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Thales622
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Been investing in my spare time for several years.
  • Two Horsemen For the Price of One: Famine and War 0 comments
    Jul 29, 2010 10:19 PM
    On the 30th of June 2010 I was on a phone call with a colleague in Europe and he told me there was a record heatwave and he was working at home without air conditioning. I ran of ideas pretty quickly so I told him to stick his feet in a bucket of water. Why not? Lots of blood vessels in the feet for heat exchange. Suffice to say he didn't.

    Anyway, prior to this I had been reading up on Iceland's Eyjafjallajökull volcano. As you may have read but forgot already, it has a neighbor called Katla which is much larger. Katla erupts about every 40-80 years the last time being in 1918 and on the last 3 occasions Eyjafjallajökull has erupted, Katla has also erupted within 6 months.

    When Eyjafjallajökull erupted in March 2010 it sent its ash into the air and caused the cancellation of many flights within Europe.

    However if Katla blows the problems may be much more far reaching than a few irate travelers. A volcanic fissure in the same system called Laki about 31 miles from Katla erupted in 1783. The ash clouds changed global weather patterns for about 3 years and "the drop in temperatures, due to the sulfuric dioxide gases spewed into the northern hemisphere, caused crop failures in Europe, droughts in India, and Japan's worst famine." (1)(2)

    The resulting famine in France was one of the factors that gave rise to the French revolution. Remember Marie Antoinette said "Let them eat cake"? This is why. 

    I had a feeling for a while I should take an insurance policy out against Katla and I plumped for DAG, DB Agriculture Double Long. You can have trouble with double ETFs and ETNs if they have high volatility (eats into returns, check the web for details) but this one didn't look too volatile to me. Also, I wanted exposure to more than one commodity and this one is comprised of corn, wheat soya beans and sugar. (3)

    After I talked to my colleague about the heatwave, I couldn't help but think about all the crop damage it would cause, so I thought I'd better jump in quick. To date due to unusually hot weather the wheat yield estimates have been halved in Russia and the Ukraine and some reductions in Western Europe too and DAG has risen 30%.

    Which brings me to the Middle East. In the last couple of days I have been concerned about tensions there. One war game scenario runs like this: Iran continues enriching uranium, Israel pre-emptively bombs Iran, Iran takes out Dubai and the Saudi refineries at Ras Tanura in retaliation (they have stated they would do this) and the price of oil doubles overnight. Perhaps anti-missle missiles could mitigate the damage but this remains to be seen. (4)

    So what's that got to do with the price of wheat? Because the biggest factor in food production is the price of petroleum related products:

    "Food needs fertilizer, and to make fertilizer, you need energy. The cost of natural gas, for example, is one of the biggest components in the price of ammonia and potash. [...] And to get food to market, you need trucks, trains and barges, all of which consume oil and gasoline" (5)

    Therefore buying agriculture ETFs, ETNs or futures is a toofer because you get a side bet on energy prices as a bonus.

    What kind of position is this then? Its not one of my regular trades, its more like an insurance policy. I don't know if there will be profit taking from the recent run, but thats not the point of this bet, its a fat tail insurance policy and I'm essentially holding at least half until term (I've been selling on the peaks and buying more lower with the other half). It might not be tomorrow or even this or next year but Katla is overdue for an eruption and one day she will blow. And the drums of war are beating once again in the Middle East.


    (1) en.wikipedia.org/wiki/Laki

    (2) www.msnbc.msn.com/id/35988484/

    "Iceland's Laki volcano erupted in 1783, freeing gases that turned into smog. The smog floated across the Jet Stream, changing weather patterns. Many died from gas poisoning in the British Isles. Crop production fell in western Europe. Famine spread. Some even linked the eruption, which helped fuel famine, to the French Revolution. Painters in the 18th century illustrated fiery sunsets in their works.

    The winter of 1784 was also one of the longest and coldest on record in North America. New England reported a record stretch of below-zero temperatures and New Jersey reported record snow accumulation. The Mississippi River also reportedly froze in New Orleans."

    (3) dbfunds.db.com/notes/Agriculture/index.aspx


    Commodity Contract Expiry Date Weight %
    Corn 14-Dec-2010 24.89
    Wheat 14-Jul-2011 26.52
    Soybeans 12-Nov-2010 27.87
    Sugar #11 30-Jun-2011 20.71
     

    (4) fora.tv/2009/10/20/Uncommon_Knowledge_Ro...


    (5) This is an old article but it mentions how energy costs are a large component of food costs:
    www.usatoday.com/money/industries/food/2...












    Disclosure: Long DAG
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