While the credit crisis and real estate debacle has been in the headlines lately, there is something else brewing in the background. The global food crisis will likely gather much more attention in the years to come as shortages in arable land, climate change, and overpopulation could potentially send food prices through the roof. The food crisis could possibly bring on the threat of famine to many more parts of the world and it could crush the earnings of businesses that are directly or indirectly impacted by rising food prices.

Although food and energy are considered by the Federal Reserve to be too volatile and unimportant to be included in the CPI, the fact is that prices of these commodities have been increasing at an accelerating rate. Highlighting the situation was the recent news that the Consumer Price Index just hit 5 percent, which is the highest level in 26 years. Food prices are up 70 percent in the last year alone. Some well respected individuals have questioned the intentions of the authorities undertaking the practice of stripping the food and energy prices from the index and changing the way it is calculated. As the average consumer is already on a tight budget, the threat of accelerating food prices should be of great concern to both individuals and businesses that are most impacted by rising food prices.

Over the past 50 years we have witnessed an explosion in the world’s population. In 1959 it was about 3.0 billion. Today the world population is close to 7 billion. It has more than doubled in the last 50 years and is increasing at a rate of 250,000 per day. Not only is the population increasing, the per capita consumption of grain intensive meats is accelerating, as well. Over the last 30 years China's average consumption of meat averaged about 20 kilograms per capita. Recent data has shown that meat consumption in China has now increased to 60 kilograms per capita.

Of the earth's 57.5 million square miles of land, approximately 7.65 million square miles are arable. However, arable land is currently being lost at the rate of over 38,610 square miles annually. Due to pollution, environmental changes, and excessive stress on the land we are facing soil erosion and degradation of the world’s water supply. It is estimated that 400 of China's 600 largest cities are short of water. According to the United Nations, more than half of humanity will be living with water shortages, depleted fisheries and polluted coastlines within 50 years because of a worldwide water crisis.

Keep in mind that energy and food prices are directly correlated. As world oil demand continues to outpace production, energy prices should continue to drive food prices higher. Soaring energy prices have nearly tripled the costs of petro based fertilizer in the past 2 years. Higher energy prices also increase the cost of transporting the grains and running the capital intensive machinery. As shown in the chart below, you can see the high correlation between corn and crude oil.

See above crude oil chart with corn overlay

All charts provided by APEX.

One way institutions and individuals can protect themselves from the global food crisis is through the establishment of bullish positions in commodity futures and options. However, professional help is strongly recommended. If you have an interest in developing a strategy for participating in this market feel free to call me 1-877-377-7936 or email me at jared.irish@archerfinancials.com.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.