Mark Whistler is the founder of www.WallStreetRockStar.com and is the author of multiple books on trading. Mark's newest book, The Swing Trader's Bible - co-authored with CNBC/Fox News regular guest Matt McCall - will be on shelves in late summer, 2008. In addition, Mark also writes regularly for TraderDaily.com and Investopedia.com.
The News:
Rice prices alone are up over 70%, while wheat has gained nearly 130% for the year. Agricultural commodities are severely hurting global economic growth, especially countries that do not have a strong agricultural export- backbone.
The Breakdown:
Agricultural commodities are through the roof globally and as of now, the rally isn't showing many signs of abating any time soon.
Why? Certainly, global demand is playing a large part in the problem, as see in the simple statistic that - every day - there are more mouths to feed. Right now, there are about 6.6 billion people on the planet. The U.S. Census Bureau predicts that by 2025 there will be over $8 billion people and by 2050 - over 9 billion. That's a 40% increase in the world's population.
The problem of rising food prices is one that transcends population growth though, having much to do with global governmental trade protectionism too. Because demand is surging, many governments are now implementing protective export tariffs as one method of controlling supply within their boarders. Case in point, China, India, Vietnam and Russia all have protective export taxes active on many grains, to keep agricultural products home.
Thailand is even trying to form a rice cartel, similar to OPEC. The BBC reported, "A Thai government spokesman confirmed that the cartel idea had been discussed in talks between the prime ministers of Thailand and Burma on Wednesday."
There's even more to the story though and it's one that U.S. citizens likely don't even know about. The United States is one of the single largest aggravators of the entire global agriculture problem - through the ethanol industry.
Right now, the U.S. supplies about 70% of the world's ethanol - through corn. However, sugarcane ethanol is actually a cheaper, more cost efficient ethanol solution. And here's where the major problem lies: The United States is the world's largest corn ethanol consumer and exporter, while Brazil is the same for sugarcane ethanol.
Just to make sure the U.S. corn-ethanol industry has an edge over the Brazilian counterpart, the U.S. government currently has a 54-cent per gallon import tariff in place against Brazilian sugarcane ethanol, while also giving almost the exact same tax credit to U.S. corn producers.
Really, Brazilian sugarcane ethanol producers are almost $1 per gallon in the hole, before they even get started in America. Amazingly, the solution is infuriatingly common sense. Get rid of corn subsidies and sugarcane tariffs and the price of corn drops almost immediately, as sugarcane ethanol replaces its counterpart.
Chris Jones of FoodNavigator-USA reported, "The head of the Federal Reserve said that demand for ethanol produced from corn - the main biofuel crop in the US - was pushing up food prices in the US, although it was hard to assess exactly how great that impact was. And he said that other crops, such as soybeans, were also being affected as farmers switched to more lucrative corn production, in turn pushing up prices for those crops as well."
See, politicians and policy makers know exactly what's going on and they know protective trade policy is the single greatest catalyst to elevated agriculture prices around the world. But dropping tariffs, like the 54-cent Brazilian sugarcane ethanol block, would take a chunk out of the U.S. ethanol industry, which is heavily supported through lobbying of companies like ADM. Fact is, keeping the tariff in place is just "business as usual" on Capital Hill, regardless if people are starving around the world.
The entire situation is truly very, very sad - in the larger picture of humanity - as once again, we see money sweeps the needs of real people under the rug. However, the U.S. government also knows that removing the sugarcane tariff, agricultural trade would kick up immensely - globally - while easing the prices of commodities, which in turn, could stimulate a massive reversal in the U.S. dollar.
The U.S. government doesn't want the U.S. dollar to go too much lower, however, it also doesn't want the greenback to stage a massive rally either. If the U.S. dollar were to really gain upside momentum, America's national debt would increase - in real dollars - as foreign currencies decline.
Funny thing: British Petroleum (BP | news | PowerRating | PR Charts ) just announced that it is taking a 50% stake in "Tropical BioEnergia SA, a joint venture established by Brazilian companies Santelisa Vale, the second-largest sugar cane crusher in Brazil, and Maeda Group, one of the largest cotton producers in the world, which is constructing a 435 million liter-per-year ethanol refinery in Edéia, Goias State, Brazil."
And here's the kicker that will blow your socks off: The 54-cent per gallon tariff for Brazilian sugarcane ethanol is set to expire on December 31, 2008.
Do you think U.S. politicians will truly allow the tariff to expire, especially with over 120 corn ethanol plants operating in the America now - and another 72 on the way?
The Bottom Line:
If the 54-cent per gallon tariff is allowed to expire this December, Forex traders could see one of the largest rallies in the U.S. dollar - in decades. However, should the tariff be kept in place, global GDP will continue to struggle, while central banks continually fight inflation. The U.S. dollar is likely on the eve a reversal, but the sugarcane tariff is the single largest key to how fast the greenback recovers.
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