Truth and Lies Series – Part 2

Three more lies to distract us from the truth.

Lie 1: The BDI Is Falling Because Of An Expanding Shipping Fleet

A new disinfo tactic  in the past two weeks is the suggestion that the Baltic Dry Index is not falling because of decreasing demand for raw goods, but a growing fleet of idle freight vessels in an already tight market. That is to say, some analysts are suggesting that it is not demand that is falling, but the supply of ships that is growing.

While it is true that world freight fleets are to add 200 new ships, this is not to occur for another year and a half:

http://thestar.com.my/maritime/story.asp?file=/2011/1/10/maritime/7756404&sec=maritime

The BDI plummeted in 2008, and has not shown any signs of recovery since. This was not due to a new supply of ships, but directly tied to the global economic collapse. The “growing fleet” argument seems to be a distraction designed specifically because of the public’s growing awareness of the Baltic Dry Index and its implications.

Another poorly conceived argument is that the BDI is inaccurate because it does not take into account that smaller fleet vessels are seeing increased freight rates while larger ships are falling out of favor. It’s true, that if you only count the shipping frequency of smaller boats, demand appears to be rising (barely). However, I hardly see how this is a good thing. Increased demand for smaller boats means no one is shipping enough volume to make leasing a large vessel worthwhile. Smaller volume still equals smaller demand.

Lie 2: Food Inflation Caused By “Bad Growing Season”

It would appear that the “mystery” of exploding food prices has been solved, and according to a USDA report released this month, the culprit is “weak agricultural output” causing a diminished supply of staple grains in the U.S.:

http://www.usda.gov/oce/commodity/wasde/latest.pdf

This release was so shocking to markets because the report’s figures were so far below the USDA’s original estimates for harvest at the middle of this year, but why should we care about the USDA’s estimates? Are they not arbitrary? Why not look at the actual output for previous years compared to 2010 and get a real sense of what is happening?

If we are going to compare the crop outputs of 2010 to 2009, we should also keep in mind that 2009 was a record year for agricultural production. Did the USDA really assume that 2010 would meet or surpass such a bumper crop?

http://www.businesspundit.com/usda-crop-report-reveals-record-harvests/

Corn harvests reportedly dropped 5% compared to last year, however, 2010 was still the third largest crop on record. Soybean production was down only 1% from 2009. Cotton (not edible, but still important) was up 50% from 2009. Wheat was down less than 1% from 2009. One of the only grains affected in a substantial way in 2010 was Sorghum. The crop yield for Sorghum dropped 10% compared to 2009, but the planting area used in 2010 was 19% less than a year before, so this drop was to be expected:

http://www.farms.com/FarmsPages/Commentary/DetailedCommentary/tabid/192/Default.aspx?NewsID=37813

What does this mean? The U.S. had a GOOD year for crop output, not a bad one. And what about Russia’s summer disaster wheat crop? Are our exports picking up the slack of bad harvests overseas, causing prices to rise? Actually, warmer Russian weather in November spurred wheat production, helping alleviate the weaker summer yields:

http://www.allbusiness.com/agriculture-forestry/agriculture-agricultural/15345042-1.html

Are there dangers in world grain output due to weather? Yes, but not enough to warrant a doubling of commodity prices. The REAL concern of agriculturalists, not just in Russia but in many nations, has not been the weather, but the ever expanding costs of production itself! From fuels to fertilizers, the process of growing food is becoming more and more expensive. What is facilitating this surging cost of production? How about the one factor that no one seems to want to discuss; the devaluation of major currencies, most especially the dollar? I find it interesting that so much disinformation on supply and demand in commodities is hitting the news streams just as the Dollar and the Euro begin to unhinge. In my view, this engineered hysteria is meant to distract us from the collapse of our currency, and to create plausible scapegoats for the inevitable ill effects that devaluation will bring.

Lie 3: Oil Inflation Caused By Rising Demand

Same argument, different commodity. Oil output has been more than ample in light of the fact that oil consumption in almost every nation has fallen substantially in the past three years:

http://politicalcalculations.blogspot.com/2010/06/us-per-capita-oil-consumption-plummets.html

http://blogs.worldbank.org/prospects/category/tags/world-oil-demand

What about the surprise shutdown of the Alaskan pipeline this month? Is our supply in danger? No. According to the EIA (Energy Information Administration), the U.S. exports (that’s right, exports!) over 2 million barrels (2009 figures) of petroleum and petroleum byproducts a day, most of it from the Alaskan fields!

http://www.eia.doe.gov/dnav/pet/pet_move_exp_dc_NUS-Z00_mbblpd_a.htm

Apparently, Americans didn’t need that oil when the pipeline was working, so shutting it down certainly wouldn’t diminish supply here at home.

Oil is pegged to and traded in the world reserve currency; the dollar. Any devaluation in the dollar will have immediate effects on the value of oil. OPEC nations can and have been absorbing the inflationary costs, but they can only succeed in this for a short time. Eventually, the fundamental expenses will overwhelm them, and they will be forced to allow the price per barrel to take flight. That time has essentially come. Prices are likely to climb at breakneck speed in 2011, not because of demand, but because of the crumbling dollar.

4 comments for “Truth and Lies Series – Part 2

  1. ivan
    January 21, 2011 at 20:35

    James, I think you will find the rise in grain prices is caused by the US and EU mandating a proportion has to be used for bio-ethanol production.

  2. January 21, 2011 at 21:50

    Ivan, you do realize this is Rossa’s series, don’t you?

  3. Rossa
    January 22, 2011 at 08:44

    I don’t see how using a proportion of their grain for bio-ethanol would automatically lead to higher prices when you read that their grain stores were full in the summer and they didn’t know how they were going to be able to store the bumper harvest that was due. Excess grain should lead to lower prices not higher.

    http://www.reuters.com/article/idUSN2512608720100825

    With oil demand dropping as consumers are hit in the pocket something else has to be forcing the increase in the barrel price. A higher cost of oil always feeds into higher food prices as oil is involved all the way down the line.

    But what is causing oil to go to $100 barrel and forecast to go higher this year? If the Middle East are worried about the dollar collapsing and they are trading in the dollar they would want to account for it in the prices they seek.

    And one other small point to consider. When oil reached $150 a barrel we didn’t have petrol prices of around £1.25+ a gallon in the UK. So why have we got so high a price now that oil is below $100. It can’t all be to do with VAT and fuel duty. A hedge against currency devaluation may be a more likely explanation.

  4. ivan
    January 22, 2011 at 11:42

    Sorry James, it was the end of a rather frustrating day 🙂

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