Yesterday over dinner with a close friend we were talking about my fear of an unseen food crisis adding up to the current economical crisis. I've written before on my fears of the impact of a Global Food Crisis on Europe an specifically Belgium . My friend yesterday doesn't believe the storm can be that bad. He believes our governments in Europe can help with price controls.
Price controls are not a solution, they only lead to reduced supplies. There were price controls in the days of the Roman Empire and in ancient Egypt or Babylon. Price controls under the Roman Emperor Diocletian led to a decline in the supply of goods. The same thing happened under President Nixon's price controls in the 70s and the same is happening today in Venezuela . This lesson from Venezuela is an essential one for us.
It's one of the biggestopportunities for entrepeneurs these days: buy farmland in Brazil and start running a farm with a vision. More on that during our investors trip in May.
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Feb 28 2008
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Jan 4 2009
It is my belief that that the coming decennium will be one where self-sufficiency in water, energy and food will be at the heart of the success of the economy of any country. Belgium scores terribly bad on each of those parameters, even when it comes to freshwater reserves . Brazil is the world's best performer on each of the 3:
1. More than 80% of the Brazilian electricity comes from hydro , more than half of the cars drive on ethanol , the country discovered vast oil reserves
2. Brazil has the biggest freshwater reserve of the world
3. Brazil is the biggest food exporting country in the world. It ranks third on exports with 34,4 billion US$ of food exports. Bigger than China with 27,86 billion US$ of food exports. But contrary to China, which also imports 22,92 billion US$ of foods, Brazil is only a very very tiny importer of food . The country imports less than 5 billion US$ of food products andeven doesn't rank in the top 5 list.
This in sharp contrast with South Africa . Bloomberg announced recently that South Africa become a net food importer last year for the first time since 1985 . The country exported 29.9 billion rand ($2.9 billion) of agricultural goods and imported products valued at 30.3 billion rand. The European Union remains South Africa's most important export market, while imports are sourced mainly from the Mercosur countries, in particular Argentina and... Brazil... South Africa's main exports are wine, fruit and sugar, while its largest imports include rice, ethyl-alcohol, wheat and oilcake. Yes, Brazil is both a big wheat and rice producer.
This news is dramatic for South Africa. The democratically elected government of South Africa is forcing white farm owners to sell to the government which turns large white-run farms into many small black-run farms. One result is that food production is dropping. Since the trend of pushing whites off the farms will continue South Africa's food production will decline and the parallels to Zimbabwe will increase. Since the more talented younger whites mostly have left or will leave the real crunch is going to come as the older skilled whites get too old to work and die off. Zimbabwe shows where South Africa could end up.
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Mar 1 2008
After the denial on recession, the newest trend is denail of stagflation. Everyone will try to convince you that the (still increasing) inflation is due to disappear in the second half of 2008. The main two drivers behind the current inflation are supposedly the (1) rising energy prices and (2) the rising food prices.
When it comes to oil prices,you'll here the following claims "Unless you think oil is going to 150 US$ a barrel by the end of the year, energy inflation will be much lower."
As to the rising food prices, the solution also seems simple: "If you want lower food prices, just tell your Senator to take away ethanol subsidies and stop using corn to make ethanol, when we can buy ethanol made from sugarcane in Brazil miuch cheaper than we can make here".
On the ethanol level, I agree. What the US is doing is absurd. The dreams of the US of an energy-independent America is not more than a dream. The US currently has 60 ethanol plants under conrtsuction to add up to the already 140 plants in existence. Last year the US produced 6,6 billion gallons of ethanol from corn. This figure will rise to 8 billion in 2008. The US government spends 3 billion US$ a year subsidizing the ethanol production from corn. And we all know that US ethanol production from corn is a dead duck compared to the Brazilian ethanol proudtcion from sugar cane. Especially if you add the biomass ethanol production in the sugarcane-waste process.
The figures are there: according to the IMF, the US production of ethanol consumes 0,82 gallons of fossil fuels to create a gallon of ethanol. According to David Pimentel of Cornel, it even takes 29% more fossiel fuel to create a gallon of corn ethanol; a net energy loss !
Yet, the US will not turn it back to the ethanol business. And Brazil certainly won't, their yields on ethanol are contrary to the US impressive.
I expect food prices to go up by 4% next year. But you have to make the right picks to profit form the wave, forget lifestocks .
The real reason why we have inflation in Belgium is not only the increasing food and energy prices. I just received my Telenet (Internet & fixed phone bill); which mentions that my bill will go up 2,5% in April, due to 'higher cost of living'. Bullshit of course; the operationg costs of Telenet are decreasing. The real reason is that Telent need to obtain an organic growth of 5% in 2008 , which it clearly cannot reach through selling more. So they decide to create inflation.
Just to say that the truth on inflation and growth is more complex than journalists wants us to believe it is . -
Apr 14 2008
I wrote before on my fears of the food crisis ahead . Now that the IMF woke up , the news is allover . Even Belgian vegetables are becoming increasingly expensive . But that's nothing compared to the upcoming surge of rice prices of 30% . Today the news announced that Egypt is stopping export of its rice . But Egypt is a tiny producer of rice, with onlt 3800 '000 metric tonnes.
Do you know which country is the biggest non-Asian producer of rice? Guess. Yes, it's Brazil. With 7800 '000 metric tonnes, it's bigger than the US (5.900 '000 metric tonnes) and much bigger than the EU (1.792 '000 metric tonnes).
Oil, sugar, meat, rice, bananas, coffee, iron, ... it's hard to think of a commodity in which Brazil is not a net exporter.
Trust me, the impact of the food crisis is way bigger than that of the credit crisis , no, this is nt my apocalyptic warning . -
Mar 29 2009
When I came living in Brazil in 2003 the first big potential I notice was the country's ability to be self-sustaining.
Brazil has plenty of food (it's the second biggest food exporting country in the world), is self-sufficient in petrol, has 80% of it's electricity coming from renewable hydro-plants, has iron ores and exports steel, makes its own cars, is the biggest meat exporter in the world, exports clothes and shoes,...
It mainly is depending on natural gas (although that might change in the future) and machinery and electronics imports.
I know, the military tried that route in the 70/80s and failed, yet I believe that this crisis is so fundamental that increasing protectionism could be a good choice for Brazil in the long run. And I'm not alone, why else would Mandelons by screaming so loud to Brazil to never regard its frontiers as the boundary .
Yestedray George Soros warned that the UK might have to seek IMF rescue . Brazil still has the IMF rescue of the 90s fresh in its memory. This time they have nothing to do with the causes of this economical crisis and this time it's "the others" who are in trouble and having to seek IMF aid. Don't expect too much mercy and understanding of Brazil towards the " white people with the blue eyes ".
This other article from Soros on the UK is also a must-read . -
Jan 3 2008
I start my daily routine listening over a cup of coffee to the daily news sessions of Miriam Leitão and Mauro Halfeld on CBN radio. Miriam analysis the macro economical context of Brasil, whereas Mauro focuses on the Brazilian stock market. Today Mauro talks about the Brasilian stock market in 2008 . As I previously wrote , the Brazilian stock exchange market is no place for the weak-of-heart in 2008. A lot of juicy picks to make, but only if you have deep insights.
Mauro thinks especially the food sector in Brazil will score high. I fully agree with him. Not only for stock pickers, but also for entrepeneurs, the Brazilian food industry is full of opportunities. You pay 3 EU in a Belgian supermarket for juices made of Brazilian fruit pulp; the Acai juice in Delhaize even goes for 4,95 EU a liter. And at the same time you can buy that pulp (pure fruit, the nutritional values are actually better than the imported fres fruits you find in the Belgian supermarkets in winter) at Brasfrut for a fraction of that price. Not hard to put 1 and 1 together. Especially when you know that delicious fruits like Caju, Cacau, Siriguela, Tamarindo or Umbu are not known (yet) in Europe. But you can also explore chicken or ready-made food segments; not to mention the huge potential of the diary segment in Brasil.
I also strongly recommend reading Ricardo Pereira's 2008 insights on Dinheirama . -
Jan 7 2009
Some people really don't get it. Wayne Mc Currie of South African RMB Bank is one of them. Soon the South African Reservee Bank should announce the December inflation figures . In November the CPIX consumer price index was at 12,8%, coming from 13,6%. 12,8% is still massively high (by way of comparison, the consumer inflation index of the last 12 months in Brasil was 6,39% , less than half the South African inflation.
Now Mister Warne Mc Currie claims :
"Now in South Africa, to divide our market into two - the non-resource shares - we know there's good news coming. So with the banks, the retailers, we know interest rates are coming down, inflation's coming down, the price of petrol's coming down - despite what the oil price has done in the last couple of days. But after the peak it's actually a massive fall - when diesel went above R12 and petrol went above R10/litre. So there'll be a massive fall. Of course, in the next three/four months the inflation numbers are just going to plummet. So we will see further - and quite significant - interest-rate cuts. So for let's call it the consumer shares, the outlook is actually reasonable. We just don't know yet about the resource shares. Now, they have rallied. Some of the resource rallies have actually been strong, simply because they fell so much."
The simplistic man believes that all will be well just because inflation is coming down a bit (but still double digit); mainly because oil prices went down. The man fails to talk about South Africa's massive negative current accounts, the painful fundamentals of South African's energy-import depence, the fact that South Africa became a net food importer . And worst of all, Mr. Wayne Mc Currie fails to understand the massive negative impact of South African's Brain drain : more tha n 2.100 South African doctors are emigrating to Canada, mainly because of the skyrocketing crime in South Africa . And when Mr. Wayne Mc Currie believes consumption will be the "all good like before" in South Africa; he should check the fundamentals and understand that South African's are already swimming in debt . A slightly lower interest rate won't structurally solve this. -
Jan 8 2008
Luc tipped me to watch the Dutch VPRO program “Tegenlicht” (click on the orange “bekijk uitzending")
He was my first boss at PING back in 1995. I have learned a great deal from him and still vividly enjoy reading his posts and talking to him. One of the things we differ on: Luc is a big fan of the US(A) and I would not be surprised if he’d announce tomorrow he's moving to Carifornia. I on the other hand feel at home in Brazil. I don't see Luc spending 3 months in Brazil -if I'm mistaken, Luc, we're leaving for 5 days with a group entrepeneurs end March-, just as I couldn’t stand living 3 months in the US. The reasons why I’ve always felt uncomfortable in the 'American society' are the same which are bringing the country to its knees. The VPRO video clearly illustrates the phenomenon. It’s a fake country, with fake people and fake figures. When the shit hits the fan, the masks fall. Brazilians on the other hand have flexed their muscles in a chaotic mix of cultures and economical tornado’s which makes the quote “Courage is grace under pressure” from Hemmingway far more appropriate on them than on the gringos.
Take for example the two main topics of discussion when people refer to the current economical context:
1. Will the US enter a recession ?
2. What is inflation? Yes, what is inflation is a huge topic of discussion of I read through all the economical opinions these days. -
Feb 21 2008
MoneyWeek is one of my favorite news sources in South Africa, they publish excellent articles like these . Last week, the South African business magazine had a special on Latin America. Their argumentation why Brazil has all the elements to become one of the strongest economical players on the globe are head on:
"In a nutshell: the United States and Britain have been victims of their own good luck; the banana republics had the good fortune of bad fortune. In the last twenty years, for example, the world rushed to lend the Anglo-Saxon tribes money. North of the Rio Grande and the Isle of Wight, credit was as abundant as calories. But when lenders visited the tropics, they hid their money in their underwear, and left their watches in the hotel safe. Our man in Rio sweated and counted his change. Our man in London or New York splashed out, and bought a $5 million house...and another one as an investment. In the air-conditioner zone there was no one to borrow from. Residents of the banana republics were spared the lure of debt, thanks to the near universal agreement on the part of lenders everywhere, who wouldn't give them a dime. And now, England and America are caught in the debt trap, while the Latinos swagger down their avenidas with hardly a care in the world. The price of soybeans is at an all time high...and their balance sheets have some of the lowest debt ratios in the world. An investor in Latin America has the trade winds at this back; the rainbow currencies are rising; so is the price of food. Most of these countries are net exporters - of bananas and other agricultural commodities, often of metals as well. Like China and the oil exporters, they are building up large piles of dollar reserves and watching their own currencies go up against the greenback. Several have had to intervene in foreign exchange markets not to protect their local currencies...but to keep them down."
The coming days, the Brazilian Central Bank will indeed have to buy massive amounts of dollars to push the currency back down .
The full article from MoneyWeek can be found behind the break . -
Jul 10 2008
Mea culpa, it has been too quiet here.
Too compensate I start pointing to the 6 page special on Brazil in the Financial Times of last Tuesday . Start reading the piece of John Rumsey on the interest rates and Jonathan Wheatley who writes on the infrastructure challenge.
Also interesting is this interview with Central Bank President Meirelles . I'm not his biggest friend (although he did a great job the last years), new names like Delfim Netto and Afonso Pastore should now give lectures to Mantega and Meirelles. These are times where brains and vision make all the difference.
But then again, I also believe Ben Bernanke, mervyn King and Jean-Claude Trichet ought to be replaced, because they refuse to see the deflationary hurricanes which will hit the US and the UK. It's truly amazing to see that most are still screaming inflation, stagflation or even hyperinflation simply because food and energy prices are rising. Deflation is here and now nin Europe and the US and there is nothing that can be done about it (Africa, Asia and Latin America are different stories). None of the financial engineering jobs that fueled the credit boom of the last decades will ever come back. SIVs, conduits, toggle bonds.... are all dead for years and decades to come.
There is no source for jobs to replace what has been lost, discretionary spending is dead. The impact of that still has to drip into the economy, once it does its here to stay. The mentality shift in the next generation towards credit will be massive. Our children will never forgive our parents. -
Jul 13 2008
The financial crisis enters the phase where the credit implosion will become visible. More than a year I've been warning now for the consequences of the levels of credit in Europe and the US .
Today more than a third (41%) of US workers are cutting back on utilities, nearly half have reduced food purchases (48.5%) and a large percentage are buying less clothing. The national survey of US workers, conducted May 12-14, 2008, also found that younger workers (between the ages of 18 to 29) are being hit the hardest by the economy and are the most desperate about their economic future. More than one third (34.3%) of young American workers say their financial situation has caused them to “feel hopelessness or despair about their economic future.” That compares with 28.8% of workers age 30 to 49, 23.5% of workers 50-64 and 17.9% of workers 65 or older. Nearly a third (31.4%) of workers report being occasionally kept awake at night because they worry they will not meet housing payments, credit cards, or other personal expenses, 36.8% of whom were between the ages of 18 and 29.
Meanwhile peak credit also reached Australia, where more than 50% of the Australian homes are loosing value . The situation is of such a kind that a wave of public school students is migrating to the public system ; their parents simply can't afford private school any longer.
Meanwhie youngsters in Finnland can apply for credit by sending a text message and also in Sweden youngsters are spiralling into debt because of the same reason .
Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and now everything will change. -
Aug 15 2008
Europe had a quarter of negative growth , another quarter like this and the Euro enters its first recession, which is likely to happen.
While the Japanese Real Estate market is crashing , the smarter US analysts are warning that there are HUGE shadow inventories of US foreclosed homes still to be released on the market ; and meanwhile Greenspan wants you to believe that the US real estate market will stabalise from 2009 on ... right. Expect this graph to go further downwards , drastically.
Today Chief Investment Strategist Richard Bernstein of Merrill Lynch stated:
"We believe that the investors seriously underestimate the extents of the credit crisis and the consequences of the deflation which will follow now".
I have written for the past half year on the de flation storms which are about to hit Europe and the United States.
Meanwhile in South Africa, Standard Bank has to rely on its offshore business to hit targets:
"Johannesburg - Standard Bank would offset the effects of lower-than-expected economic growth rate in South Africa with profits from its offshore businesses in Nigeria and China. One worrying sign for Standard Bank was the increasing problems the company was facing in its card division. The credit loss ratio in card debtors increased from 6.34% to 9.44% indicating that the consumer was becoming increasingly stretched ." 9,44% credit loss ratio in amongst card debtors, ouch !! Meanwhile Mboweni decides to not raise interests above the current 12% rate. This is a strategic blunder. Yes, I know, the general tone is that he did good in not raising the rates, because ""… the alarming rate at which cars and houses had been repossessed should be a matter of concern to Mboweni and the MPC. " At the same time inflation keeps skyrocketing and will go from the current 11,6% to 13% by the third quarter. Yet, Mboweni keeps the repo at 12%. Read that again: inflation at 13% with a repo rate of 12%.
At the same time, South African banks are turning into vulture hawks. If you put down a deposit on a property and FNB reassessed your loan and denied you your bond causing you to lose your deposit, FNB says that you should thank them because in actual fact you probably were going to lose a lot more money later on. No, I didn't make this up, it's happening, on a wide scale .
Mboweni claims "``Food and oil price increases continue to cloud the inflation outlook, but there are tentative signs that these pressures may be moderating.'' The wording makes me smile: Food and oil price increases continue to cloud the inflation outlook, but there are tentative signs that these pressures may be moderating .
Well, I think Mboweni is wrong. "Prices will decrease when supply surpasses demand. And that will happen South Africa focuses now on expanding infrastructure and assist its people to be more productive. For this reason the government should now focus on the production side of the economy and increasing skills rather than simply placing money, in the form of social grants, in people's hands. When increased production is attained prices will be constrained, which will eventually also curb inflation." These are not my words, but a literal quote from this article . And the worst is, Mboweni will blind people, inflation will go down…well the CPI will go down…because the government plans to change the measurement of the consumer price index next year. The SA statistics office said on July 1st it will reduce the weighting of food in the CPI, which will lower the inflation rate… artificially ( see Bloomberg ).
Meanwhile, at the annual Rode conference on property in South Africa today " Johannesburg - House prices are expected to drop by between 10% and 15% in the next 12 months as rising interest rates and tougher credit-granting laws force buyers to tighten their purse strings, a property expert said on Thursday." Prices in Plettenberg Bay are taking a dive and when asked for the reason of selling, 18% of the people mention emigration, this figure is up from 7% 12 months ago .
Standard Bank posted a 7% rise in first-half normalised headline earnings per share (EPS) to 481,8 cents today, but said rising bad debts meant it could not give full-year guidance . When banks come with these messages you better brace yourselve for the storm, especially when you are in real estate business. One of the "saviours" of the housing market is supposed to be the Black Diamonds , the young black professionals who have been spending money like crazy the past few years. Only one problem though, they've been spending borrowed money (mainly via credit and store cards) and getting into a heap of debt, and now that debt is becoming overwhelming, read the details here .
Conclusion:
The monetary loosening of Mboweni worries me; of course it 'could' boost sentiment a little bit on a short term; but it will come at a very, very high price; if you lived in Brazil in the 70s and 90s, you know all about that.
Zimbabwe worries me.
And what worries me most (although there are some opportunities in it for the well connected) is the ongoing land reform in SA .
As I've been saying repeatedly: not just an ordinary global economical blip . -
Aug 29 2009
As was expected by most analysts, South Africa's GDP shrank in the second quarter of this year at an annualized rate of 3% over the first quarter as compared to the 6.4% rate seen in the first three months of the year. This is one of the steepest contractions seen worldwide. Especially agriculture was a serious disappointment, with a 17% drop in Q1.
The unemployment now raised to a total of 29,7% (28,4% in 2009). Also worrying is that retail sales decreased in June by an annual 6,7% following by a drop of 4,4% in May. The mix of people being worried about job security, high levels of household debt and still high inflation is is a deadly one. What is wost worrying is the inflation which remains extremely high.
The year-on-year CPI inflation rate was 8. 1 per cent in January 2009. It then rose to 8.6 per cent in February before declining marginally to 8.5 per cent in March Inflation in the first quarter of the year was driven mainly by increases in food prices, alcoholic beverages, household maintenance and repair, electricity, and in financial services. Since that time the inflation rate has fallen back slightly - from 8.0 per cent in May 2009 to 6.9 per cent in June - but given the extended recession and the low levels of capacity utilization this rate is still noteworthy for its size. Electricity prices in South Africa went up by 28,6%. Inflation of 6,9% is a headache for the SA Central Bank. The bank already lowered its repurchase to 7 percent. Governor Tito Mboweni said in a televised statement after the monetary policy meeting that the decision to reduce rates had been a “very closely debated one”, and it seems unlikely that further rate cuts will follow rapidly. The South Africa rand has climbed 21% this year against the dollar. This is mainly due to the inflow of so called carry traders from Europe and the US. But is this impressive performance of the ZAR supported by the underlying macro fundamentals?
Negative growth, depressed confidence and steadily rising unemployment certainly do not make it look like it is. “We are deeply concerned about a permanent decline in productive capacity as factories close rather than simply reduce output,” Patel said to the South African Parliament, "Manufacturing output has been declining since mid-last year. It has now reached levels last seen some five years ago.” All of which naturally enough feeds directly through to the pretty substantial current account deficit.
The growing pressure on the fiscal side will be enormous. South Africa’s borrowing needs are likely to double the government’s projection according to estimates from JPMorgan Chase & Co. Government borrowing may surge to 183 billion rand (22,4 billion US$) in the 2009-10 fiscal year to cover spending, compared to the budgeted 90,37 billion budget. This would increase the budget deficit to 7,4% of GDP, compared to the forecasted 3,8%.
Read the full report here . -
Aug 24 2008
I picked up the South African Times in the airport on Friday, the cover read:
" Six million can't pay their debt ":
Experts told The Times that the economic “perfect storm” — high inflation, including food and fuel, and the resultant interest rate hikes — have driven six million South Africans to the brink.
Rajeen Devpruth, manager of statistics and research at the National Credit Regulator, said that by the end of last year, 6.3 million South Africans had “impaired credit records”, which means their payments were more than three months in arrears or judgment had been obtained against them for outstanding payments.
That’s half of the 13 306 000 South Africans currently employed, according to the latest Labour Force Survey in September 2007.
I've been predicting this situation for over 18 months now. And still today, while the South African government is looking for thousands extra debt counselors , some peopleare still no realising the extent of the crisis and pretending the dip will be over in a few months from here. Think again !
Last week, Johann Rupert, chairperson of SA Remgro told to his shareholders that the South African recession could last another 5 to 10 years . Even Mbeki is extremely sceptical about South African Trade .
The signals are clear: South African retailers Woolworths and Truworths forecast a tough year ahead, only Massmart can keep its nose above the water with its low-cost stores .
Some people will state that the June-July 2010 Fifa World Cup will save the day . I have a different view: the Fifa World Cup is a huge risk for South Africa. When you visit Johannesburg, Port Elizabeth and Cape Town, you will understand that FIFA executives have expressed concern over the planning, organisation and pace of South African's preparations. And even if the World Cup will take place in South Africa, it will be a very disappointing event with the Chinese Olympics in the back of our heads. Also, June-July is winter in South Africa, not an ideal period to receive tourists. And on top of that, June 2010 willbe exactly one year after the elections.
To sum it up, next to the economical crisis, the country is also facing the following challenges:
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