The Black Swan in Food

Everybody knows there is some kind of food crisis. Grocery prices are painful. Wal-Mart has rationed rice purchases. Mexico has had tortilla riots due to corn prices. Rice riots have occurred Asia. China introduced laws prohibiting conversion of human food crops to fuel.

However, who would have predicted a 5 standard deviation price move for an index of 60 foods, or a 16 standard deviation move in rice prices. No, that is not a typo. On Thursday, Bloomberg reported a UN Food Crisis study and related price charts revealing this food Black Swan.

At the core of the definition of Black Swan is an unpredictable and unexpected price move that is way off the chart in terms of standard deviations from the mean.

Since 3 standard deviations theoretically encompasses 99.7% of all observations, 5 to 16 standard deviations is a shocker.

We’ll have to rely on businesses and governments to solve the problem, but as investors we need to be aware that this situation will take away profits from some and make profits for others.

The recent rate of change in prices cannot be maintained, or it would go to infinity soon, but a new world food supply-demand structure may be upon us. We need to understand that theme and identify ways to be on the right side of it.

We encourage a dialog with our readers to develop long and short ideas related to this long-term, high impact theme.

There are obvious immediate opportunities in the futures market, or with ETFs or ETNs dealing with food commodities, such as Powershares DB Agricultural Fund (DBA) (the leading volume pure agricultural investment fund). There are several other ETFs or ETNs, but none currently have sufficient liquidity for safe use. They include funds specializing in grains, livestock, and food generally.

There are probably individual operating companies, or country funds, that will more effectively capture the continuing profit potential for this new world of food; and there are those who will be chronically disadvantaged.

We don’t have a current list of candidates, but will be working on that. What are your thoughts on investing in the face of this food situation?

Comments

[amerlafrance]

With this type of move, reversion to the mean is a risk that really precludes me from going long directly in the grains at this time. However, the high cost of grain has farmers liquidating herds and that is depressing cattle prices temporarily as those herds move to market. With the world's increasing demand for protein in the diet, I am looking at livestock as the trading play over the summer. I do not like the ETFs (COW, LSO, UBC) because of the credit risk of the banks, so am looking how else to trade this idea. From investing standpoint for longterm funds, I wonder if there will be a full reversion to the mean in grains or whether there is a new paradigm (mean reset) for grain crops caused by the spread of wealth to larger segements of the population (in essence a flattening of wealth disparities with the US losing wealth to other countires). That would have hugh implications but direct investment in grains would not necessarily be the best approach. The farm support sector may work best (seed, fertilizer and equipment) for agricultural investments, but the actual impacts of such a shift in relative wealth could be more dramatic as basic food needs are met and the welath effect translates to other forms of consumption. Sustainability is the big issue here, and I would bet that there will need to be a change of lifestyle to allow needs to be met long term. Crystal ball cloudy, but the discussion should be enlightening.

[squeezerb]

Look at Freeseas (symb:FREE) as a play on this black swan. their home page gives day rates that have significantly improved as either food, fertillizer, farm equipment, grains, etc. need to be moved across the ocean. typical quote sites show this small cap's revenue to be about 1/3 of what my math shows, so the less risky potential in my opinion is in the transportation of the goods needed to feed the world.

[Learning Curve]

And looking even farther out, don't these moves across the oceans and nations require diesel... (?!?)

[User 68940]

First and foremost, this is a human crisis of monstrous proportions. It must be addressed effectively by governments and human service organizations and humane institutions before we can even begin to sort out its econcomic or investment implications.

[User 65166]

Investing in ammunitions is also a possibility, as people will start killing each other for food! Just a thought.

[Georealist]

How about regression of appetites? Ordinarily, regression to the mean is natures (and the investment worlds) way of telling us things can never stay as bad or as good as they seem. The problem is..food is entertwined with oil/gas..weather..and population growth (still). I wouldn't be so sure that demand destruction..or additional supply will take over. I look down the list of typical substitutes for different foodstuffs and they are rising at a near equal rate.
I'd look at ETFs like DBA as on might at market shorting positions (SRS, etc)..as insurance..not to be actively traded, but bought and held while this coming ugly cycle plays itself out...which I am guessing is much longer than anyone wants to believe.

[slider]

Long cattle-London Stock Exchange CATL. Ranchers in Minnesota selling cattle to plant corn and soybeans. I will take the contrarian play.