The Market Way of Thinking

There have always been people with a survivalist mentality who think some sort of supremely disruptive national emergency is just around the corner.  In the years following the financial crisis and Great Recession, more of these people have warned others to prepare as they do.

It always pays to be prepared, but is it reasonable to believe a general food shortage could be around the corner in the US, for example, as this lady in Alaska does?  And what does it mean to be prepared?

The answer to the first question is there’s no foreseeable cause of a food shortage in America.  The US produces more food than it consumes and not only exports some of the surplus, but the government has long even subsidized over-production that goes to waste.

Given the way we run our economy, general food shortages are simply incredibly unlikely, and even in the event one should occur, it would likely be very short-lived.  The US has the most productive agricultural sector in the world, thanks to our relatively free markets and high capital investment.

This is in contrast to Venezuela, which currently has wide food shortages due to a combination of government expropriation of some food producers and sellers, domestic price controls on many food items, fixed currency exchange rates, and a fall in the price of oil.  As a result, people line up in long queues on their assigned days, often for the opportunity to buy very few food items.

The US is not completely unfamiliar with similar policies.  Price controls were imposed during the Nixon administration in the hapless attempt to fight the inflation that administration encouraged, and price controls and rationing have sometimes been employed in times of war.

It has been more than 40 years since price controls on food were last imposed, so food shortages should not be a concern for Americans now.  But, even if shortages were thought to become likely, would stocking up on food be the right way to prepare?

It would be far more convenient and profitable to buy commodity futures or related ETFs instead.  A futures contract on pork bellies, for example, could yield a considerable profit were a shortage on related food to occur or worsen while holding the contract.

Mind you, “shortage” does not usually mean “complete absence of”.  Food is normally available during times of shortage, but at higher prices.  There’s no reason to feel the need to stockpile food for emergencies unless something as significant as a major asteroid strike is expected to occur nearby, which could cripple the ability to even transport food to and from your location for a time.

It’s obvious when you think about it that stocking up on food while anticipating a shortage is buying perishable goods that may go to waste if the shortage doesn’t occur or isn’t as severe as expected.  One is typically better off buying a commodity future or related ETF, because it’s easy to recover at least part of the initial investment, and enjoy the flexibility money provides.

However, investing in commodity futures or related ETFs is not something most investors are necessarily prepared to do well.  Considerable knowledge and experience can be required to successfully make such investments and commodity price movements can be very volatile. It is also important to note that the futures themselves are not income-producing.

However, investing in commodity index funds, the stocks of commodity producers, or sector or index ETFs of such companies can offer the safety of increased diversification, less volatility, and in the case of stocks and stock ETFs, income.

It is usually best not to invest in things you don’t understand.  Earning money on the investments you do understand is the ultimate solution to any problem money can solve. It obviously pays to have a general nest egg.



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