The effort to prevent the ‘fiscal cliff’ from blasting all over the economy is continuing even as time is running out. On December 27, U.S. President, Barack Obama sent yet another plan before Congress to avoid a free fall over the edge of the fiscal abyss, one which will inevitably absorb the lower and middle classes of the United States, and by extension – given the effects of the ‘chaos theory’ – those of many other western countries. Obama’s chances of success are slim; even though both the Republicans and Democratic Parties are well aware that failure to reach a compromise on the ‘fiscal cliff’ represents a failure to serve the interest of a vast majority of Americans.
At the time of writing, members of Congress appear to have rejected any suggestion of compromise after the latest clash took place between the Democrats and Republicans in the Senate, the latter being accused of perpetuating the deadlock. The House of Representatives has entered an extraordinary session and if an agreement is not found, two million Americans at risk of running out of unemployment benefits while those who still have a job will be taking home less of their heard earned dollars as payroll taxes would increase by two points. The U.S. Treasury Department is getting ready to launch ”extraordinary” measures to prevent public debt from exceeding the ceiling of 16.394 trillion U.S. dollars, a level that could plunge the country into default. In such a gloomy framework it is difficult to imagine that the stock market could respond in any other way but down; nevertheless, there are some investments that can hedge against this probability.
The increased inflation expected from the fiscal cliff implies a lower value for the Dollar, which makes agricultural products, in particular, more valuable in real terms. Oil, natural resources and minerals and companies dealing in such commodities are worth considering. In particular, agricultural stocks are especially interesting in periods of high inflation, such as is expected in the wake of the US going off the fiscal cliff. Inflation would lead an increase in food prices, one not caused by increased fuel and transportation costs. The fiscal cliff, moreover, would not halt the trend toward a more carbohydrate intense diet in Asian societies, where population growth is strong. The consumption of meat in those areas has increased steadily: in China it has gone from 20 kg/year in 1985 to more than 50 kg/year today (in the United States that figure is 123 kg/year). Increased meat consumption generates inflation in grain prices. The production of meat does not imply decreased consumption of soft commodities such as grains or seeds; animals for slaughter in turn consume agricultural products (about a third of the wheat production is directed to feed). It is estimated that for every kilogram of beef we need 8 pounds of wheat.
This trend suggests that agriculture in developing countries will continue to increase, especially insofar as cereals are concerned needing more potash and other fertilizers. Moreover, the resulting higher prices for food in general, as happened in 2008, will put more pressure on many governments to uphold food subsidies in order to confront the risk of social unrest. Subsidies would include those devoted to mineral fertilizers, especially in India, where it is a common practice and where potash purchases have been delayed. Demand for food will persist even if the US economy weakens, leaving fertilizer stocks as standouts in an otherwise bearish market. Should Congress get its act together and agree on a fiscal cliff solution, meanwhile, potash will benefit just the same as the economics of its demand will have remained unchanged.