That in turn cripples the larger economy, because an impoverished population cannot consume, nor can it give rise to broad based economic drive and innovation. But a crippled economy does not necessarily look unappetizing to predatory capitalists, however, because it gives them the opportunity to go on binges of acquisition and consolidation.
We saw in Europe, between the end of WW2 and the rise of the EU, that socialist-capitalist economies can contribute to broad-based well being; sadly, the EU wrecked all that, using American style phony financing. It has been cliché for a long time now in America to mock European economies, but the fact is that they have tended to grow slower, but still to grow, and without the familiar US inequities. In other words, they have come far closer to working the way an economy should work - slow, steady, broad-based growth. Until the EU shenanigans.
And despite the mystifications of the economists and political scientists, there's no great mystery about any of this. Everyone knows that a society/economy is going to work best when everyone sees that well-being is broad-based, that effort is rewarded, that equality is not enforced, while inequality is not encouraged, that trust is the general operating principle, instead of cheating and fraud, that a future looms that most if not all people actually want for themselves and their children and children's children. Ancient wisdom tells us to think seven generations into the future. This is what people really do, on a gut level. If they see around them a society that bodes ill for the future, their motivation flags. Pretty soon the elites start flogging the workhorse population (as they see it) using scare tactics, and when those don't work anymore, the police state starts in, and when that doesn't work anymore, it's time for war. Right now, we have all three of those things happening (scare tactics, police state, war), and still the economy is crashing. That means we are at quite an historical crossroads for humanity....
The Bull Market in Food Is Only Just Starting. I believe that the surge in the price of food we have seen in the past two years is the beginning of a major, secular, long term trend. During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050.
Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Australia, Africa, and China, soil is exhausted, and global warming is shriveling yields. Underground water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring.
Food reserves are now at 30-40 year lows, depending on who you listen to. Rising emerging market standards of living are consuming more and better food, with Chinese pork demand rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism. To produce one pound of beef, you need 16 pounds of grain and over 2,000 gallons of water. I won’t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply.
It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver.
The amount of arable land per person has fallen precipitously since 1960, from 1.1 acres to 0.6 acres, and that could halve again by 2050. Water is about to become even more scarce than land. Productivity gains from new seed types are hitting a wall.
China, especially, is in a pickle because it has 20% of the world’s population, but only 7% of the arable land. It has committed $5 billion to agricultural land in Africa. There are now thought to be over one million Chinese agricultural workers on the Dark Continent. Similarly, South Korea has leased half the arable land in Madagascar to insure their own food supplies.
An impending global famine has not escaped the notice of major hedge funds. George Soros has snatched up 650,000 acres of land in Argentina and Brazil on the cheap, an area half the size of Rhode Island, Others are getting into the game, quietly building portfolios of farms in the Midwest and the South.
The net of all of this is that food prices are going up, a lot. While prices are certainly overheated at the moment, you should use any decent pull back to build core long positions in corn, wheat, and soybeans, as well as in the second derivative plays like Agrium (AGU), Potash (POT) and Monsanto (MON). You might also look at the Power-shares Multi Sector Agricultural ETF (DBA).