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Politics in Wisconsin as they roll up to every level... and some other thoughts that may cross my mind are explored here from my lefty point of view. My values shape my opinions. You'll always find them in here. Let's have some fun exploring why Liberal values are American values!

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(The watercolor is called Magnolia Tree for Momma, by Audrey Crawford)

Monday, March 09, 2009

Afghan Opium and the DJIA-2008 Figures

I have been tracking these figures for 8 years and still don't know exactly why they continue to be so congruent. I'm not even sure why I track this annually, except that I am absolutely fascinated by it and am waiting for the two lines to, at least once, go in different directions.... (Search on the word "opium" on my blog for previous posts on this)

The 2008 figures in particular are a bit stunning not just for the fact that the drop in the DJIA is significantly more than the drop in the Afghan opium projected figures.

What seems most significant to me is that now the figures are released twice a year in the early fall and in the winter (3 winter reports now). What seems significant is that in August 2008 the opium crop came in 19% shorter than expected.

Now, all I really know about commodities trading is what I learned in the movie Trading Places... but I seem to remember the crop reports are pretty important to the stock market... Had I gotten that report early, I would have bet the market was going down, and very soon, based on the trends I've been tracking below.

In fact, it was just a few weeks later that then entire market crashed and our financial system went bust. Hmmm... What's really interesting is if you were trading on the futures market of the opium crop, you would indeed be selling off everything right now.

From the Executive Summary of the UNODC January 2009 Report:

The Afghan drug economy. In 2007 the (farm gate) value of opium cultivation was one of the largest ever, at about $1 billion. In 2008 it dropped by more than a quarter, to $730 million. In 2007 the (potential) export value of opium, morphine and heroin (at border prices in neighbouring countries) was $4 billion. This year’s drug export was valued at $3.4 billion. (Note that these export amounts are potential as they do not account for changes in domestic stocks, unknown to us).

The downturn in the opium economy. Since 2007 opium cultivation declined by 19% to 157,000 hectares this year, for several reasons. First, as shown in our August Report, restraint at planting (but not eradication), has been successful. Pressure by governors, shuras and village elders has kept cultivation down in many provinces. Second, and most importantly, the dynamics of farm prices. As (Afghan) supply has once again exceeded (world) demand, prices for opium (both fresh and old) are down 20% in nominal terms (and much more at constant prices). Third, the terms of trade effect. While opium farmers’ income has declined, the revenue from wheat has tripled since 2007 (partly due to drought).

In other words, if wheat prices stay high, opium production will continue to go down. With Obama's Afghan war, one of a few specific goals being to take out the opium cartels, a serious attempt to decrease opium production in Afghanistan means that if there really is some link between these two indices, the market has responded to a futures forecast that is bleak for Afghan opium and crashed even farther than the actual drop would normally predict.

Or maybe wheat prices have nothing to do with opium production an interesting blurb from the US Dept of State:

Overall agricultural production dramatically declined following severe drought as well as sustained fighting, instability in rural areas, and deteriorated infrastructure. The easing of the drought and the end of civil war produced the largest wheat harvest in 25 years during 2003. Wheat production was an estimated 58% higher than in 2002. However, the country still needs to import an estimated one million tons of wheat to meet its requirements. Millions of Afghans, particularly in rural areas, remain dependent on food aid.
Note in the chart in 2002, 2003 and 2004, opium production began to skyrocket regardless of the "largest wheat harvest in 25 years in 2003). I would seem that wheat production has no effect on whether or not the Afghans grow opium poppy...

So without further delay, I now show you the chart for this year.

I am again making no guarantees that I have any idea what this means. In fact, I make no guarantees that I have any idea what I'm talking about at all, just that the numbers are accurate.

I'll let the chart speak for itself (email me if you need the citations or would like the full spreadsheet to review...)

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