Russell, I first started really thinking about this after listening to your podcast in March 2021 with grant Williams. It was a very good discussion. You said that cbs are political animals (agree) and that food price inflation disproportionately impacts poor people (agree) and hence will result in a political will to increase interest rates. We are living this now. You then said that it’s this increase in interest rates in the past which catalyses market crashes and Ponzi schemes being found out. The dynamics being asset prices being bid you by more and more debt gets reversed and the Ponzi scheme falls apart. I would be interested in what you see as canary in coal mine here as it is is different in every cycle. What do you think are the unique “Ponzi schemes” this cycle which aren’t obvious. (As fellow Aussie, Aussie housing is probably a stand out). Exploring this in future blogs would be really interesting IMO.
Current market reminds me of my dad talking about the labour market in 1970s. No matter what happened to profits, wages had to rise. Even as unemployment rose, wages had to rise. It was also next to impossible to fire someone. Now instead of labour, capital has to earn a return, even if housing is unaffordable, or inflation is running at 6 or 7%, or the government are running huge deficits, the position of capital and corporates has to be maintained. Ultimately, politicians will do what people want - and it looks to me like China has gone down that route first. The question is if or when we follow...
As always - great work! One thing I'd like to bring to your attention. Peter Zeihan was recently on the Grant William's Podcast. He mentioned that the Chinese have not completely eradicated the Swine flu and that all of this herd rebuilding will ultimately go to waste. This obviously changes the dynamic for further food inflation in a massive way. Have you heard anything regarding to the swine flu not being completely eradicated? Or is this just rumor?
Apologies - was not on the GW podcast but on realvision. Here's what he said from the transcript.
PETER ZEIHAN: I'm horrified about what's going to happen in China, because China is facing a complete food cycle collapse because of the combination of African swine flu and now what's happening with the Russians.
13:17
MAGGIE LAKE: Okay, say more about that, a complete food cycle crash, is that what you said?
PETER ZEIHAN: Three years ago, the Chinese were infected with African swine fever, and they ended up killing, culling more of their hogs than the world's commercial farms have. They're now trying to rebuild it. But almost all the people who came in to rebuild have no experience in farming, and they have never gotten rid of African swine fever. When you want to build up a herd of hogs that are in the tens of the millions, there isn't enough fodder.
What the Chinese have been doing is buying food from everywhere, even things that are wildly inappropriate, not just corn from Iowa, but broken rice from India, and even food grade wheat, like croissant grade wheat from France, anything they can find. That's what's drawn everything down. And it's all going to be wasted because they never got rid of the disease in the first place.
Well African Swine Flu is endemic - its has existed in Europe for over 100 years with no vaccine, despite the best efforts of everyone involved. It does disrupt the food system, but the reality is that Chinese pork prices have fallen back to "normal" levels... which implies some improvement in the situation. Certainly, they have reduced the number of backyard operators, which should slow any further outbreak. Lets see what happens.
Some quotes to add to the discussion, copied from TME that quoted from a podcast:
15% of world’s calories come from wheat. 1/3 of all wheat comes from Russia and Ukraine.
Russia has banned export of wheat; a lot of wheat supply blocked. Whole planet earth operates on a 90 day food supply. Once we stop making food the world runs out in 90 days. Most vulnerable nations lose the supply first; very quickly a massive bifurcation. Already have 1bn living on under 1200 calories.
The even bigger problem is the future planting season. Wheat spring planting season is right now; not a lot of planting going on.
This is because of the fertilizer problem. All fertilizer is made up of nitrogen, phosphorus or potassium. All farmers must use this. Without fertilizer crop does not grow. Nitrogen is made from natural gas. Nat Gas prices have doubled. The price of nitrogen based fertilizer has gone from 200 per ton to 1000 per ton. 10% of world phosphate and 25% pf potash is from Russia and that has been banned for export. Prices on phosphate and potash have sky-rocketed too. Now it is so expensive to grow crop that farmers are pulling out of production.
The worlds is “scrambling” for food right now, corn, soybeans etc skyrocketing. Strategic reserves of food being released now.
A bad weather year can be disastrous. Regardless, it will be a humanitarian disaster within 12 months and we will see hundreds of millions will go starving (think famine)
We just don’t have enough food. The way supply chains are set up will just don’t work.
Yes all true and all very depressing. And there are many people much more informed on this than myself. But I think I see a pattern to food prices, that offers a different way to think about things, and to make long term investing decisions, which is what I am going to focus on
Im really looking forward to the next one along with your long term investing decisions!
Do Chickens come into play at all? Only reason im asking is, bird flu is killing a lot of chickens in our area, enough to shut down an egg laying farm in our area. It seems to be happening in other areas as well in the US.
Chicken farming is so much harder to analyse. The cycle is quicker, and you need to make allowances for layers first broilers etc etc... I also know when chinese pig farmers were in trouble, and many went into chicken, which has been wildly unprofitable... the only winners in chicken seems to be the companies that own the dna
thank you for the post Russell, looking forward to the next one!
Russell, I first started really thinking about this after listening to your podcast in March 2021 with grant Williams. It was a very good discussion. You said that cbs are political animals (agree) and that food price inflation disproportionately impacts poor people (agree) and hence will result in a political will to increase interest rates. We are living this now. You then said that it’s this increase in interest rates in the past which catalyses market crashes and Ponzi schemes being found out. The dynamics being asset prices being bid you by more and more debt gets reversed and the Ponzi scheme falls apart. I would be interested in what you see as canary in coal mine here as it is is different in every cycle. What do you think are the unique “Ponzi schemes” this cycle which aren’t obvious. (As fellow Aussie, Aussie housing is probably a stand out). Exploring this in future blogs would be really interesting IMO.
Current market reminds me of my dad talking about the labour market in 1970s. No matter what happened to profits, wages had to rise. Even as unemployment rose, wages had to rise. It was also next to impossible to fire someone. Now instead of labour, capital has to earn a return, even if housing is unaffordable, or inflation is running at 6 or 7%, or the government are running huge deficits, the position of capital and corporates has to be maintained. Ultimately, politicians will do what people want - and it looks to me like China has gone down that route first. The question is if or when we follow...
Russell,
As always - great work! One thing I'd like to bring to your attention. Peter Zeihan was recently on the Grant William's Podcast. He mentioned that the Chinese have not completely eradicated the Swine flu and that all of this herd rebuilding will ultimately go to waste. This obviously changes the dynamic for further food inflation in a massive way. Have you heard anything regarding to the swine flu not being completely eradicated? Or is this just rumor?
Apologies - was not on the GW podcast but on realvision. Here's what he said from the transcript.
PETER ZEIHAN: I'm horrified about what's going to happen in China, because China is facing a complete food cycle collapse because of the combination of African swine flu and now what's happening with the Russians.
13:17
MAGGIE LAKE: Okay, say more about that, a complete food cycle crash, is that what you said?
PETER ZEIHAN: Three years ago, the Chinese were infected with African swine fever, and they ended up killing, culling more of their hogs than the world's commercial farms have. They're now trying to rebuild it. But almost all the people who came in to rebuild have no experience in farming, and they have never gotten rid of African swine fever. When you want to build up a herd of hogs that are in the tens of the millions, there isn't enough fodder.
What the Chinese have been doing is buying food from everywhere, even things that are wildly inappropriate, not just corn from Iowa, but broken rice from India, and even food grade wheat, like croissant grade wheat from France, anything they can find. That's what's drawn everything down. And it's all going to be wasted because they never got rid of the disease in the first place.
Well African Swine Flu is endemic - its has existed in Europe for over 100 years with no vaccine, despite the best efforts of everyone involved. It does disrupt the food system, but the reality is that Chinese pork prices have fallen back to "normal" levels... which implies some improvement in the situation. Certainly, they have reduced the number of backyard operators, which should slow any further outbreak. Lets see what happens.
Some quotes to add to the discussion, copied from TME that quoted from a podcast:
15% of world’s calories come from wheat. 1/3 of all wheat comes from Russia and Ukraine.
Russia has banned export of wheat; a lot of wheat supply blocked. Whole planet earth operates on a 90 day food supply. Once we stop making food the world runs out in 90 days. Most vulnerable nations lose the supply first; very quickly a massive bifurcation. Already have 1bn living on under 1200 calories.
The even bigger problem is the future planting season. Wheat spring planting season is right now; not a lot of planting going on.
This is because of the fertilizer problem. All fertilizer is made up of nitrogen, phosphorus or potassium. All farmers must use this. Without fertilizer crop does not grow. Nitrogen is made from natural gas. Nat Gas prices have doubled. The price of nitrogen based fertilizer has gone from 200 per ton to 1000 per ton. 10% of world phosphate and 25% pf potash is from Russia and that has been banned for export. Prices on phosphate and potash have sky-rocketed too. Now it is so expensive to grow crop that farmers are pulling out of production.
The worlds is “scrambling” for food right now, corn, soybeans etc skyrocketing. Strategic reserves of food being released now.
A bad weather year can be disastrous. Regardless, it will be a humanitarian disaster within 12 months and we will see hundreds of millions will go starving (think famine)
We just don’t have enough food. The way supply chains are set up will just don’t work.
(from All-In Podcast)
https://themarketear.com/posts/ckY_2hjuA-
Yes all true and all very depressing. And there are many people much more informed on this than myself. But I think I see a pattern to food prices, that offers a different way to think about things, and to make long term investing decisions, which is what I am going to focus on
Food production and fertilization is a lot more complicated.
For instance-
Legumes are used in sugarcane cropping as a fallow crop purely to reduce/eliminate N fertilizer usage.
In conjunction with the correct Rhizombes legumes can convert atmospheric N into freely available soil N.
https://sugarresearch.com.au/growers-and-millers/nutrient-management/six-easy-steps-toolbox/refining-nutrients-for-specific-circumstances/accounting-for-legume-fallow-crops/
🙌🙌🙌🙌
Im really looking forward to the next one along with your long term investing decisions!
Do Chickens come into play at all? Only reason im asking is, bird flu is killing a lot of chickens in our area, enough to shut down an egg laying farm in our area. It seems to be happening in other areas as well in the US.
Chicken farming is so much harder to analyse. The cycle is quicker, and you need to make allowances for layers first broilers etc etc... I also know when chinese pig farmers were in trouble, and many went into chicken, which has been wildly unprofitable... the only winners in chicken seems to be the companies that own the dna