Poor Crops, Soaring Demand, Currency Wars: A Recipe for Food Shortages

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food shortagesAnother lackluster monthly jobs report took center stage Friday. Stocks rallied, and government bond yields remained at rock-bottom levels as investors anticipate more action soon by the Federal Reserve to drive down interest rates even further.

Reports about how much slack the U.S. economy still needs to work through -- like unemployment -- understandably get the spotlight. But investors may be overlooking an even bigger story as the developing world stages a sharp rebound: Shortages of items like food and commodities are once again becoming a major concern.

Prices for agricultural commodities spiked so much on Oct. 8 that they triggered daily movement limits on the Chicago exchange. Options markets saw prices for commodities like corn soar more than 13% during the day following reports of supply shortages around the world.

Commodity-oriented exchange-traded funds like the PowerShares DB Agriculture (DBA) leaped as well. The ETF surged almost 10% over the previous week, with more than 6% of the gains registered on Friday alone.

Supply and Demand Discrepancies

A sharp shortfall in the U.S. Department of Agriculture's corn production forecast, due to poor weather patterns, also helped set prices soaring around the world. U.S. corn crop yields would come in 4% short of prior estimates and drop to their lowest levels in 14 years, the Agriculture Department said.

Fears of commodity shortages in the face of surging global demand are leading to export-slashing. Ukraine announced a sharp cutback in the amount of commodities like wheat and barley it would allow to be shipped out of the country. The likelihood of a major discrepancy between supply and demand have led to surging prices worldwide. European wheat prices rallied 10%, with other commodities, such as soybeans and cotton, climbing as well.

Still, investors should be cautious because commodity prices are known to be extremely volatile and difficult to put a price on.

Fundamental Forces

Nevertheless, rising prices are creating alarm about humanitarian concerns. Morgan Stanley (MS) and the U.N. have warned about the prospects of a rerun of the 2007 food crisis that slammed the developing world.

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Beyond crop shortfalls amid recovering worldwide demand following the financial crisis in 2008, additional factors may also be pushing prices up now.

Massive liquidity injections by governments around the world coupled with the rising chances of currency wars, in which countries seek an advantage by devaluing their currency, are likely to play an increasing role in rising commodity prices as well. Even more fundamental factors like steep population growth and a preference for more resource-intensive foods like meat make it easy to see where the booming demand is coming from.

Policymakers in the developed world are constantly warned of the unintended consequences of their search for quick fixes. Adding more heat to a simmering food crisis would be among the most damaging results.
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