by Chris Mayer of the Daily Reckoning
In 1972, Russia's wheat crop failed. Russia had to dip into the global grain markets to meet demand. Before Washington knew the plight of its Cold War adversary, Russia bought up all of the surplus wheat in the US. Dubbed "The Great Grain Robbery," Russia's purchases sent grain prices soaring around the world.
Grain prices soon hit 125-year highs in Chicago. In a 10-month span, soybeans went from $3.31 to $12.90 a bushel. Food prices around the world rose 50% in 1973.
Some of the old traders are wondering if it's happening all over again.
On Thursday, wheat prices hit $7.25 a bushel, a 71% increase since the June low. It's the biggest one-month jump in three decades. The last time prices got this high was during the food crisis in 2008. (Wheat prices topped out at $13 then.) You may recall the ensuing food riots across the globe from Haiti to Egypt to Bangladesh.
Russia is again the center of attention. The worst heat wave and drought in a century has baked crops to a crisp in Russia, Ukraine and Kazakhstan. These three are among the biggest exporters of wheat in the world. They provide critical food supplies to the largest importing regions in the world - the Middle East and North Africa.
In some areas of Russia, the heat and lack of rain killed half the crop. Withered wheat stalks litter the usually fertile fields along the Volga River. This is one of the world's breadbaskets. Russia and the Ukraine alone were supposed to supply 18% of the world's wheat. Now it looks like Russia's exports could drop to zero.
Originally, forecasts called for 81-85 million metric tons of wheat, rye, barley and other crops. Now the Russian Grain Union says 72-78 million. Skeptics abound on that number, which looks too optimistic. The head of Glencore, the giant grain-trading house, thinks the real number will be closer to 65 million tonnes.
Holy smokes, I hear you say. Yes, it is bad. But it gets worse.
It's so bad that Glencore begged Moscow to ban the export of grain - as it did in the food crisis of 2007-2008. That's because Glencore thinks that trading houses around the world won't be able to fulfill their contracts to deliver grains. When Moscow bans exports, then trading houses can declare force majeure, a clause that allows them to escape these deals. On Thursday afternoon, Russia did just that.
Russia's crop failure comes at a bad time. Most of the world's wheat exporters are having problems. The Aussies battle locusts. The Canadians suffer from too much rain. Even European farmers struggle with drought. The Italians' beloved tomato crop will come up 10-15% short this year. Belgian potato farmers say drought will nick their yields. Polish fruit orchards will be down by a fifth. The French wheat farmers curse the skies as their wheat fields shrivel in the sun. The English sheep farmers, short on hay and grass, have sold their flocks early. Even the Dutch expect 10% fewer tulip bulbs this year.
The market is tightening and there are ripple effects across the globe. Over the weekend, Egypt bought 180,000 metric tons of wheat - its second purchase in two weeks and more than expected. Egypt is the world's largest importer.
One key difference this time around compared to 2007-08 is that inventories are in better shape - at least on paper. But I have to wonder. In India, government officials have let their once-plentiful grain stockpiles rot in the fields. India thinks food is too important to leave to the private sector. The government is in charge of food stockpiles. In a common display of government folly, bureaucrats, apparently, threw thin plastic sheets over these supplies and let them sit in the fields to rot and wash away in the rains.
The savior in all this looks like it will be the US. Stockpiles here should be healthy, at almost 30 million tons.
It seems like only yesterday the market took a cheerful look at the grain markets and said all was well. Global harvests looked like they were going to put in another record. I warned that nothing counts until the crops hit the bin.
Now that record harvest is gone, kaput, in just a month's time.
So what are the effects of all this? Expect ripples across the food chain. Prices for everything will rise. Prices for cocoa, coffee and pork bellies have already gone up. Beer brewers will pay more for barley, as the barley crop will be down by 20%. All flour-related products - breads, biscuits and the like - will be more costly. As The Financial Times reported, "Food executives are also warning about surging prices for feeding and malting barley, which could push higher the retail cost of products from poultry to beer."
How will this go over with the already rattled consumer in a fragile recovery? Many companies seem reluctant to raise prices. As Domino's CEO said, "Consumers are still hurting out there." Many companies hedge their exposure to food commodities, but if these prices continue to climb, it could crimp their bottom lines.
Meanwhile, the fertilizer stocks have rallied. From July 6 lows, PotashCorp (NYSE:POT) shares are up 34% and Mosaic (NYSE:MOS) is up 31%. The logic is simple enough. High grain prices inspire more planting. More planting means more fertilizer use. Already, as we've seen, volumes are snapping back in the fertilizer business. In their last quarterly reports, both Potash and Mosaic doubled their profits from a year ago.
Recent events show you, once again, the challenges in meeting the world's demand for food. The food crisis of 2007-2008 was not a one-off event. It was a warning. And today, we see again how quickly and easily we can get to another food crisis.
Hang onto those fertilizer stocks.
Chris Mayer,
for The Daily Reckoning
Monday, August 9, 2010
Saturday, August 7, 2010
Going Deep: An Interview with President of Chevron Arica & Latin America Exploration and Production Co.
By Byron W. King Pittsburgh, Pennysylvania
Recently, I had a long talk with Ali Moshiri, President of Chevron Africa and Latin America Exploration and Production Company. Mr. Moshiri has been working for Chevron for over 30 years. He’s one busy man, whose responsibilities begin in the southern waters of the Gulf of Mexico and extend to the cold reaches of the southern Atlantic Ocean.
In our talk, Mr. Moshiri and I looked at the future of offshore oil and gas exploration and development. Here’s part of what we discussed...
Byron W. King: Mr. Moshiri, you run a division of Chevron that includes Africa and Latin America. How much oil and gas do you pull out of the ground every day?
Ali Moshiri: For Africa and Latin America, on a gross basis, Chevron is producing somewhere around 840,000 barrels per day.
BWK: That’s about 1% of all the oil that the world uses every day, at 85 million barrels per day. Can you say some more about what’s happening in the areas with which you deal?
AM: (My area is ) the Atlantic Basin... If you look down at the southern part of the Americas and Africa, people are ignoring the contribution it’s making worldwide.
The basins in this area are different. It’s not necessarily like the Middle East, that they are huge fields. But there are many accumulations. On the aggregate, they’re significant. Not only to the Chevron portfolio, but overall to the supply of oil to the market.
If you look at this area, they’ll always be a net exporter. They’ll always produce more than they can consume. My personal view is that if they continue their level of economic growth, that they assume is going to be above global, they’ll still be an exporter.
It creates an environment for industry to include them as part of the energy equation. The barrels can move to other locations where they don’t have that balance.
BWK: Are you only looking for oil? What’s the larger hydrocarbon picture?
AM: The (Atlantic) basins have similarity, but at the same time the basins have both oil and gas. It’s not just oil. At the moment, the focus has been tremendously towards oil. I believe that both basins in West Africa as well as in Latin America have tremendous potential for gas for the future. But because of lack of infrastructure, they haven’t got to the point similar to Asia Pacific of the Middle East yet.
But if you look ahead 15 years, they’ll get to the point of contributing natural gas, through LNG (liquefied natural gas) or pipeline... That’s the next phase. Today it’s very much focused on the oil side.
BWK: In the Middle East, you’re looking at a mature, 60-70 year old concept of exploration. Also, culturally, you’ve got similarities of climate, ethnicity to some extent, religion too. Not that everybody’s the same. But by comparison, if you’re moving from the Caribbean Basin to West Africa to Brazil to Angola, you’re going to see a lot of different people and different governments and different cultures that you’re going to have to work with. Can you comment?
AM: Absolutely. If you look at the Chevron operations, we deal with ten different countries. Three of them are in OPEC. Two of them are observers in OPEC. Therefore five of them are very much within the framework of the OPEC community. That shows that each of them have (their) oil policy and different view compared to when you look at places like the US, Australia, UK and Europe.
For that matter, you have to deal with each country separately. You have to understand, first of all, the geology, the technical aspects of it. And also the policies. The policies vary.
I’m not saying it’s good or bad, whether it’s in the hands of the government or the private sector. That’s what we deal with in this area. Not only do we have to worry about the technical side, but also about the fiscal, commercial aspects of it as well.
BWK: Can you comment about what you’ve seen over the past 20 years, with the rise of the national oil companies (NOCs) in these regions, and how you’ve had to adapt from the way you used to do business to the way you have to do business now in the NOC environment?
AM: The reality is that with the truly conventional aspects of oil and gas, the technology is there. The know-how is there. Whether or not we have it, or a service company has it. It’s there. So the view of the NOC is that they have more than one option on just the conventional (development).
For example, (what) if you discover an oil field on land, say light oil? Then building it, developing it, putting it into the market is relatively conventional. So what we would focus on is increasing the recovery factor. We focus on getting more out of the ground.
The next phase is what I’d say depends on technology. You get into deepwater. The technology is different. The incremental cost is significant. Room for efficiency becomes a greater part of how we develop things. Yes, everybody (says that they) can develop deepwater. But how do you manage expensive wells that you’ve got to drill? How do you test the basin? How do you commit to the investment? Those are significant.
As you see in the market today, it’s almost becoming like there are a lot of people who can explore. But there are not a lot of people who can develop deep water.
BWK: I had a chance to visit a Chevron operation in the Gulf of Mexico (GOM) in March. Chevron had the Transocean vessel, Discoverer Inspiration, drilling in over 6,700 feet of water, about 200 miles off the Louisiana coastline. The target depth was over 30,000 feet. It was quite an operation.
AM: I’m glad you took a visit to some of our operations. (You should see) some of the other remote places like offshore, deepwater off Nigeria. You can see how those places are highly technically driven.
And for as much as we’ve gone so far into developing these (deepwater) fields, the technology is not there to work over the wells when there are problems. The technology is not there to create efficiency for working over some of these wells. For example, if a well goes off production in West Africa, and it’s in the swamp, or in Block Zero, off Angola, in shallow water, we move a rig in and we know how to work over the well.
But if a well goes off production and it comes to a work-over, if it’s in deepwater, in say 8,000 feet of water, then you almost have to spend as much to work over a well as you spent to drill the well. Therefore, we are looking for the technology, and expanding our expertise, how to go back and do some of that work. To work those kinds of wells over.
BWK: Can you describe how Chevron’s relationships are changing over time, with the NOCs?
AM: Yes, our relationship with the NOCs is changing, moving to a different direction. The next phase goes several years down the road and gets into the non-conventional hydrocarbons. Like tight sands and shale gas. I always use the US as the base, where we started.
I’ve been in this business 32 years with Chevron. I remember when 500 feet of water was deep water. But now 500 feet of water is a conventional development, or work-over, with high recovery factor. And I think we need to expand that one all the way.
In some of the other regions, especially my region, we are not to that point yet. Again, it’s because some of these basins have not matured yet.
BWK: Can you elaborate on that concept of maturity? How are things different between, say the US and further south in the Atlantic Basin?
AM: (The US) Gulf of Mexico shelf is mature. But if you look at it south, from Mexico down to Argentina, or West Africa or sub Sahara or East Africa, we are still at the first phase of understanding the basins, understanding the potential, developing the technology around it, and being able to transport it.
Some of the discoveries (that) some of the companies have, in sub Sahara Africa, the transportation is going to be the issue. That region is going through a different phase. The transportation is about one phase behind where we are in the US.
According to Chevron’s Mr. Moshiri, there’s great potential for future energy development in the Atlantic Basin. The hydrocarbon resource is there – both oil and natural gas – and development is at an early stage.
The future will see more exploration and development, moving from oil into gas. The local markets will doubtless expand, but there’s still quite a bit available for export. But to accomplish this, the transportation infrastructure needs to expand. In short, there’s much left to accomplish in an immense swath of the world.
The Future Challenge of Energy Development
There are great opportunities for future exploration and energy development in Latin America and Africa. This will require trillions of dollars of capital over many years. That, plus world-class technology, superb and skilled people, as well as close coordination between developers and the national host governments.
Chevron, the subject of this article, is one of the world’s best independent oil companies. From its roots in the California oil patch of more than a century past, Chevron has a solid record of successful exploration and development. Chevron has great financial strength, and a deep pool of technical competence. Chevron’s success – certainly in deepwater development – is built upon its highly skilled and talented people such as Mr. Moshiri and the many members of his extensive team.
That said, there are many other companies working on deepwater oil exploration and development projects across the world. They range from very big to not very big, from independent to nationally-owned and operated.
If you’re interested in learning about another aspect of deepwater development, I can tell you about a small, Canadian company that is developing a remarkable play in offshore Africa. To access my full presentation, just click here.
Until we meet again,
Byron W. King
for The Daily Reckoning
Recently, I had a long talk with Ali Moshiri, President of Chevron Africa and Latin America Exploration and Production Company. Mr. Moshiri has been working for Chevron for over 30 years. He’s one busy man, whose responsibilities begin in the southern waters of the Gulf of Mexico and extend to the cold reaches of the southern Atlantic Ocean.
In our talk, Mr. Moshiri and I looked at the future of offshore oil and gas exploration and development. Here’s part of what we discussed...
Byron W. King: Mr. Moshiri, you run a division of Chevron that includes Africa and Latin America. How much oil and gas do you pull out of the ground every day?
Ali Moshiri: For Africa and Latin America, on a gross basis, Chevron is producing somewhere around 840,000 barrels per day.
BWK: That’s about 1% of all the oil that the world uses every day, at 85 million barrels per day. Can you say some more about what’s happening in the areas with which you deal?
AM: (My area is ) the Atlantic Basin... If you look down at the southern part of the Americas and Africa, people are ignoring the contribution it’s making worldwide.
The basins in this area are different. It’s not necessarily like the Middle East, that they are huge fields. But there are many accumulations. On the aggregate, they’re significant. Not only to the Chevron portfolio, but overall to the supply of oil to the market.
If you look at this area, they’ll always be a net exporter. They’ll always produce more than they can consume. My personal view is that if they continue their level of economic growth, that they assume is going to be above global, they’ll still be an exporter.
It creates an environment for industry to include them as part of the energy equation. The barrels can move to other locations where they don’t have that balance.
BWK: Are you only looking for oil? What’s the larger hydrocarbon picture?
AM: The (Atlantic) basins have similarity, but at the same time the basins have both oil and gas. It’s not just oil. At the moment, the focus has been tremendously towards oil. I believe that both basins in West Africa as well as in Latin America have tremendous potential for gas for the future. But because of lack of infrastructure, they haven’t got to the point similar to Asia Pacific of the Middle East yet.
But if you look ahead 15 years, they’ll get to the point of contributing natural gas, through LNG (liquefied natural gas) or pipeline... That’s the next phase. Today it’s very much focused on the oil side.
BWK: In the Middle East, you’re looking at a mature, 60-70 year old concept of exploration. Also, culturally, you’ve got similarities of climate, ethnicity to some extent, religion too. Not that everybody’s the same. But by comparison, if you’re moving from the Caribbean Basin to West Africa to Brazil to Angola, you’re going to see a lot of different people and different governments and different cultures that you’re going to have to work with. Can you comment?
AM: Absolutely. If you look at the Chevron operations, we deal with ten different countries. Three of them are in OPEC. Two of them are observers in OPEC. Therefore five of them are very much within the framework of the OPEC community. That shows that each of them have (their) oil policy and different view compared to when you look at places like the US, Australia, UK and Europe.
For that matter, you have to deal with each country separately. You have to understand, first of all, the geology, the technical aspects of it. And also the policies. The policies vary.
I’m not saying it’s good or bad, whether it’s in the hands of the government or the private sector. That’s what we deal with in this area. Not only do we have to worry about the technical side, but also about the fiscal, commercial aspects of it as well.
BWK: Can you comment about what you’ve seen over the past 20 years, with the rise of the national oil companies (NOCs) in these regions, and how you’ve had to adapt from the way you used to do business to the way you have to do business now in the NOC environment?
AM: The reality is that with the truly conventional aspects of oil and gas, the technology is there. The know-how is there. Whether or not we have it, or a service company has it. It’s there. So the view of the NOC is that they have more than one option on just the conventional (development).
For example, (what) if you discover an oil field on land, say light oil? Then building it, developing it, putting it into the market is relatively conventional. So what we would focus on is increasing the recovery factor. We focus on getting more out of the ground.
The next phase is what I’d say depends on technology. You get into deepwater. The technology is different. The incremental cost is significant. Room for efficiency becomes a greater part of how we develop things. Yes, everybody (says that they) can develop deepwater. But how do you manage expensive wells that you’ve got to drill? How do you test the basin? How do you commit to the investment? Those are significant.
As you see in the market today, it’s almost becoming like there are a lot of people who can explore. But there are not a lot of people who can develop deep water.
BWK: I had a chance to visit a Chevron operation in the Gulf of Mexico (GOM) in March. Chevron had the Transocean vessel, Discoverer Inspiration, drilling in over 6,700 feet of water, about 200 miles off the Louisiana coastline. The target depth was over 30,000 feet. It was quite an operation.
AM: I’m glad you took a visit to some of our operations. (You should see) some of the other remote places like offshore, deepwater off Nigeria. You can see how those places are highly technically driven.
And for as much as we’ve gone so far into developing these (deepwater) fields, the technology is not there to work over the wells when there are problems. The technology is not there to create efficiency for working over some of these wells. For example, if a well goes off production in West Africa, and it’s in the swamp, or in Block Zero, off Angola, in shallow water, we move a rig in and we know how to work over the well.
But if a well goes off production and it comes to a work-over, if it’s in deepwater, in say 8,000 feet of water, then you almost have to spend as much to work over a well as you spent to drill the well. Therefore, we are looking for the technology, and expanding our expertise, how to go back and do some of that work. To work those kinds of wells over.
BWK: Can you describe how Chevron’s relationships are changing over time, with the NOCs?
AM: Yes, our relationship with the NOCs is changing, moving to a different direction. The next phase goes several years down the road and gets into the non-conventional hydrocarbons. Like tight sands and shale gas. I always use the US as the base, where we started.
I’ve been in this business 32 years with Chevron. I remember when 500 feet of water was deep water. But now 500 feet of water is a conventional development, or work-over, with high recovery factor. And I think we need to expand that one all the way.
In some of the other regions, especially my region, we are not to that point yet. Again, it’s because some of these basins have not matured yet.
BWK: Can you elaborate on that concept of maturity? How are things different between, say the US and further south in the Atlantic Basin?
AM: (The US) Gulf of Mexico shelf is mature. But if you look at it south, from Mexico down to Argentina, or West Africa or sub Sahara or East Africa, we are still at the first phase of understanding the basins, understanding the potential, developing the technology around it, and being able to transport it.
Some of the discoveries (that) some of the companies have, in sub Sahara Africa, the transportation is going to be the issue. That region is going through a different phase. The transportation is about one phase behind where we are in the US.
According to Chevron’s Mr. Moshiri, there’s great potential for future energy development in the Atlantic Basin. The hydrocarbon resource is there – both oil and natural gas – and development is at an early stage.
The future will see more exploration and development, moving from oil into gas. The local markets will doubtless expand, but there’s still quite a bit available for export. But to accomplish this, the transportation infrastructure needs to expand. In short, there’s much left to accomplish in an immense swath of the world.
The Future Challenge of Energy Development
There are great opportunities for future exploration and energy development in Latin America and Africa. This will require trillions of dollars of capital over many years. That, plus world-class technology, superb and skilled people, as well as close coordination between developers and the national host governments.
Chevron, the subject of this article, is one of the world’s best independent oil companies. From its roots in the California oil patch of more than a century past, Chevron has a solid record of successful exploration and development. Chevron has great financial strength, and a deep pool of technical competence. Chevron’s success – certainly in deepwater development – is built upon its highly skilled and talented people such as Mr. Moshiri and the many members of his extensive team.
That said, there are many other companies working on deepwater oil exploration and development projects across the world. They range from very big to not very big, from independent to nationally-owned and operated.
If you’re interested in learning about another aspect of deepwater development, I can tell you about a small, Canadian company that is developing a remarkable play in offshore Africa. To access my full presentation, just click here.
Until we meet again,
Byron W. King
for The Daily Reckoning
Wednesday, August 4, 2010
According to the feds, 74% of all the oil leaked into the Gulf has already been removed.
Despite headlines screaming “the worst oil spill in history,” it turns out the BP blowout disaster wasn’t really as big a deal as you’d have thought.
Oh, well… sorry.
According to the feds, 74% of all the oil leaked into the Gulf has already been removed. “Much of the rest,” The New York Times summarizes a government report released today, “is so diluted that it does not seem to pose much additional risk of harm.”
Nearly half -- 41% -- of the oil simply “evaporated, dissolved or dispersed” -- taken care of by Mother Nature herself. That’s a larger share of spill containment than all of BP’s burning, skimming, recovery, dispersing and plugging efforts… combined.
The report estimates about a million barrels of crude oil remains floating in the Gulf.
“Of course, it's not good to blow out your oil wells,” Byron King explains. “But we can be thankful that nature has oil-eating bacteria out there. Add oil to the seawater, with heat from the sun, and sunlight, and stir it up with wind and wave and you see that the oil is going away faster than many people expected.
“In a normal environment, oil-eating bacteria are in equilibrium with their surroundings. If there's not much oil in the water, the bacteria are few and far between. But if you add oil to the mix, the bacteria bloom.
“As the bloom progresses, more bacteria eat more and more of the oil. They eat the oil until it's mostly gone. When the ‘oil food’ is gone, the bacteria die off. The result is much less oil, and much more microscopic biomass in the water.”
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. Small question: If so many people hate this new video format, why is it grabbing so much attention?
Thank you for reading The 5 Min. Forecast! We greatly value your questions and comments. Please send all feedback to 5minforecast@agorafinancial.com
Oh, well… sorry.
According to the feds, 74% of all the oil leaked into the Gulf has already been removed. “Much of the rest,” The New York Times summarizes a government report released today, “is so diluted that it does not seem to pose much additional risk of harm.”
Nearly half -- 41% -- of the oil simply “evaporated, dissolved or dispersed” -- taken care of by Mother Nature herself. That’s a larger share of spill containment than all of BP’s burning, skimming, recovery, dispersing and plugging efforts… combined.
The report estimates about a million barrels of crude oil remains floating in the Gulf.
“Of course, it's not good to blow out your oil wells,” Byron King explains. “But we can be thankful that nature has oil-eating bacteria out there. Add oil to the seawater, with heat from the sun, and sunlight, and stir it up with wind and wave and you see that the oil is going away faster than many people expected.
“In a normal environment, oil-eating bacteria are in equilibrium with their surroundings. If there's not much oil in the water, the bacteria are few and far between. But if you add oil to the mix, the bacteria bloom.
“As the bloom progresses, more bacteria eat more and more of the oil. They eat the oil until it's mostly gone. When the ‘oil food’ is gone, the bacteria die off. The result is much less oil, and much more microscopic biomass in the water.”
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. Small question: If so many people hate this new video format, why is it grabbing so much attention?
Thank you for reading The 5 Min. Forecast! We greatly value your questions and comments. Please send all feedback to 5minforecast@agorafinancial.com
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