Everybody knows there is some kind of food crisis. Grocery prices are painful. Wal-Mart has rationed rice purchases. Mexico has had tortilla riots due to corn prices. Rice riots have occurred Asia. China introduced laws prohibiting conversion of human food crops to fuel.

However, who would have predicted a 5 standard deviation price move for an index of 60 foods, or a 16 standard deviation move in rice prices. No, that is not a typo. Bloomberg today reported a UN Food Crisis study and related price charts revealing this food Black Swan.

At the core of the definition of Black Swan is an unpredictable and unexpected price move that is way off the chart in terms of standard deviations from the mean.

Since 3 standard deviations theoretically encompasses 99.7% of all observations, 5 to 16 standard deviations is a shocker.

We’ll have to rely on businesses and governments to solve the problem, but as investors we need to be aware that this situation will take away profits from some and make profits for others.

The recent rate of change in prices cannot be maintained, or it would go to infinity soon, but a new world food supply-demand structure may be upon us. We need to understand that theme and identify ways to be on the right side of it.

We encourage a dialog with our readers to develop long and short ideas related to this long-term, high impact theme.

There are obvious immediate opportunities in the futures market, or with ETFs or ETNs dealing with food commodities, such as Powershares DBA (the leading volume pure agricultural investment fund). There are several other ETFs or ETNs, but none currently have sufficient liquidity for safe use. They include funds specializing in grains, livestock, and food generally.

There are probably individual operating companies, or country funds, that will more effectively capture the continuing profit potential for this new world of food; and there are those who will be chronically disadvantaged.

We don’t have a current list of candidates, but will be working on that. What are your thoughts on investing in the face of this food situation?

Richard Shaw
QVM Group LLC

This entry was posted on Thursday, May 8th, 2008 at 5:14 pm and is filed under Commodities. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.