Trader Talk

This story about rice shortages -- which we covered yesterday and has today reached the "general" media -- is a good example of how the public can misunderstand an event.

There are two things going on here:

1) stories about food commodity prices rising over the past few months has attracted speculative investment, and

2) a few stories in the popular press about the increasing price of foodstuffs has caused a small percentage of the population to act, by buying much larger quantities of certain foodstuffs than they normally would. A small percentage (my guess is maybe 3-5 percent of the households) may actually be "hoarding," that is, buying far larger quantities of food than they could consume in several weeks.

But is there a physical shortage of rice? The answer seems to be no; but if that is so, why is CostCo

COST loading...

Quote  |  Chart  |  News  |  Profile

[COST  Loading...      ()   ] limiting sales?

The answer lies in how a modern economy works: just-in-time inventory has become the standard. Under this methodology, stores do not stock large supplies of food, clothing, or anything else; they rely on computer models to accurately predict supply and demand. They rely on a supply chain that replenishes the products on a daily basis.

According to NewScientist:
1) a typical city has a 3-day supply of food;
2) a typical hospital has a 2-day supply of oxygen

Sound shocking? It hasn't bothered anyone, and it works fine, as long as something strange -- like hoarding -- doesn't occur.

Because when hoarding occurs, when even, say, 10 percent of your customers suddenly buy 10 times the amount of a single product than they normally would buy, the product is quickly exhausted and the supply chain will have trouble immediately providing the product.

So there is not a physical shortage of rice; there is a problem with the supply chain because hoarding has stressed the system.

Of course, if everyone decided to start hoarding, there would be a problem with the actual supply of rice. My point is that this story happened for a different reason.

Don't get me wrong -- there are long-term factors increasing demand for protein-based foods, and the grains that are used to feed the livestock.

Potash this morning included a long essay in its earnings report, noting that people in developing countries where populations are increasing "require more food and can afford a more nutritious diet that includes protein from meat sources. This requires an ever-increasing number of animals for food production and millions of additional tonnes of feed grains."

But that long-term issue is a far cry from the so-called shortage of rice we are seeing.

Questions?  Comments? 

Tools:

PrintEmail

Next Post

Previous PostBack to Main Page

• 

POPULAR TRADER TALK POSTS

• 

• Gold Shatters Another Record 

• 

• The Good And Bad of Credit Cards 

• 

• Wall Street Fears Dodd Bill 

COMMENTS

More Comments

 

« First | « Previous

Next » | Last »

Thank you for joining our discussion. Your comment has been posted.

ADD COMMENTS

Please Sign In or Register to participate.

In order to add a comment you must click here and accept our terms and conditions.

Edit Screen Name

Please sign-in/optin or register to be able to submit comments.

Remaining characters

CNBC welcomes your contribution. Please respect our community and the integrity of its participants. CNBC reserves the right to moderate and approve your comment.

PREVIEW COMMENT

Your comments have not been posted yet.
Please review your submission to make sure you are comfortable with your entry.

Your Comments:

MORE TRADER TALK

» Trader Talk Home Page

Current DateTime: 05:50:11 23 Nov 2009
LinksList Documentid: 23279666
Expiration DateTime: 11/23/2009 5:51:26 AM

• • This Week's Biggest Story: The Dollar
  • Corporate Issuance Continues at Torrid Pace
  • The Bernanke Dollar Bounce & Gross Says Forget About Rate Hike
  • Colgate Really Sparkles After Hours
  • Light Volume Has Traders Complaining
  • Gold Shatters Another Record
  • Have Retailers Reached Their Limits?
  • The Retail Mind Game
  • The Gold Rush Is On
  • Bernanke Offers Something For Everyone