Cheap Food, Government Subsidies
Research for Online Investors

by John Dalt

8/31/09

The U.S. lost a case before the World Trade Organization (W.T.O.). The subject is subsidies to domestic cotton growers. Our government has consistently subsidized farmers to keep cheap food for American consumers. Having grown up on a family farm, I appreciate the importance of a farm program that levels the playing field with overseas government subsidies. However, the current level of subsidies is absurd. It makes no sense to subsidize production and depress world prices. The New York Times explains the current conflict.

Having left the farm after college to seek wealth and excitement in the “big city”, I had a discussion on “farm subsidies” with my brother ten or fifteen years ago. He cut the whole discussion down to its very core with, I thought, a very good observation. I will paraphrase it as, “John, I will compete with any farmer anywhere. I am the lowest cost producer of my goods. I don’t want any government subsidy, but I cannot compete with a foreign government bank account. Don’t ever forget, our government wants cheap food for the masses. It is the easiest way to keep people happy, and happy voters re-elect incumbents.”

His point was important in that he wants a free market, without subsidies.  Farmers and ranchers are some of the toughest entrepreneurs I know.  They want to, and will, match up against any farm or ranch anywhere in the world.  They will work long hours and sweat to out produce them.  But, if another government is going to subsidize their commodities, they can break the back of an individual farmer.

This is exactly what has happened, and is happening in so many industries, textiles, steel, manufacturing, and the list goes on.  Foreign governments target industries and subsidize their domestic producers until they drive out competitors, then once they clear the competition a good old-fashioned monopoly exists.

I hope our cotton subsidies are not doing this, but fear they are just a political payoff to a voting block for many farm state legislators.  It is an increasingly small block of voters because farmers have to grow and get bigger to be more efficient, or perish.  It is harder work than most of us would ever want to do.

I don’t trust the W.T.O., as they are as much political as judicial.  That being said, the U.S. needs to be above reproach on trade, and aggressive to punish countries that use trade as a weapon.

Three more banks were closed this weekend, bringing the total to 84 for the year. Last week the FDIC said they had plenty of funds to cover expected losses, but the $10.4 billion balance did not include the charges for any of the banks closed in August. With 416 banks on their problem list, and 28% of the banks they insure losing money last quarter, I wish we could short the FDIC. I suppose the Fed can just print some more money.

The Manufacturing Purchasing Managers Index (PMI) came out last night; it was 6% higher than expected.  The PMI gives us an insight into purchasing managers in Japan.  Purchasing Managers order the supplies necessary to meet planned production, so should be first to predict an economic recovery.

The market seems to have changed from ignoring bad news and going up, to ignoring good news and going  _ _ _ _.  You can fill in the blank to know what I think this means for the near future.  Disney (DIS) offered to buy Marvel Entertainment (MVL) for $48 per share, a 25% premium over Friday’s closing price.  Baker Hughes (BHI) offered a 16% premium for BJ Services in the oil services sector.  Even with these announcements that signify confidence in the economy and the ability to finance big deals, the market sold off.

The U.S. Commander in Afghanistan, Gen. Stanley McChrystal delivered his strategic assessment today.  He said, "The situation in Afghanistan is serious, but success is achievable and demands a revised implementation strategy, commitment and resolve, and increased unity of effort."  The White House press was after Press Sec. Robert Gibbs to explain how OH! Bama was going to “save the day.” More blame on Bush, not much else for explanation at this time was his answer.  The London Times Online has a good article on, “Afghanistan Strategy Failing”

I received an email this weekend about the late Sen. Ted Kennedy. It ended with R.I.H.  I had never seen this term of endearment before.

The senate has written a clause into a bill under consideration that would allow the president to declare a “cyber security emergency” and shut down the internet.  Wow, 1984 here we come.

It's what he does not say, that scares me!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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