Below is another section from the major article. This section is not completely finished, but is fairly close (needs another 2 or 3 hours of work).

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1) Chinese demand driving commodity prices

I have been predicting hyperinflation would start in China, leading to the dollar's collapse. Now it is happening. Chinese efforts to boost domestic consumption while supporting exports with its dollar peg and adopting loose monetary policy are creating enormous demand for raw materials. As a result, China is sucking up the world's supply of raw goods, putting massive upwards pressure on commodity prices, especially soybeans.

The dollar peg fuels demand from Chinese export sector

Since the dollar September last year, the yuan has been hovering around 6.83, as shown in the chart below.



As the Chinese yuan has been pretty much pegged to the US dollar and the dollar has been quickly losing value, the yuan has depreciated 6.9 percent since February this year, greatly helping China' s export sector. September's month-on-month import and export numbers showed the seventh consecutive month of positive growth since March. While China's exports have dropped significantly, its market share has not, and its trade surplus keep growing.

The dollar peg, by subsidizing China's export sector, is creating tremendous demand for raw materials.

China' s exploding money supply driving up demand

As I explained in my article on Hyperinflation in China, China' s dollar peg and trade surpluses fuel monetary inflation.

The US's trade deficit requires China to print money!

The little discussed downside of the dollar peg is all the money China has to print to maintain it. China's Central Bank puts the extra dollars it receives from its trade surplus into its growing foreign reserves and then prints yuan to pay Chinese exporters. This results in an increase in China's base money supply by an amount equal to the increase in its foreign exchange reserves. While China's ability to keep accumulating US reserves is endless, its ability to keep its money supply under control is not.

China' s money supply has exploded since China re-pegged. Beijing has scrapped lending quotas, adopted a loose monetary policy, and kept interest rates at four-year lows to bolster liquidity and promote growth. The policy has obviously worked: Chinese banks have extended a massive 8.67 trillion yuan ($1.27 trillion) in new loans this year. To put this lending in context, consider the following:

A) 8.67 trillion yuan far exceeding the China' s initial full-year target of 5 trillion yuan.
B) New bank lending in the first nine months of this year is up 250 percent from the same period last year.
C) China has lent out more money in the first four months of this year than in the whole of 2008.

The effects of all this overextension of credit can be seen in the graph of Chinese money supply growth below.



China' s increasing supply of Yuan means that a lot more money is chasing its domestic supply of commodities, and bank lending is multiplying the effect of the government's spending. As a result, the prices of commodities in China are higher than the rest of the world, and this price imbalance is leading to record commodity imports (Chinese producers are buying commodities abroad rather than pay higher domestic prices).

China has no plans to abandon its loose monetary policy.

Chinese Working To Boost Domestic Consumption

China is turning to its poorer residents to help revive growth instead of Western consumers. It is dismantling all the measures it put in place over the years to suppress demand to fight inflation. It has dropped restrictions on purchasing property, eliminated price controls, got rid of loan quotas, lowered interest rates, ceased its sterilization efforts, etc… China has also been speeding up economic and political reforms to boost domestic consumption. A few of the measures include:

1) Raising subsidies for auto replacements from 1 billion yuan to 5 billion yuan.
2) Allocating 2 billion yuan to encourage home appliance upgrades.
3) Allowing non-deposit-taking institutions to offer consumer loans to Chinese citizens
4) Slashing the minimum financial requirement for commercial property investments for the first time in 13 years (from 35 percent to 20 percent).
5) Earmarking 6 billion yuan (878 million dollars) for low-rent house building projects across the country.
6) Issuing new rules to allow insurers to invest in corporate bonds without bank guarantees and allow smaller insurers to trade stocks directly.
7) Creating its own "NASDAQ" (the ChiNext).
8) Encouraging the creation of new commodity derivatives (trading in steel futures, rice futures, and polyvinyl chloride (PVC) futures have been launched this year).
9) Promoting Shanghai as a global financial center and a major gold trading market.
10) Supporting eleven national research programs with at least 62.8 billion yuan.
11) Quickly expanding its social security net and allocating 728 billion yuan ($106 billion, a 29.4 percent increase from prior year) for education, medical and health care, social security, employment, low-income housing and culture.
12) Developing its own credit rating agencies and sovereign credit rating standards
13) Opening its capital markets and currency to the world.

China' s efforts are working. Domestic consumption has become the driving force of the nation's growth. China has already surpassed the United States last January to become the world's largest auto market based on monthly sales. Chinese web shopping is reaching record highs. Additionally, with a significant part of China's population at the age of peak consumer spending, domestic consumption holds the potential for a period of extremely rapid growth over the next decade.

China's efforts to boost consumption (economic liberation, massive government spending, etc...) are hugely inflationary, creating tremendous hunger for raw materials.

Chinese demand driving commodity prices

Strong Chinese demand for the raw material is driving up commodity prices across the board. China is importing record quantities of everything from wood to sugar. The price of copper, used for autos and construction, had its biggest six-month gain in 22 years as Chinese buyers boost imports to records to replenish stockpiles. Chinese demand has also been a key driver of US soybeans prices this year. First quarter imports alone were up an incredible 31% from the same period in 2008. The Chinese government has been purchasing soybeans to protect the interests of domestic peasants and encourage them to keep planting. This is forcing China to import more soybeans from America.

Eventually Chinese demand will drive up commodity prices to an extent which forces it to drop the dollar to contain domestic inflation. Judging by its incredible levels of commodity imports, this event will happen in the very near future.

2) Just-in-time inventory system facing collapse

Since 1980, a combination of oversupply, ultra high interest rates and new business practices quickly turned the idea of owning extra inventory into financial heresy of the highest order, leading to just-in-time inventory management. Just-in-time inventory management means that everything is delivered just as it is needed or nearly so, which lowers inventory levels and frees up cash for other purposes. The last two decades of low inflation have lulled purchasing managers into believing that needed materials would be cheaper tomorrow than today, leading to the widespread use of just in time systems. In almost every corner of the globe and in almost every organization, spartan inventories have become an essential cost-cutting measure to remain competitive.

Users of commodities and manufactured goods today have business models that rely on weekly, or even daily, calculations to determine their inventory needs. For example, Wal-Mart tries to keep much of its inventory on the road in trucks to maintain low costs and flexibility.

Unfortunately there is a problem: just-in-time inventory is COMPLETELY DEPENDENT ON A STABLE DOLLAR. In a high inflation environment, every act of restocking inventory becomes a painful experience, destroying the just in time management' s cost saving justifications. If the dollar goes into a freefall, the entire global just-in-time system will collapse.


3) Catastrophic fall in global food production


*****Catastrophic Fall in 2009 Global Food Production*****


Water shortages

Of all the environmental trends that are shrinking the world's food supplies, the most immediate is water shortages.

[unfinished]

Longer term, the water situation is even scarier. Two billion people face acute water shortage this century as Himalayan glaciers melt. The Tibetan plateau (The glaciers of the Himalayas) is the faucet for much of Asia's drinking water, and the melting glaciers of the Himalayas feed the major rivers of China, India, Pakistan, Nepal, Bhutan, Bangladesh, Myanmar, Thailand, Vietnam, Laos and Cambodia. The shrinking Himalayan glaciers, which could melt entirely by 2035, will turn Chinese and Indian rivers like the Ganga and the Yangtze into seasonal rivers that dry up in summers, when irrigation needs are greatest. The countries dependent on the glaciers of the Himalayas contain 85 percent of the people in Asia and nearly half the world's population. The situation is an international political time bomb.


Australia's Food Bowl, Like The World's, Is Drying Up
This year thousands of acres went unplanted by Californian farmers coping with drought
Cities Are Running Out Of Water


Desertification

Desertification refers the spread of existing deserts and the creation of new ones. desertification isn't the result of global warming (thought it is possible global warming is making it worse). It is the result of reckless and extensive overuse of drylands around the world.

1930's Dust Bowl is a perfect example of desertification. When the United States entered an economic recession in the 1920s, farmers in Western states tried to raise profits by plowing and planting more acreage with new mechanized farming methods. Within a decade, a massive drought hit the entire country. Strong winds swept across the Great Plains, stirring up loose topsoil that had been displaced by overplowing and overgrazing of cattle. The results were dozens of epic dust storms that swallowed whole cities in black clouds and turned day into night.

Today, the UN is warning that parts of the world could become 'economic deserts', unviable for people or agriculture, and may have to be abandoned. Even in rich countries, people are hitting the limits of what can be done with money and infrastructure because there simply isn't enough water anymore. Disaster is feared as desertification spreads.

1) In China's northwest, desertification has escalated from 1,560 sq km annually in the 1970s to 2,100-2,400 sq km in the 1990s. Dust storms from the Gobi desert regularly blow through Beijing, and the government's response is getting more desperate: Chinese authorities have begun telling hundreds of villagers that farming will cease and that they will have to give up their animals.

2) Strong desertification processes have been developing in Latin America with several countries of the region, as well as significant sectors within some countries, in a state of water stress. This situation is projected to worsen significantly over the medium term.

3) Decades of war and mismanagement, compounded by two years of drought, are wreaking havoc on Iraq's ecosystem, drying up riverbeds and marshes, turning arable land into desert, killing trees and plants, and generally transforming what was once the region's most fertile area into a wasteland.

4) The Sahara desert is encroaching into the Nigerian landmass at the speed of 600 meters per annum, thereby threatening the country's food base. Most villages in the northern states have already been overtaken by sand dunes.

5) 90 percent of the water in Lake Chad, which is considered to be the sixth largest in the world and is bordered by four countries (Chad, Niger, Nigeria and the Cameroon) has been lost to the adverse effects of climate change. Lake Chad served as source of fresh water to the more than 30 million people living around its bank.

6) The Sahara Desert is crossing the Mediterranean, and the livelihoods of 6.5 million people living along its shores could be at risk.

7) 74 million acres of fertile land along the Mediterranean is turning to desert, giving rise to the term Sahelisation (ie: becoming part of the Sahara desert).

8) In Egypt, brackish groundwater has already compromised half the country's farmland.

9) Aquifers around the Po Delta in northern Italy are also showing signs of saltwater contamination.

10) Spain has implemented its first Program of National Action against Desertification after recognizing that 37 percent of the country is at risk from desertification and is in danger of becoming "eroded forever".

11) A new desert is forming 250 km from the 'Garden City of India', Bangalore. This new desert is the result of continued indiscriminate water use by village inhabitants even as sand from floods and wind started covering the region. Now thousands of acres of land are covered by sand dunes.

12) This September, Sydney residents woke to scenes from a Hollywood apocalypse movie as the worst dust storm in 70 years, carrying an estimated 5 million tons of soil from drought-ravaged farmland, turned the sky blood red.



Save for the Antarctica, desertification affects all continents. New deserts are growing at a rate of 20,000 square miles (51,800 square kilometers) a year. More than 70 percent of drylands in Africa, Asia and Latin America that are being used for agricultural purposes are already experiencing the effects of desertification. Desertification leads to famine, mass starvation and unprecedented human migration.

Low commodity prices


Recession Compounds World Food Crisis
Across the nation, farmers are making plans to cut their production of corn, wheat, rice, peanuts, beef, pork, poultry and milk.

The low prices at the end of 2008 discouraged the planting of new crops in 2009. In Kansas for example, farmers seeded nine million acres, the smallest planting for half a century. Wheat plantings this year are down about 4 million acres across the US and about 1.1 million acres in Canada. So even discounting drought related losses, the US, Canada, and other food producing nations are facing lower agricultural output in 2009.

Falling Milk Prices Kill Cows


Lack of credit

A lack of credit for farmers curbed their ability to buy seeds and fertilizers in 2008/2009 and will limit production around the world. The effects of droughts worldwide will also be amplified by the smaller amount of seeds and fertilizers used to grow crops.

prices may rise because a lack of credit for farmers curbed their ability to buy seeds and fertilizers and may limit production


Adverse weather conditions

[unfinished]

Middle East and Central Asia suffering worst droughts in recent history

Texas Drought Conditions Becoming Historic
The Texas drought continues

*****Torrential Rains Devastate India's Wheat Crop*****

an "UN-FREAKIN-BELIEVABLE" Harvest

*****Rains Swamp Crops And Wash Away Any Hope Of A Decent Harvest*****



Disaster in the making: the 2009/10 food crisis

If you are keeping track, so far we have:

1) Increased demand
2) Decreased supply
3) No buffer inventory

Sounds bad like a pretty bad situation right? Well, it gets worse. To "keep everyone calm" and "prevent panics", governments are lying about the looming food crisis.

… some experts and governments, in full cognizance of the facts, want us not to create panic and paint a picture of parched crops and a looming food crisis. This, they say, would push up food prices unnaturally, lead to hoarding and ultimately result in a situation where many more millions across the world would go hungry. And whether it is the developing world or the developed, it is those at the bottom of the pyramid who are the most affected in such scenarios.

This leads to a confusing divide between reality and government pronouncements, or even between the perspectives of government departments.

The food crisis should have started Last June

At the beginning of last June, concerns were mounting over the sharp rise in food costs. Faced with the terrible outlook for 2009 global wheat output, agricultural markets were getting fairly nervous about the tightness in food stockpiles. China was chewing through US old-crop soybeans with month after the month of record exports. Hedge funds and other big institutional investors had begun to pour money into the agricultural market, helping to drive commodities prices higher against the weakening dollar.

Against this backdrop, the USDA began a campaign to suppress rallying food staples. To start off, the USDA magically discovered an extra 113 million bushels of soybean supply within its “residual use” accounting column to ensure soybean end stocks would not slide below 100 million bushels. Even worse, the USDA began releasing production estimates which were pure madness. For example, despite a 40% drop in planted acreage, The USDA left their production estimate for Argentina's wheat crop unchanged at 11 MMT, a stunning 33% higher than last season' s 8.3 MMT (The Buenos Aires Grain Exchange Argentine was predicting a 6 MMT wheat crop at the time). The USDA also announced that wheat ending stocks would increase in 2009/10 and that world wheat stock to use ratios would climb to a comfortable 28.5pct. The media became filled with bearish stories based on the USDA' s bearish propaganda: the US will not run out of beans, prices will ration demand, China have more than enough and will go away, etc. Rumors of cancelled soybean exports sales were widespread (these cancellation never happened). To culminate everything, on June 30^th the USDA shocked the trade with estimates showing record soybean and near record corn plantings. Somehow, the USDA found a million more wheat acres, one and a half million more soybean acres AND two million more corn acres than they had in March!

Given the stark contrast between USDA numbers and reality, there is no way that the flawed data released last June was an innocent mistake. The USDA deliberately mislead investors about the true state of the world's food supplies.

The August 2009 Soybean Crisis

While the USDA might have successfully changed perceptions about the food supply, it could not alter the reality. With Brazilian soybean supplies on the open market having all but ran out, the US was left as the only shop in town, resulting in monstrous soybean sales to China. By the end of August grain movement in the US came to a virtual standstill, with farmers are mostly sold out of soybeans. Those few soybean end-users (ie: feedmakers and poultry producers) were caught short, and were forced to pay prices as high as they paid at the very height of the bull market a year ago in 2008.

Soybean shortage causes intense backwardation

The struggle to secure quick-delivery soybeans in the US cash markets sent soybean futures into intense backwardation (backwardation is when cash prices are higher than future prices). Desperate Midwest crushers were bidding up to $2.72 a bushel over CBOT September futures contracts to acquire scarce soybean supplies. Some processors in the heart of the Midwest soy belt grew so desperate for soybeans to crush that they paid to transport some of the early harvest from the Mississippi River Delta northward to Illinois.

The chart below shows the backwardation of soybean futures on August 28. Notice the huge price gap between promises to September and November contracts. Notice the even larger gap between cash prices and September futures.

The threat posed by soybean backwardation

Futures markets are dependent on confidence in the same way as banks. Futures markets offer promises to deliver commodities on specific dates (commodity IOUs) and Bank offer deposits, which promises to deliver cash on demand (dollar IOUs). Futures markets and banks issue far more IOUs then they have cash and commodities on hand to make good on these promises. For both futures markets and banks, a loss of faith in the ability to make good on these IOUs is fatal. Had the backwardation in soybeans continued into September, a panic could have quickly developed, spreading other agricultural commodities.

New wave of USDA propaganda

The intense backwardation in soybeans did not last. In the first week of September, the US launched a new attack on soybean markets which included:

1) More insane production estimates predicting a record breaking soybean crop.

2) Rumors that China was planning on unilaterally terminating OTC soybean derivative contracts (ie: more rumors about China cancelling outstanding export sales).

3) Rumors about a huge supply of old crop soybeans that were going to be dumped on the market to make way for the “record” 2009 corp.

4) The sale of 104.5 million bushels of soybean futures to reinforce the idea that soybean prices were headed for collapse.

5) Helpful news stories warning farmers about a imminent price collapse and suggesting they sell before its too late.

Below is a good example of what this USDA propaganda looked like:

PRICE COLLAPSE LOOMS

Despite the strength of the current market, observers said prices could easily plunge as the Midwest soybean harvest finally gets rolling in late September or early October.

Barring an early freeze that could cut yields, U.S. farmers are expected to bring in a bumper crop. The U.S. Department of Agriculture has projected U.S. soybean production at 3.199 billion bushels, an all-time high.

Export buyers and crushers may find themselves awash in soybeans, triggering a collapse in the cash market.

"When it breaks," the eastern soymeal broker said, "it's going to be swift and violent."

The USDA' s scare tactics worked and pressure in the soy cash market eased as. Soybeans trickled into grain terminals and processors in Nebraska, southern Illinois and Iowa as farmers sold their stocks before the “price collapse”. Old crop sales saw net cancellations of 58.8 TMT as buying switched to the cheaper new crop with 1.11 MMT export sales. Exporters backed off their spot soybean bids. Crushers decided to shut down for two weeks and wait for new-crop beans to be available. Soybeans on the Chicago Board of Trade fell to a five-month low.

The consequence of USDA propaganda


Despite what the USDA wants us to believe, the food situation hasn' t improved. There is no bumper US harvest bail the world out. Asian demand for US soybeans is surging. The reality of food shortages in 2009/10 remains unchanged.


On the other hand, USDA propaganda has succeeded in making the situation much worse.


1) Waiting for new crop has created a lot of pent up demand


Many US processors extended their plant downtime maintenance in July due to both weaker profit margins and the unwillingness to outbid exporters for spot soybeans.
As a result, US soybean consumption has plunged in the last three months, as seen in the graph of monthly US soybean crush data below.



All the soybean crushers who shutdown production waiting for the new crop will be crushing far more soybeans than normal to make up for lost time, which means there is a lot of pent up demand.

An insane amount of outstanding export sales for US soybeans

Below is a graph of total outstanding export sales for US soybeans going back ten years (data straight from the USDA' s website). As of October 16, the US has already committed to exporting 19,716,862 Metric Tons (724 million bushels) of soybean from the 2009 crop. The United States has never had a backlog of exports sales this size. If the USDA' s record harvest never comes in, things are going to get ugly real fast!

Everyone is waiting for the record harvest that doesn't exist!


2) Low prices are causing to overconsumption and underproduction


New crop of soybeans is already being rapidly consumed: early harvest from the Mississippi River Delta is being shipped to desperate Midwest crushers.


Even governments are being duped by the USDA production estimates, with grain exports pouring out of desperate Ukraine. Despite is 20% fall in grain production, cash-starved ukraine continues to export grain ahead of even last season's record pace. Because they are unaware of the food shortage facing the world, distressed sellers like Ukraine are mismanaging their grain supplies, and will have little grain available for export during the second half of 2009/10 (when global food shortage will be at its worse).

Meanwhile, farmers are allowing millions of bushels to rot in the rain because it is too expensive to harvest and dry them at current prices. Acres of spring wheat are going unplanted because


3) The USDA' s false estimates will lead to panic


USDA estimates have NO CREDIBILITY

Below are the latest USDA estimates for soybean production, imports, and exports. I highlighted in red the numbers that are worth noticing.

Thousand Metric Tons
Date Created 10/9/2009 8:44:57 AM

Some of the glaring problems with these estimates for 2009/10:

1) The USDA expects the United States to harvest a record breaking 88.454 MMT (Million Metric Tons). With soybean fields buried in snow across the Midwest, this seems highly unlikely.

2) Despite predicting that Chinese soybean production will drop by 1 MMT in 2009/10 (from 15.5 MMT to 14.5 MMT), the USDA is also predicting China will import 1.2 MMT less (from 40.7 MMT to 39.5 MMT). That makes absolutely no sense! If Chinese demand for soybean is soaring (see above) and Chinese production is down, for what possible reason would the USDA predict China' s soybean imports to be less in 2009/10?

3) India is suffering from the worst drought in over forty year, yet the USDA is expecting Indian soybean production to fall only 1% in 2009/10!

4) The USDA is predicting a 2% increase in soybean exports for 2009/10! In light of surging Asian demand for soybeans and the huge amount of export sales outstanding, predicting that the US will export only 35.5 MMT of soybeans is simply ridiculous.


The USDA's numbers don't add up. The shortages of wheat, soybean, sugar, etc will soon reach the point where no about of spin can hide them. As the world will realize there are a few a few months food supply missing, faith in the USDA will crumble, and panic will start. Prices of virtually all agricultural commodities will double or triple (sending the dollar into a freefall).

The world is heading towards a complete disaster

As a result of governments covering up about the looming food shortage over the last few months, there has been no stockpiling (which would have help ease the crisis). Worse, with the USDA predicting record crops for everything under the sun, end users were convinced to shift demand from 2008/09 (when world had a bumper harvest) to 2009/10 (which saw a catastrophic fall in production).