Thursday, April 24, 2008

Risk Analysis Update On The Grain Shortage

Brazil, with their restriction on rice export, now joins Russia, China, India, Egypt, Cambodia, and Vietnam. This list of countries that are restricting exports of grain will grow as more countries decide to add to their stockpile as hedge for global grain supply uncertainty. Thailand, a major exporter of rice, may announce some restrictions in the near future. China has also stopped work on new ethanol production while it assesses the risks of the potential grain shortage on its population and economy.

While there is no shortage of grain in the U.S. yet, the news of Sam’s Club and Costco limiting purchases of rice has brought the issue to our doorsteps. The news of limits on purchases of rice will create an artificial run on rice as small business and restaurants that use rice will stock up.

Also, with our tunnel vision focus on turning corn into ethanol, the U.S. is in danger of running short on wheat, our staple, as more farmers have switched to growing corn to feed the ethanol production. This headlong rush into corn ethanol is setting the stage for a calamitous event for the American farmers.

Growing corn depletes the soil of its nutrients and thereby requires more fertilizer. This has driven up the cost of fertilizers and potash, a key ingredient in fertilizers. These along with increased costs of gas and diesel have made it more expensive to grow crops. A knock-on effect of this increased cost will be for farmers to cut corners on the use of fertilizers while growing wheat and corn. Few years from now, expect to hear news of farm production declining substantially as the soil becomes completely depleted of nutrients.

In my previous article “Risk Analysis Of Global Grain Shortage” I have noted that the risk of the grain shortage will lead to series of 14 risk events that may occur. Some of the risk events – ever increasing grain prices and people beginning to hoard – have already happened. Expect more of the listed risk events to unfold in 2008-2009.

Ed Kim

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