Roy Nersesian Sees The Perfect Storm

Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hi everybody, it’s Mike Norman, your host at the HardAssetsInvestor.com interview series. I’m here with the second part of my interview with Roy Nersesian, who is a professor at the Center for Energy, Marine Transportation and Public Policy at Columbia University.

Roy, we were talking about biodiesel and biofuels in general and the link between rising food prices, agricultural commodity prices and biofuels. Yet you say, at least with biodiesel, that that’s not the case and in fact [that biodiesel] could help in terms of mitigating some of the food price increases we were seeing. How is that so?

Roy Nersesian, professor at the Center for Energy, Marine Transportation and Public Policy, Columbia University (Nersesian): Well, this is irony of the situation. They have planted tens of thousands of acres of palm trees, in Indonesia and Malaysia primarily.

Norman: I love palm trees.

Nersesian: I’m not sure that those are the same ones that have berries on them for vegetable oil. But anyway, be that as it may, the whole idea of all this planting is to increase the supply of biodiesel. It takes eight years for these trees to mature, but some of them have been planted a couple of years.

When these plants mature, they will become vegetable oil for the people, not necessarily biodiesel. Biodiesel plants that feed off palm oil are all idle, mostly in Asia. All that palm oil is going into the diets of people.

Norman: So there’s a tremendous amount of spare capacity in terms of the potential to produce this biodiesel and the ability to grow it in crops. So there is not necessarily a direct impact on the food supply as we’re seeing now, for example, with the corn. That’s what you’re saying, right?

Nersesian: Yes, that the planting of the palm trees can go either way, and if there’s a shortage of vegetable oil, that’s where it’s going to go.

Norman: Now Roy, let me ask you something, because clearly high oil prices are behind at least part of the impetus or the desire to develop biofuels.

Nersesian: How about one hundred percent.

Norman: One hundred percent? Well, how about the political element? Because we saw here in the Energy Bill that the United States mandated a certain amount of production of biofuels. Now here’s my question, because a lot of people are thinking along the lines that this is creating food price increases. What if this were to be stopped? What if suddenly we had a new administration that said, “This is a crazy idea. It’s causing people to have to pay more money for food. We’re going to end the whole thing.” What would then happen in terms of the momentum to produce biofuels?

Nersesian: Well, first off, regarding corn, you have to remember that the nutritional value of the corn [used in ethanol production] is actually preserved and becomes feed for cattle, so corn is not one hundred percent lost. Maybe one-third of the corn crop is lost, so to speak, by the starch component going away. The other thing is that a lot of the problems today have nothing to do with agricultural [issues]; they have to do with the fact that we have more people eating. We have a billion and a half people in China whose diet is improving, and as you go from rice to meat, [it takes] two pounds of grain for a pound of chicken, two pounds of grain for a pound of pork, ten pounds of grain for a pound of beef. If you can have a billion people starting to eat beef, you can well imagine what’s going to happen to grain prices.

Shipping prices, by the way, are at all-time peaks because of Chinese imports, and on top of that, you have the massive failure of agricultural output in Australia due to the drought. There’s one plant in Australia that processes rice that can feed 20 million people. That plant is idle. No rice, no water.

Norman: Finally, let me ask you about the element of speculation. We see now the agricultural markets and all commodity markets have become the interest of very large investors - pension funds, endowments, commodity funds - who look to own these resources as an asset class. Don’t you believe that’s a contributor to the price rise as well?

Nersesian: Yes it is, and frankly, I can’t wait until there’s a big break and these people have to start liquidating their positions.

Norman: Do you think that will happen since a lot of these are these passive, long-only investors? They have to allocate up to a certain amount and they’re in there.

Nersesian: Just a couple of weeks ago, gold was over $1,000/ounce and it fell by a hundred dollars, and if you own gold futures, this might make you a little bit nervous. Oil is off its peak. I think it’s a possibility. Someone starts to play a game of chicken and maybe starts a panic. Because these are futures, you can’t stay with a future once there’s a 10% decline in the price. They have to be rolled over.

Norman: So from a fundamental standpoint, getting back to I think your real arguments for this long term - growing population, the need for alternative energy, high oil prices, people looking for competitive sources of energy - those fundamentals are going to stick around.

Nersesian: For a while, for the perfect storm.

Norman: It is the perfect storm.

Nersesian: If you are a poor person, this is the perfect storm.

Norman: Oh boy. All right, well you heard it folks, the perfect storm. Keep your eyes focused on biodiesel and keep your eyes focused right here at this Web site, HardAssetsInvestor.com, for a lot more interviews to come. I’m Mike Norman; see you next time.

Be sure to check Part I of the interview with Roy Nersesian.

Comments

[white orangutan]

Jatropha oil is a much better plant than palm for making biodiesel. It grows well on poor soil, grows wildly in many parts of Indonesia and does not need to be managed in a plantation. The palm oil industry in Borneo (Kalimantan) is about food oil and old growth tropical hardwood, not biodiesel. Large swaths of the land have been rendered useless for anything, even palm, after the clearcutting. So tropically-produced biodiesel is not a viable option for international trade.

[OJO Zafado]

Not a very clear interview. It presents a dichotomy on the one hand there is a commodities bubble which I do not agree with. On the other hand there are nearly 4 billion people living between Istanbul and Sapporo. Maybe they are going to eat rabbits? What ever there is a perfect storm in commodities. The weakening US Dollar. There is no chance this trend will end as the US dollar depends on a 2 year election cycle. The dollar has squandered itself on a pocketful of promises. Falling production and a higher demand by the +6 billion. Lower supply due to drought persisting, production declining, an increasing of political upheaval and demand rising. South Africa is going the way of Rhodesia. Africanizing and changing the name of the country will not improve production of coal and base metals. Oil production continues to decline. Any way... the conclusion to this interview would seem to be buy the MOO and the DBA. Throw in some RJI too. Clear cutting ruining the forests? Buy some CUT as well. Sooner or later most of the 6 billion will want to own a roll of toilet paper. There is no commodities bubble there is a huge amount of world wide inflation. Too many dollars being shipped abroad to stock the shelves of Walmart and supply the refiineries of Exxon-Mobil. These dollars get exchanged into local currrencies. The world has to run the printing presses to keep up. So everyone world wide has plenty of money. Not everyone has enough oil, electricity and clean water. The US no longer just prints money to export they export it electronically now as well. A few key board strokes and off goes another 100 Billion in TRCA to the banks of the ECB and SNB. The next week it is another 50 billion off to the BOE. The commodities bubble may have only begun. The lawmakers in what used to be the world's richest nation are just beginning to try their hand at manipulating the financial and futures markets. Look at the Swiss franc. It has stood up over time. A very small country with a currency that ranks among the world's most dependable. What is to stop an Abu Dhabi or Kuwait or some other small nation from creating a new currency backed by a basket of world commodities? If the US treasury TIC data remains negative for a couple more months in a row, it will then be time to stick a fork in the US Dollar. Having 5 -15% of one's portfolio in precious metals and soft commodities does not make you a gold nut. The PBW is alot more than just a biodiesel fund. Owning an investment that has a broad exposure to the alternative energy industry is a good long term play. in the shorter time frame we need to heat our homes and provide running hot water. Nothing else to do but buy some UHN in partial lots and hope the investment goes nowhere. Even if you lose a few dollars you will at least then be able to afford the oil deliveries.

[jjason]

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