonged environment of elevated prices in agricultural commodities will likely induce an adverse impact to the region’s domestic economies too. (chart from Financial Times)

Stagflation risks therefore represents as another potential source of contagion.

Yet the most likely political response from the risks of a food crisis will be protectionist in nature (couched through cries of “self sufficiency”) that will only exacerbate such conditions.

In the Philippines, the risks of global and local food crisis may have been amplified by the desire by the Philippine central bank, Bangko Sentral ng Pilipinas’ (BSP) to stoke inflation through the recent cut of policy interest rates to new lows.

As the Inquirer reported last week,

Lower interest rates are expected to spur demand for loans which, in turn, could help boost purchases of goods and services. Higher demand, if supply remains constant, will help accelerate inflation.

The BSP said preventing the consumer price index from falling below target was as important for the economy as avoiding a higher-than-target inflation. Depending on variables, a very low inflation rate can be just as bad for business as high inflation, according to economists.

The BSP shares the same demand side interventionist creed as her international contemporaries.

They believe that the stealth redistribution of resources from the society (which includes the poor) to the cronies and to the political class will ‘help the economy’. In reality, this functions no more than a political setup, where markets will eventually get the blame, and thus lays the groundwork for more interventionism.

The great Ludwig von Mises presciently warned of this in his Theory of Money and Credit (bold highlights mine)

The undesirable but inevitable consequence of inflation, the rise in prices, provides them with a welcome pretext to establish price control and thus step by step to realize their scheme of all-round planning. The illusory profits which the inflationary falsification of economic calculation makes appear are dealt with as if they were real profits; in taxing them away under the misleading label of excess profits, parts of the capital invested are confiscated. In spreading discontent and social unrest, inflation generates favourable conditions for the subversive propaganda of the self-styled champions of welfare and progress. The spectacle that the political scene of the last two decades has offered has been really amazing. Governments without any hesitation have embarked upon vast inflation and government economists have proclaimed deficit spending and 'expansionist' monetary and credit management as the surest way towards prosperity, steady progress, and economic improvement. But the same governments and their henchmen have indicted business for the inevitable consequences of inflation. While advocating high prices and wage rates as a panacea and praising the Administration for having raised the 'national income' (of course, expressed in terms of a depreciating currency) to an unprecedented height, they blamed private enterprise for charging outrageous prices and profiteering. While deliberately restricting the output of agricultural products in order to raise prices, statesmen have had the audacity to contend that capitalism creates scarcity and that but for the sinister machinations of big business there would be plenty of everything. And millions of voters have swallowed all this.

So the next time a food crisis erupts, you should know the real culprit.

The Peripheral Plays of the Agriculture Boom

Speaking of the boom in agriculture, such buoyancy hasn’t been limited to commodities and farmlands but almost across the other agricultural spectrum.

For instance agri based equipments have been surging too. Other calls this a pick and shovel or peripheral play.

The Bloomberg observes,

The CHART OF THE DAY compares the shares of two equipment makers, Agco Corp. and CNH Global NV, with the price of corn on the Chicago Board of Trade, which has more than doubled in the past year. This month, the stocks have fallen further than the commodity, which has recouped most of a 10 percent loss.

Demand for farm machinery is rising along with prices, according to a report yesterday by Henry Kirn, a UBS analyst. He based this conclusion on a semiannual survey of U.S. dealers for Agco, CNH and Deere & Co. equipment.

“Dealers are generally optimistic,” Kirn wrote. Seventy- one percent of the survey participants expect sales to increase this year. The percentage is the highest since 2004. Prices for new and used farm machines are generally rising, the report said, and inventories of older gear are below normal levels.

The upswing can also be seen in fertilizer and seed stocks, food processing and many other agri related products.

I will be guilty of representative bias here. The above (stockchart.com) chart shows of some performances of Agri based ETFs and stocks which I think could represent most of the price actions of the industry

The Market Vectors Agribusiness ETF (NYSE:MOO) will give you a broader exposure to the agricultural sector.

Agrium Inc. (NYSE:AGU) A fertilizer producer that sells direct to farmers in the U.S., Argentina, Chile and Uruguay.

Potash (NYSE:POT), the largest fertilizer company in the world

Archer Daniels Midland Company (NYSE:ADM) A food processing company, Archer Daniels takes raw products like corn, wheat and oilseeds and turns them into food and agricultural products.

(my sources here here and here)

Bottom line: The agriculture inflation boom has been broadening.

The Importance of Peripheral Vision

``Entrepreneurial profit and loss emanate from the dedication of factors of production to definite projects. Stock exchange speculation and analogous transactions outside the securities market determine on whom the incidence of these profits and losses shall fall. A tendency prevails to make a sharp distinction between such purely speculative ventures and genuinely sound investment. The distinction is one of degree only. There is no such thing as a nonspeculative investment. In a changing economy action always involves speculation. Investments may be good or bad, but they are always speculative. A radical change in conditions may render bad even investments commonly considered perfectly safe.”-Ludwig von Mises

ASEAN Markets Ablaze!

Here is an update of the seemingly majestic performances of ASEAN bourses (see Figure 1).

Figure 1: Bloomberg: ASEAN Bourses On Fire!

Of course, the reason why we should take the BIG PICTURE into perspective is primarily to avoid getting mired with the FALSE impression that domestic politics has been the DRIVER of these dynamics.

As one would note from the above, despite the tremendous showing of the Philippine Phisix (yellow trend line), which has been up over 17% on a year-to-date basis (as of Friday’s close), the fact is the local benchmark TRAILS the fiery actions of Thailand’s SETI (red line) and the Indonesia’s JCI (green line), up nearly 22% and 23% over the same period respectively.

Incidentally, the turbocharged Thailand’s SETI has already caught up and surpassed Indonesia’s JCI based on a one year basis and has been closing in fast even based on the year-to-date as reference point.

Now Asia markets have been uneven in terms of performances. What I am saying is that the inflationary milieu hasn’t lifted all boats similarly, and this simply validates the theory that inflationism has relative effects on almost everything, whether applied to financial assets, commodities to consumer goods or services. This also disproves the fictitious Keynesian construct of neutrality of money and of the obsessive fixation on aggregatism.

Yet the ASEAN bourses, while stirring hot, would seem only a shadow to the spitfire actions of South Asian bourses, particularly, Sri Lanka and Bangladesh up 64% and 49% respectively. Outside South Asia, Mongolia seems to be another bourse ablaze and has been likewise up 65% as of Friday’s close.

In other words, the trajectory of impact from global inflationism has been conspicuous in the markets (financial and non-financial) of the periphery nations. And I also would infer that these effects have been amplified by globalization.

The China Influence

Although China has been getting most of the news, such as having to successfully overtake Japan as the second largest economy in the world[1], the kernel of important actions again are in the peripheral markets but somewhat related to China.

Despite an up week, both of China’s bourses have been significantly down on a year to date basis (see figure 2).

Figure 2: stockcharts.com: China, Emerging Market Bonds and the Baltic Dry Index

One must NOT forget that the actions in China’s stock markets have been repeatedly tampered by with government interventions since late last year. This has been aimed at preventing a homegrown policy induced bubble from inflating into an unwieldy monster, and thus the material underperformance of China’s stock market indices.

And most of financial markets of developed Asia seem to either track the actions of China (e.g. Australia) or the market motions of the West (e.g. Singapore, Hong Kong and Japan).

Nevertheless following a steep decline last quarter, the Shanghai index (SSEC) seems to be manifesting of a rebound.

We can’t say if the momentum will persist until she successfully breaks out of the 2,700 level. A successful breach would possibly suggest that the Shanghai index will attempt for the threshold level of 3,000-3,150.

And China’s stock market actions appear to synchronize with the actions of the copper market (COPPER-the window below the Shanghai Index).

While we are NOT suggesting that China’s stock market has influences on the copper market, what both of these markets seem to say is that they could be responding to the current crop of policies being effected by the Chinese government.

The ongoing slowdown in China’s economy appears to reduce China’s government’s interest to tighten the monetary landscape, and thus, the prospects of lesser government intervention could be giving China’s stockmarkets a boost, especially in the light of the still generally loose credit environment.

Whereas the rebound in the copper market, while possibly partially influenced by these developments, could also be exhibiting signs of “inflationary pressures”. Monetary easing for China could extrapolate to more “speculative” flows from, or “reservation demand”[2] for, commodity buyers. As previously pointed out[3], the commodity price inflation appears to be rotating or diffusing into the “soft” or agriculture based commodities.

Debunking Selective Perception

Another thing that I’d like to point out, which the bears have been pounding on in the recent past, has been the Baltic Dry Index (BDI).

The recent collapse of BDI had been used to prognosticate a market collapse from what we see as fictitious “deflation” in a world of fiat money and central banking. And like US monetary aggregates, such as the M2 which we earlier discussed[4], these indicators have now tilted against them hence the apparent reticence or the deliberate omission of this indicator in current “deflation” discussions.

The selective use of the perma bears of these indicators to prove their case has gradually and repeatedly been falsified. Now to turn the tables, we use these indicators to disprove them.

They never seem to run out of materials to throw in, after the earlier “death cross” and the ERCI leading indicator, whose effects remain to be seen, now they point to the Hindenburg Omen[5] as a reason to take flight.

While September-October tend to be the seasonally weakest month for the stockmarket—where most crashes tend to occur—the dynamics for a crash doesn’t seem to be in place.

Not with the Federal Reserve already embarking on to replace the maturing mortgage bonds with fresh Treasury purchases[6] and certainly not with interest rates at zero bound for an extended period for key developed OECD economies.

Selective use of data for interpretation apparently disregards other things that matter more. For instance, the underlying ‘mixed’ actions (albeit mostly bullilsh) for emerging markets stocks doesn’t seem to be congruent with the actions in emerging bonds which has been exploding (JEMDX)!

Moreover we’d like to add that the steep yield curve has definitely had diversified or distinctive impact on the asset markets (see Figure 3) as we have repeatedly been pointing out[7].

Figure 3: Asian Development Bank[8]: Yield Spread Between 2 year and 10 year bonds

We can still say that the US and Europe has very steep yield curves (as of August 13-green bar) despite recent signs of flattening.

Moreover, outside these crisis affected economies, where the effects of the yield curve could be muted due to balance sheet constrains on the respective domestic banking system, in crisis free Asia, the Philippines still has the steepest yield curve.

What this seem to imply is that Philippine banks will likely take advantage of the maturity transformation[9] (converting short term liabilities to long term assets) in a system which has relatively higher savings, less systemic leverage and unimpaired banking system. In short, credit growth is likely to explode here.

And I would discern that many of the new credit issued could be finding its way into the domestic asset markets including the domestic stock market.

And I would also suspect the same dynamics in operation in other ASEAN economies which has fuelled her recent outperformance.

And one can’t ignore the influences of the divergences of monetary policies between developed economies and emerging markets, where the expectations in the changes of policies seem to induce international capital in favour of emerging markets.

For many, the temptation to get into the bandwagon would seem irresistible. And as the region’s stock market continues to flourish, short term momentum trades would be appear to very lucrative.

In addition, these shifts appear to hallmark the seeds of the bubble.

---

[1] See The Power of Slow Change: The China-Emerging Market Story

[2] See Financialization of Commodities: Boon Or Bane?, May 31, 2010

[3] See Breakfast Inflation, August 5, 2010

[4] See Why Deflationists Are Most Likely Wrong Again, August 15, 2010

[5] Kahn Michael, Taking Stock of a Scary Market Signal, Barrons, August 18, 2010

[6] Bloomberg.com Fed Buys $3.609 Billion of Notes to Keep Yields Low, August, 19, 2010

[7] See What Has Pavlov’s Dogs And Posttraumatic Stress Got To Do With The Current Market Weakness?, February 1, 2010

[8] Asian Bonds Online, Weekly Debt Highlights, August 16 2010

[9] Wikipedia.org, Financial intermediary

Donald Coxe: Underweight US Markets, Overweight Commodities, Canada And Emerging Markets

Donald Coxe in his December issue of Basic Points has some interesting recommendations (hat tip: Prieur Du Plessis)

From Mr. Coxe: (bold and italics highlights mine)

1. Remain underweighted in US equities - as a percentage of equities within global portfolios, and as a percentage of assets in US balanced portfolios. Underweight US bonds in global portfolios.

The long-term financial projections for the US are scary, even if one accepts the Obama assumptions: ten years of large deficits, no recessions, strong, sustained economic growth, and a mere 1% increase in Treasury yields. Those numbers make no allowance for the costs of health care, which will be huge. Debilitating tax increases are inevitable, even if the global warming “cap and tax” legislation does not pass.

2. Within US equity portfolios, underweight US economy-related stocks and overweight stocks tied to foreign economies.

US stocks outperformed after Obama’s election, but that created what could be called erogenous risk for investors. As long as the KRE [Regional Bank Index] continues to underperform both the BKX [Philadelphia Bank Index] and S&P, risks of a double-dip economy remain.

3. Overweight Emerged Markets (such as China, Hong Kong, Brazil, India and Korea) within global and international equity portfolios.

These markets should no longer be discounted heavily because of assumed gaps between their accounting and American practices. The credibility gap has been narrowed significantly. The FASB’s capitulation to Congressional pressure on big banks’ balance sheets is a sign that Volcker-style virtue is outdated.

4. Remain overweight commodity stocks within balanced accounts and equity-only accounts.

Strong commodity-oriented companies are tied to global growth trends, led by the Asian powerhouses, which means they have less endogenous risk than companies tied to the US and Europe.

5. Emphasize gold stocks in commodity stock accounts.

Gold and other precious metals appear to have entered a period of above-average volatility, but the unprecedented creation of paper money and national debts means ownership of the metals and producers will tend to reduce endogenous risk in most portfolios. The stocks will tend to outperform bullion on the upside; the bullion will outperform on the downside.

6. Continue to overweight the agriculture stocks.

The best-performing commodity group in the past three months has been the agricultural stocks, led by the machinery and fertilizer stocks. Street analysts turned negative on these groups during the summer, when it looked as if US crop production would reach painful levels. Then the weather intervened. We remain of the view that the best of the agriculture stocks are among the best-quality core positions among all equities.

7. Maintain exposure to the energy stocks, but continue to emphasize oil producers and to de-emphasize natural gas producers.

Oil and natural gas are both in oversupply at the moment. The difference is that crude oil prices remain strong despite oversupply, as oil companies and speculators hoard oil in anticipation of stronger demand next year - and in fear of a new Mideast war. Shale gas may be too readily available to be good short-term news for either the profits or stock prices of oil and gas producers - but Exxon’s move on XTO Energy shows what having huge shale reserves can do for takeover values in politically-secure terrain.

8. Base metal stock prices are somewhat riskier than those of other commodity groups, but are worth holding.

The producers are dependent on China’s willingness to continue to buy more metal than it needs for current consumption.

9. Within balanced portfolios, emphasize long-duration, high-quality bonds at the expense of Cash. Canadian bonds should be used by foreign investors, where possible, as alternatives to Treasurys and US corporates.

Cash isn’t a true risk reducer, because it delivers no yield and cannot rise if there’s a new panic. If you must own something that pays you nothing, buy gold. In contrast, long-duration bonds are the best hedge against a renewed economic downturn.

10. Canada offers better government, better governance, a better currency, and a better stock market than the USA. Buy Canadian.

The flip side to this is a wise balance sheet policy for Canadian companies. Borrowing in American dollars makes sense for Canadian exporters and resource companies - and for some other Canadian industries. Take advantage of (1) Bernanke’s heroin injections into US debt markets, and (2) Canada’s new financial prestige to reduce your endogenous currency risk by bulking up your borrowing in greenbacks.

Read the rest of Mr. Donald Coxe's report here.

BMO Capital Markets Basic Points Dec 2009

Food Crisis Watch: Has The Recent Spike In Coffee and Sugar Prices Been Ominous of Food Inflation?

A recent article from the Financial Times caught my eye. It highlighted on the "shortages" in sugar and coffee which according to the report triggered an attendant surge in prices.

Quoting the Financial Times (emphasis added), ``Caffeine addicts face higher prices for their daily fix as the wholesale cost of both coffee and sugar rise sharply because of poor crops and robust demand.

``“We are in a dangerous situation,” Andrea Illy, chief executive of Italy’s leading coffee company, told the Financial Times, warning that prices could “explode” due to supply shortages.

``His comments echo those of other industry players – and point to a sharp shift in sentiment among analysts.

``Until recently, it was widely assumed that the global economic crisis would damp consumption and prices for coffee. However, that forecast proved wrong, since demand for coffee has remained high, even while consumers have moved from cafés to home drinking."

And since we think that the ocean of money flooding the world today would need to flow into assets or goods or services, we suspect that such surges have been part of the "inflationary seep through".

So far, traces of rising food prices seems generally contained. Nonetheless there seems some signs that food inflation may have just begun.

in Pig and Feeder Cattle prices (courtesy of Danske)...

and in wheat, soybeans and corn, aside from sugar

Meanwhile, rice prices appear to be "bottoming"

From ino.com