Food Inflation, Ethanol Stocks and the Future

Nearly a year ago we authored an article discussing the secular change in food and energy prices and their likely impact on inflation across the board. We suggested headline CPI was more realistic than the Federal Reserve even understood. We insisted that food and energy price rise would lead to embedded inflation, and rise in the Core CPI.

There were two interesting articles published over the past couple days that add chapters to the inflation saga that is still in the midst of development. The IMF warned yesterday that global inflation was in fact a problem. An organization loaded with representatives who make a lot more money than me, the IMF, brilliantly reported that inflation had reemerged and that the drivers appeared to be "fundamental" in nature. Sound familiar? Yeah, you read that at The Greek last summer, when we said the drivers of food price rise were not seasonal, but secular in nature (a.k.a. IMF's fundamental), and should not be discounted as temporary noise that would weed itself out.

First, I have to acknowledge that I'm not an IMF press release junkie, and so can't be sure of what they were saying last summer. Also, they're definitely reporting on something that is of current importance, so kudos for that. But, imagine how much more productive warnings from institutions like the IMF might have been last year. Rather than reporting the news, why don't we shape it... Hey fellas, I'm available for consultation services if you want to know what's going to happen six months from now!

But let's not be one of those "I told you so" kind of newsletters. Let's look ahead now. First, let's take a closer look at what the IMF had to say, and analyze that (I am as frustrated as De Niro with the pistol and the pillow; it's about time someone who gets paid to know these things woke up right!?).

A Look at the IMF Warning

It's just a regurgitation of my article basically, pointing to growth in the emerging world and developing economies, and how that is driving increased demand for basic commodities, and food and energy. In fact, the IMF notes that emerging and developed economies as a group have accounted for 95% of the growth in demand for oil since 2003.

What the IMF neglected to point out is that the industrialization of China, India and the like have also impacted domestic food supply in the developing world. Farmers are increasingly being wooed away from the fields by the promise of greater opportunities in the big cities that are modernizing at breakneck pace. Factory opportunities are also luring labor away from the fields and patties.

Developments in Crop Planting and Yields

The development of corn based ethanol certainly seems ill-timed now, and will serve as another point of criticism of the Bush Administration as the history books record it. While its worked in Brazil, they didn't damage food pricing at the cost of insuring energy. In the meantime, the wild ride in ethanol stocks has ended up killing a lot of capital. Pacific Ethanol's (Nasdaq: PEIX) 52-week price range is $3 to $16, with the current price at $3 and change.

I find the developments in agriculture an interesting study. Initially, every farmer and his mother rushed to plant corn and join ethanol partnerships. Then corn prices skyrocketed and farmers rushed to plant more corn at the cost of other crop acreage, thus raising the prices of agricultural crops and then proteins across the board. Now, in typical human reactionary pattern, farmers are rushing to plant wheat and soybeans, taking corn crop acreage away. Guess what's happening as a result. Corn crop yield and inventory are expected to see significant decline (analysts surveyed by Thomson Financial see a 47% decrease in corn stocks in 2009 (Aug.)), and corn prices have risen again. In the meantime, the other crops have posted price decline. Where's this all taking us!!!

Ethanol Stocks Might Find New Life (if they can survive)

If recent patterns hold true, corn planting seems sure to increase again, so if oil prices stick high, margins might widen for the ethanol producers in the future. While The Greek believes it's still too early to start counting on that profit opportunity, the key names in the field to place on your radar screens include Verasun Energy (NYSE: VSE), Archer Daniels Midland (NYSE: ADM) and Pacific Ethanol (Nasdaq: PEIX). These stocks are up today, as the market likely reflects an overdone trade in corn, with the news due this afternoon from the USDA.

But, corn based ethanol is definitely not the answer to our energy needs and goal for such independence. Just as important, the pinch on American consumers must be mitigated. And don't forget, The Greek lives on potatoes (and your kind patronage of our advertising sponsors), so all this planting of wheat, soybeans and corn is increasing even my minimal survival costs! I'm coining that new term, "survival costs," as I expect it to replace "cost of living" relatively soon in the nation's general lexicon.

The second part to this article will focus on energy, and The Greek's fix for the problem.

Please visit our Wall Street Greek website to see our disclosure and other work. Article also interests: (AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, AMEX: DOG, AMEX: SDS, AMEX: QLD)