As long as the Federal Reserve continues to print dollars to buy Washington’s debt, I’m long-term bearish on the dollar.
But I don’t think an outright currency collapse is likely to happen anytime soon in the U.S. And I don’t think the U.S. dollar will lose its reserve status anytime soon either.
Fact is, for the U.S. dollar to stop being the world’s reserve currency, there needs to be a suitable alternative reserve currency. And such an alternative simply doesn’t exist right now.
The dollar may be “ugly.” But it has plenty of competitors in the “ugly contest” going on right now between the world’s major currencies.
To put it another way, for capital to leave the dollar all at once it has to go somewhere.
And right now, the survival of the euro is highly questionable…the Japanese government has too much debt of its own to make the yen a credible option…and the Chinese yuan is not yet a convertible currency.
There is some talk of a basket of currencies supervised by the IMF replacing the dollar as the world’s reserve currency. But this isn’t very credible either.
Can you imagine investors placing their faith in the technocrats at the IMF? I can’t.
A much more immediate and worrying crisis is in the world’s food supply.
Food prices have skyrocketed over the last six months. This is particularly worrying for overseas investors.
In India, food inflation is running at about 20% a year. And the price of onions—a staple in India—is up by about 70%. In China, people are hoarding cooking oil, despite the government’s explicit ban on hoarding. And in Algeria and in Jordan people are rioting over flour and bread prices.
This crisis is very real. And it is happening NOW.
There are three main reasons why food prices are going higher from here:
1) Extreme weather – Last summer, droughts and heat waves devastated Russia’s wheat crop. This year, we’re seeing heavy flooding in Australia and extreme cold weather conditions in Western Europe and the U.S. If the current erratic weather patterns continue into 2011, the price of key foodstuffs, especially grains, could spike even further.
2) Growing demand from the emerging markets – It may sound obvious, but the more people there are to feed in the world the greater the demand for food there will be. The United Nations forecasts that by 2050 the global population will grow from the current 6.8 billion to 9 billion. And 98% of that growth will come from the emerging markets, where the growth in the middle class is also the strongest. This means more demand for meat…and more demand for grains to fatten livestock. Meanwhile, the amount of arable land is relatively fixed—meaning supply will struggle to keep up with demand.
3) Rising oil prices – A barrel of oil trading in New York is now selling for over $90 in the futures market. And analysts predict that oil will reach $100 per barrel this year. As the price of oil rises, so does the cost of manufacturing fertilizer and transporting food from farms and processing plants to consumers. For example, when crude oil prices topped $147 in 2008, rice prices tripled over six months.
Two Ways to Profit…And Help Solve the Food Crisis
I believe rising food prices will pose the real crisis this year. And I believe investments in agricultural commodities—things like wheat, corn, soybeans and cotton—will outperform by a wide margin investments in gold…and even oil.
My favorite way to play the situation is to invest in the companies that can help boost farm yields: fertilizer makers and agribusiness companies.
One overseas agribusiness stock I like is Swiss crop protection specialist Syngenta AG, which you can buy on the New York Stock Exchange in dollars under the ticker symbol SYT.
The Market Vectors Agribusiness ETF (NYSE:MOO) tracks a basket of agribusiness stocks linked to the DAXglobal Agribusiness Index. And it’s another great way to play this powerful global trend.