The Smart Asset

No Heroes, Only Heroin: Afghan Opium Production Plummets, But Prices Stay Low

By Harkavy in Afghan War, Agribusiness, Derivatives, Drugs, Featured

Thursday, Sep. 3 2009 @ 1:44PM

Opium production in Afghanistan has dropped 10 percent, but prices are still at a 10-year low, according to the U.N. Office on Drugs and Crime (Afghan Opium Survey 2009). Somehow, this is kinda being spun as progress in the war on drugs.

Taking away Afghan farmers' livelihoods may not be the best way to win the overall Afghan War, and the farmers are fighting back the only way they know how. With an efficiency that would put the most cunning Wall Street derivatives genius to shame, Afghan farmers who haven't been rousted by narcs are extracting more of the popular derivative per poppy bulb.

So why are prices dropping? The same reason that oil prices don't really depend upon supply.

The report explains:

World demand for opium remains stable (at around 5,000 tons), which is several thousand tons lower than is produced in Afghanistan every year. Yet, prices are not crashing, which suggests that a large amount of opium is being withheld from the market. "Stockpiles of illicit opium now probably exceed 10,000 tons — enough to satisfy two years of world (heroin) addiction, or three years of medical (morphine) prescription", says [UNODC Executive Director Antonio Maria] Costa. "Where is it, who is hoarding it and why? Intelligence agencies should defuse the ticking-bomb of opium stockpiles before these become the source of potential sinister scenarios."

Tackling the illegal Big Poppy, however, is as difficult as tackling the legal Big Pharma (although Pfizer would disagree).

The stockpiles are obviously why opium prices facing Afghan producers are the lowest they've been since the late '90s, when the weirdly mascara-and-rouge-adorned Taliban ruled the country. Here are some details that other traders in other commodities may find interesting:

Oversupply at the source in Afghanistan and lower market penetration in Europe are pushing opium prices down. Farm-gate prices have fallen by a third in the past year: from $70/kg to $48/kg for fresh opium and from $95/kg to $64/kg for the dry variety.