I have been monitoring growing food shortages (particularly of freeze-dried storage foods) and food inflation for several months. Both are quietly accelerating because of a perfect storm of multiple drivers:

Impact of the Japanese Tsunami & Nuclear Reactor Meltdown

Thanks to disaster fatigue, most Americans have already forgotten about the ongoing mess in Japan. 99% of the press coverage is focusing on the nuclear meltdown at the Fukushima nuclear reactors. There has been virtually no coverage of the impacts of the crisis on the U.S. economy and on commodity markets.

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Supply Chain Distruptions: Both Japan and the United States have grown increasingly dependent on global just-in-time (JIT) delivery zero inventory supply chains. The Japanese are discovering the downside of JIT – when things go wrong, industry and commerce shut down and the people starve. For lack of fuel, deliveries are not being made. For lack of parts, factories through out the world are shutting down. This has hit the automotive industry  particularly hard. Toyota will have to shut down all of the U.S. car factories because they are rapidly running out of parts for 80% U.S. manufactured cars that have a small percentage of parts made in Japan. Many Japanese grocery stores, particularly those in Tokyo and to the North, are running low on food and bottled water. Why should Americans care about Just-in-Time inventory problems in Japan? The reason you should care is that our food supply system uses the same system to minimize inventory and is just as vulnerable to disruptions.

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Japanese Food Production Problems: Japan imports approximately 80% of their food. Their local food production is primarily vegetables and fishing. The region North of Tokyo is one of their major fishing and agricultural regions. My best guess is that about 25% of Japanese food production has been lost between the tsunami and the reactor meltdown. The tsunami devastated the Japanese fishing fleet and fish processing facilities in Northern Japan. It also appears to have contaminated and destroyed a substantial portion of Japanese rice and vegetable production in these areas. The Fukushima nuclear reactor meltdown has already guaranteed that all lands within a 50 mile radius are permanently contaminated and will become part of a future exclusion zone comparable to the one surrounding Chernobyl. The longer these four reactors and their fuel rod storage areas continue to melt down, the wider this radius could be. The worst case scenario would be a 200 mile exclusion zone. However, my best guess is that all agricultural production will be lost within a 200 mile radius while the cities like Tokyo will simply be decontaminated at great expense. The net result from a food perspective is that Japanese demand for food imports just increased 5% to 85% of their total demand. Given their wealth, the Japanese will not starve – they will drive food prices higher and price others into starvation.

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Developing U.S. Treasury Meltdown & Currency Crisis

The U.S. Treasury is getting increasingly desperate as we appear to have finally reached a tipping point. For the past three years, the country has run annual budget deficits in excess of 10% of GDP. We have relied on cheap borrowing at interest rates below 1% to prevent collapse. Without this deficit spending, the economy would contract at least 30% more from current levels. One buyer after another has stopped buying U.S. Treasuries. Russia dumped their Treasuries over a year ago. China stopped buying more. Pimco, one of the largest U.S. based investors in Treasuries dumped their entire portfolio of Treasuries a week before the Japanese earthquake. Most of the Arab oil producers have stopped buying Treasuries and several have started selling their portfolios in desperate attempts to buy off discontented populations. The Japanese were the last major buyer. That is until the Earthquake struck. The Japanese 9.1 magnitude Earthquake, 77 foot tsunami (the peak wave proved to be 77 feet high, not the 33 foot reported shortly after it hit), and the four nuclear reactor meltdowns at Fukushima have proven to be the ultimate Black Swan Event.  Japan is now facing rebuilding costs of at least $309 billion. The ultimate cost when one accounts for the full impact of the Fukushima meltdowns, the global supply chain disruptions, and lower stock prices will likely exceed $1 trillion. For over 20 years, investors world-wide have played the carry trade borrowing in Yen to invest in Dollars. The Yen-Dollar carry trade is being rapidly reversed as Japanese investors, financial institutions, and insurance companies liquidate their foreign investments. Overnight, Japan switched from a major buyer of U.S. Treasuries to being a forced seller of Treasuries. The net effect is that there are no remaining major foreign buyers of Treasuries and the U.S. Federal Reserve has been forced to print even more money. They now have no choice - Either massively print Dollars to monetize the debt (causing major inflation and probably hyperinflation) or allow interest rates to rapidly rise from their artificially low levels to levels that would make U.S. government interest payments more than 50% of all government spending, trigger a rapid economic collapse, and a default on the outstanding U.S. debt. Either route will cause the prices of imported commodities and food to increase. The European Global Europe Anticipation Bulletin (GEAB) put out a warning this week expecting a systemic crisis in the second half of 2011 and warning their readers to prepare for a U.S. Treasury meltdown:

Beyond its tragic human consequences (1), the terrible disaster that has just hit Japan weakens the shaky US Treasury Bond market a little more. In the GEAB No. 52, our team had already explained how the sequence of Arab revolutions, this fall of the “petro-dollar” wall (2), would translate during 2011 into the cessation of the massive purchases of US Treasury Bonds by the Gulf States. In this issue, we anticipate that the sudden shock experienced by the Japanese economy will lead not only to the halt in US T-Bond purchases by Japan, but it will force the authorities in Tokyo to make substantial sales of a significant portion of their US Treasury Bond reserves to finance the enormous cost of stabilization, reconstruction and revival of the Japanese economy (3).

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With Japan and the Gulf States alone accounting for 25% of the total 4.4 trillion USD of US federal debt (December 2010), LEAP/E2020 believes that this new situation which is asserting itself during the first quarter of 2011, against a background of China’s increasing reluctance (holding 20% of US Treasury Bonds) to continue to invest in US government debt (4), carries the seeds for the collapse of the US Treasury Bond market in the second half of 2011, a market that now has only a single buyer: the US Federal Reserve (5).

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But beyond the Japanese and Arab shocks (see GEAB N°52 ), the process of US Federal debt market implosion in the second half of 2011 is accelerating under the effect of four other events:

. the introduction of budget austerity in the US (as anticipated in GEAB No. 47) which condemns US local authorities to a major crisis in the market for their debt (“Munis”)
. impossible for the Fed to introduce QE3
. the inevitable rise in interest rates against a backdrop of global inflation
. the end of safe-haven status for the US currency.

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Of course, these events are related and, characteristic of a major crisis, we are entering a period that will see a mutual strengthening of their effects, leading to this sudden shock in the second quarter of 2011. Incidentally, we could add a fifth event: the complete decisional paralysis of the US powers. The daily confrontation on virtually all subjects, between Republicans (hardened by the “Tea Parties”) and Democrats (demoralized by an Obama administration that has betrayed the substance of its campaign promises (7)), tends to show, a little more each day, that Washington has become a sort of “Ship of Fools“, tossed about by events, without any strategy, without willpower, incapable of action(8); in other words, according to LEAP/E2020, when the US Treasury Bond collapse begins, one cannot expect anything from Washington other than a colossal squawking that will only worsen the crisis.

Competition For Limited Supplies

While the United States complacently relies on a Just-in-Time inventory system for food, foreign buyers are signing long-term contracts to purchase both U.S. and Foreign food production. My day job involves work helping structure and broker commodity deals – mostly agriculture, energy, and precious metals. One of my major clients has multiple Middle Eastern buyers who are signing major long-term contracts for sugar, wheat, and other food commodities. Their customers are Middle Eastern countries who are desperately trying to secure food for their populations – largely as insurance against Egyptian style revolts from their people. China, Japan, and South Korea have also been major buyers of U.S. food exports and have been locking down supplies under long-term contracts. Russia and Ukraine banned the export of wheat at the same time global reserves are at their lowest levels in five years. Unfortunately for Americans, our government’s Commodity Credit Corporation sold all of our food inventory to foreigners:

As of Feb. 7, the latest monthly look-see, the CCC held not one pound of butter, nary a slice a cheese, no corn, not one soybean and zero wheat. In fact, the CCC currently has nothing in-hand, on hand or near-to-hand. Not one bushel, hundredweight, pound or bale of barley, sunflowers, butter, cotton, dry peas, flax, nonfat dry milk, honey, chickpeas or sorghum, let alone one kernel of any major food or feed grain.

Even though the United States might be a bread basket for the world, much of our food production may be exported for hard currency and may not be available for Americans to eat in the near future.

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Furthermore, humans must compete with biofuels. 40% of the U.S. corn crop was used to make ethanol fuel. Burning food is insanity, especially as humans starve as the corn needed to fill one 20 gallon gas tank of one vehicle is enough to feed one person for a year.

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Crop Problems

Wheat production is down significantly in Russia, China, Australia, and the United States. Bloomberg reports:

In the U.S., snow and rain saturated soil and increased the risk of flooding that may delay spring-wheat planting in North Dakota, the biggest producing state. Dry weather in Kansas, the second-biggest grower, left only 26 percent of crops in good or excellent condition, the worst since 2006, according to the USDA.

Meanwhile, wheat rust has devastated wheat crops in Africa, the Middle East, and China. Flooding is causing major problems for wheat crops in Canada and North Dakota. Drought continues to be a problem in much of Texas, Oklahoma, and Kansas.

Shortages

Long-term storage foods such as freeze-dried or dried foods packaged for 20 to 30+ year storage lives are often the canary in the food shortage world. Shortages in this space can give hints about potential shortages in the broader food markets. I have already reported extensively on Oregon Freeze Dried halting sales of their Mountain House food and the long lead times and back orders at many of the canneries. I am getting more and more reports of shortages – with wheat being the latest commodity that is getting harder to find:

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• Coop – No More Wheat: LostonRichwood at the Tree of Liberty reported that their Coop warned them that “‘the hard wheat we have NOW is ALL we are getting? he said that all the rest of this years harvest, including the fall harvest AND next years harvest have all been bought (by foreign buyers) and that we only have what we have”.
• LDS Canneries: I have received multiple reports of different LDS Family Home Storage Center canneries being out of wheat or other products. One reported that one of the 25 pound bags of wheat from an Indiana location appeared to have ergot. The LDS store has backorders for wheat, rice, and starter kits. The Washington DC cannery was out of flour (I guess a lot of their DC area customers don’t have grain mills) and dehydrated carrots. The Spokane cannery ran out of hard red wheat and powdered milk. However, others have reported no shortages at their local canneries.
• Emergency Essentials: They are “backordered” on superpails of Wheat, Oats, and pretty much all pails except for instant milk, spelt, and popcorn. They also have backorders for many of their Provident Pantry freeze dried offerings.
• Amish Stores: I have a report that some Amish stores are out of wheat.
• Tennessee Grain Mills: I have another report that much of the wheat from Tennessee has vomitoxin and is unfit for human consumption.

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What to Do: Follow the Alpha Strategy

We can expect food prices to double or triple in the next year if we muddle along. Food will be completely unaffordable for most Americans if we have hyperinflation — something that is looking increasingly unavoidable and about to hit in the near future. Over thirty years ago, John Pugsley published a book called The Alpha Strategy. This book is available as a free PDF download. The core concept behind the alpha strategy is that if inflation is inevitable, invest in production capabilities and build an inventory of the food and other consumables you consume offers a better investment return than most other investments. You only buy the amount of inventory you or your family would use before it would spoil. He specifically cites food, cleaning supplies, toiletries, automotive consumables, clothes, building materials needed for maintenance, and tools as items to store and purchase in advance. Note that at the time this was written, there were very few sources of freeze dried storage foods. Today, we have additional options for long-term storage of food.

There was a bit of an additional surge in demand for storage food after the Japanese disaster but this wave has been followed by another wave of complacency and normalcy bias. Prices are not going to go down and shortages will inevitably get worse. Given known shortages, your three best options for food storage are:

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LDS Canneries: The LDS Family Home Storage Centers have the absolute best prices and are open to everyone. Call for hours and times when they are open. Although many are reporting crowds and shortages, they do get regular weekly shipments so today’s shortage may be back in stock in a few days. Some locations are busier than others.

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Shelf Reliance: Shelf Reliance has two month inventories on virtually their entire product line except for the freeze-dried vanilla yogurt. They are now quoting one week shipping times, down from two to three weeks as little as a week ago. They have been adding capacity. Their pricing is extremely competitive. They have a monthly buyer program called ‘The Q Club’ that is an excellent way to set a budget and stock up every month according to your customized plan. Shelf Reliance only sells to customers in the United States and Canada, does not sell to government customers, and has previously announced that they will give priority to their consultants and their ‘Q Club’ customers in any situation involving rationing or long backorders.

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Honeyville Grain: They have wheat and most other storage foods in stock and are shipping fast.

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