Imagine this: Upon execution of our stock promotion campaign, you get an Accredited Investor, the capital infusion is significant, but there is one major problem, your investor is invasive, almost stalking you.

You know the type that calls you 8-10 times a day, sends you a truck load of e-mails and even shows up at your place unexpected. Even though you keep telling this investor you will intergrate his opinions into those changes and you even tell him/her it’ll be done by such and such date… the phone keeps ringing.

Ok, We at Level 3 Securities Know all to well (even worse) how bad the situation can get, sometimes it can get out of hand if you don’t know how to act/react. Something similar happened to us before, and we learned a lot from it. How can you deal with these folks that seem to never “get it“?

Make Things Clear Before it gets out of Control
The best way to avoid those situations is to simply tell your investors you have other projects you need to work on (you’re a Senior Executive and, you have multiple tasks at once). Tell your investors right at the begining, make it real clear.

There is absolutely nothing wrong in saying something like:

Everything will be on track by [date], I will keep you updated on how the company is going on a continual basis. If there’s anything, give me a call, if I can’t answer the phone, leave me a message, and I’ll call you back within a couple of hours (make sure you do call him back). If it isn’t top priority, simply send me an e-mail, I check my e-mails 2 times a day, once in the morning, and again around 4pm, when the market is closed

This should give your cell phone a rest. Simply check for new messages every 2 hours or so, if it is urgent, give your investor a call. Remember: no one will die if you don’t answer your phone. You have work to do. Also, your investors are well aware, you won’t reply to there e-mail’s right away.

Some People Never Learn
If you did tell that particular investor to stop calling 10 times a day, and you also told him you check your e-mails only twice a day, but the phone keeps ringing……. and the investor even go’s so far, as to knocking at your door, expecting you’ll be there (you know, when it’s really urgent… right!!), but!!!! you’re right on schedule, So.. what could be so urgent?

That, to us, is like the point of no return. You either make it really clear (much clearer this time), and make sure your investor understands, or you tell that investor you’re not Corresponding with him anymore, return his investment, and explain why. Remember: some people never learn.

Unfortunately, We have had to deal with investors and Clients like this before, and honestly, the best decision we ever made was to tell them “go work with someone else”. What a relief! But don’t get us wrong, not all clients are like that, it happened to us only once, but once was enough, we learned…….

As your Broker Relations Firm we will work with you to identify viable sources of Capital.

1.Investment Banking firms specialize in many various Sectors. If you find a Venture Capitalist who focuses on enviromental services, renewable fuels, and alternative sciences and your In the wine fermentation (or other) field? Don’t waste your time. Find a different Venture Capitalist firm that specializes in your Sector.

2.Get an introduction to a Venture Capitalist Firm by a well established Coporate Finance Attorney
Why? You will have passed one leg of the Venture Capitalist Filter.

3.Make sure you have had your business incorporated by the same Attorney
Don’t use forms from OfficeMax or your relative who thinks he’s a paralegal.

4.If you are still in school and go to a name brand university, have your Department Head get in touch with the Venture Capital Firm on your behalf.
You (and the head of your department!) had better make sure that you have something impressive to put in front of the Firm in the first place. As in, the school hasn’t seen this kind of innovation in years. Or ever.

5.Have a CEO of a Public Company in the Firm’s portfolio that’s doing well make an introduction for you.

6.Most Venture Capital Firms realizes that many people don’t have these connections. Their advice?
Life is tough. Other people have made these connections. So can you, if you have an idea and company worth investing in.

7.So let’s say you have none of these things. What do you do?
You have a shot.., three paragraphs, and there’s no room for Hore Manure. And you better have tried steps 1-6 first. Send Level3corp@yahoo.com an email. Don’t you dare use the words “patent”, “our partner”, “conservative projections” or “hurry because other firms are interested” or bother with any of those other “cliche “lies.

DON’T send an attachment, don’t waste our time.

DO have brand credentials, and you had better have paid attention to all the steps.

You have three paragraphs to pitch your company, talking specifically about how and what you do, and how it appeals to people. This isn’t just about you!!!! - this is the golden rule of “What’s in it for Them”. Always remenber that

The process is different at each firm but generally follows this pattern. I will just outline the steps.

1.No harm - no foul 30 minute introduction. This can be done by phone, email, or in person. The goal is to get a full length first meeting.

2.Pre-meeting information package. Send an email with a 10 slide PowerPoint presentation and maybe a link to market sizing data.

3.The first meeting (in person or by phone). Explain succinctly what problem you solve, who your customers are, how you will collect revenue, who your competitors are, and why your management team will be successful. Don’t spend a lot of time on “how” the technology works. Save the demo for the end, if there is time. Again, read my post above, and Rick’s post for more detail on how to handle the first meeting.

4.The Monday morning partners meeting. Our Firm has a partners meeting on Monday morning to review their portfolio companies and new companies under consideration. Voldemar (a partner) calls this “The Huddle”. It is the first chance for the rest of the partners to veto the deal.

5.Send more information. Assuming you made it past the first partner test we will ask for more detailed information. Give us everything we ask for, and more. Make it organized and clearly address each point we raise. Don’t send a generic package of materials. We will start to do some due diligence based on this information.

6.In person or phone meeting with more partners. You already have one partner championing the deal, but this is a partnership and everyone needs to feel comfortable with the investment. The other partners want to get a general understanding of the product, but more importantly get comfortable with you as a management team.

7.The second Monday morning partner meeting. Now that several partners have seen the company they will decide if they want to proceed with a term sheet, and the general parameters of a deal. Lots of deals die at this point.

8.The Term Sheet. Term sheets are pretty standard …we do them all the time. But for entrepreneurs and senior executives these are scary, sometimes intimidating documents. There will be lots of legal terms and words you have never heard before. This is not a time to think you know it all. Get a good lawyer who has lots of experience with VC financing and Investment Banking. Some of these standard terms could come back to bite you later. You need to understand exactly what you are agreeing to. I recommend thinking up three scenarios and applying the terms to each of them to see what would happen. It may surprise you. Take the time to do it.

9.Due Diligence - Validation time. This is where the firm gets serious about investigating the company, the technology, the team, and the competition. This can can take a lot or a little bit of time so be patient. You might think you have a deal “in the bag” when you get a term sheet, but this is just an outline of a deal. Negotiations start, the background checks start. Things can still fall apart.

10.Third Partner Meeting, they agree to move forward. Here the partners agree to do the deal, commit the money for lawyers, raise any concerns, etc.

11.The Attorney’s. Attorney’s can kill deals, or they can find creative ways to make deals happen. This can be a painful emotional process. Try to stay focused on the long term, bigger picture. Your Attorney’s job is to advise you of risks. You can decide to take the risk, but at least be aware of what they are.

12.Signing the deal. It has been a long process but you have made it. It can be somewhat anticlimactic after all the hard work, but it is time for celebration. Celebrate now. The real hard work is just beginning.

13.It may only be interesting to first time entrepreneurs. But, let me tell you if you are going through this for the first time it is nerve wracking. Send a link to this post to any friends who are trying to navigate their way through the maze.

As I said earlier, every firm handles this slightly differently. There is a lot of detail and nuance behind every step. The deal can die at any step in the process. Try to have back up plans in place.

Good luck!

Senior Executives face some pretty tough questions at a very early stage. Should I take Angel or VC money? How much money should I raise? How much equity should I give up? How much equity should I grant to early employees? There are some guidelines, but every situation is different.

P.Graham wrote “The Equity Equation” 1/(1-n), which basically says “You should give up n% of your company if what you trade it for improves your average outcome enough that what you have left is worth more than the whole company was before.” For example, if you take $1 Million from a Investment Banker in exchange for 33% of your company, it is a good deal if the company is worth 50% more as a result. Theoretically you owned 100% of a $2M company before the investment, and now you own 66% of a company worth $3M.

Both the executive and the investor have much higher expectations than just “even money” on their bet. The executive expects the company to be worth many times this valuation and so does the investor. VCs Angels and Investment Bankers can add tremendous value to a growing company, and it is in their best interest to work hard for you.

Shouldn’t the executive negotiate to only give up 20% of the company for $1M? The short answer is that the company is only worth whatever a competitive group of investors is willing to pay at that point in time. The key is to have several VCs or investors competing for the deal to arrive at a “fair” valuation. It isn’t always possible to have a competitive bidding situation at each financing round so here are some guidelines for funding sources and percentages.

Friends & Family can usually raise between $30K and $300K and usually take an interest bearing note that is convertible into stock at the next financing.

Angels will usually invest between $300K and $2M. They often take a convertible note too, but with warrants for additional shares or a discount on Series A shares. No loss of equity, at least until they convert at Series A.

VCs want to put in $2M to $8M and usually want 30% to 50% of the company. So they will give you a pre-money valuation somewhere around the amount you raise. Sounds strange, but it usually works out that if you are raising $2M the VCs will value your company at $2M pre-money, and $4M post money so they end up with 50% of the stock. If you are raising $5M they will typically value your company at $5M pre-money. The theory is that if they trust you and your business plan enough to give you $5M, then you have probably created something that is already worth $5M.

The second and third rounds of funding take additional shares of equity and dilute existing investors and founders. Founders usually end up with 10% to 20%, all the other employees end up with about 15%, and the VCs end up with about 60% to 75%.

How much money should I take? Marc Andreessen says take all you can get. My simple answer is a little more than you need to reach the next milestone. Don’t cut it too close. Things will take longer than you project, some things will go wrong, and it always take longer to raise money than you think it will. So, figure out how much you need to fund you for a year, or to your next milestone, then add 50% as a safety cushion. That is how much you should raise.

Shouldn’t I raise as little as possible now and raise more later at a higher valuation? Great in theory, that is what you hope to do. But, don’t cut it too close. Give yourself some extra cash and runway to get to the next level. Companies fail because they run out of cash. This sounds simple but think long and hard about this. Companies fail because they run out of cash…they usually don’t fail when they have too much cash in the bank.

Don’t worry about giving up too much equity at an early stage. If the company is successful you will be very rich. If it isn’t successful then holding 60% versus 30% won’t matter anyway.

How much equity should be given to employees? This is another tough question but there are some broad guidelines. To use P. Graham’s theory, you should give that superstar employee enough stock to keep them, and in return they should add double the value you gave up. If you give up 1% equity for an employee, they should add 2% of value to the company. That is much harder than you might imagine.

A basic rule is that each level of the organization should get about one half the options as the level above. If a VP level person gets 100,000 shares, then a director level person might get 50,000, and a manager/supervisor might get 25,000 shares. Here are some “average” guidelines for equity percentages at a liquidity event. They start out higher and get diluted down to these levels after multiple rounds of financing;

CEO - 4%

VPs - 1% each

Director level - .5%

Managers - .25%

Individuals - .05

Now, lets do the math for a company that has 100 employees. The VCs will end up with about 60% to 75% of the company depending on how much was raised and how many rounds. Founders and VPs usually have about 10% and employees have about 15%.

The CEO will have 2% to 4% depending on when they joined or if they are a founder. Lets say you have a non-founder CEO and two founders who are VPs; they will account for 6% of the stock. There will probably be 4 other VP level people with 1% each. That is a total of 10% for founders and execs.

You might have five directors with .5% each and ten manager/supervisors with .25% each for a total of 5% equity. Then you have about 75 individual contributors at a variety of levels, but on average they hold .05% each for a total of about 4%. So, founders and execs end up with about 10%, directors and managers get 5%, and individual contributors account for another 5% collectively, for a total of 20% of the company.

Should I sell the company now for $5M or hold out for a $100M exit 5 to 7 years down the line? This sounds like a “no brainer” but it really depends on what stage you are at and how much equity you have given up. If you are one of three founders holding 33% of the company a $5M exit gets you $1,667,000. If you build the company to 100 employees and sell it for $100M you will probably end up with about $2M. See the equity percentages above to understand how I got to $2M.

Talk to other entrepreneurs - These are tough questions. Every situation is different. The investment market conditions change all the time. What worked three years ago may not work today. Experienced entrepreneurs who have “been there - done that” are your best source of advice. They have lived it and most often are happy to help a fellow entrepreneur. Good luck!!!!! Stay Watchful and Viligant about the importance of cash flow, keeping burn rates low, and avoiding excessive equity dilution.

With a slumping economy, falling dollar and banks tightening up their lending practices, consumers are finding it harder and harder to get loans at decent rates, if at all. Financial planners are abuzz with the fact that people are quickly turning to family and friends for help with financial issues. Combining the growing need and technology a new solution is on the horizon for people in need. The social networking world of the Internet has slowly been providing a solution through sites that allow consumers to get loans from other people instead of banks or credit cards.

The numbers speak for themselves that the trend of lending to your neighbor, family members or even strangers is becoming a fast alternative to suffering in debt, fighting foreclosure or just trying to make ends meet. The largest person-to-person lending website, Virgin Money, has managed a total of over $200 million in loans. The next largest site, Prosper.com just made an announcement on November 27th, 2007 that they had hit the benchmark of $100 million in funded loans through their marketplace.

While these two companies are the biggest, they only scratch the surface on all of the new services offering peer-to-peer lending. Other services launching soon or already running are Lending Club, UK’s Zopa.com, GlobeFunder.com, Loanio and Community Lend. Big or small, these sites all generally operate the same way.

The organizations behind these websites provide a marketplace for borrowers and lenders to find the best combination weighing credit risks, identification and verification and way for people to tell their story. One leap these websites allow people to do when loaning money is to do it in a professional manner by proper documentation and loan issuing. After everything has been squared away in a documented loan with terms and conditions a repayment schedule and tax issues are covered and worked out with both parties. If it couldn’t get any more streamlined than this, you can also setup ACH payments directly from borrowers bank accounts. The cost for this is a percentage fee of up to 1% of the loan for the lender and the borrower can pay anywhere form .75% - 2% dependent upon their credit rating.

According to a research firm, Online Banking Report, the future looks bright for person-to-person lending. By 2010 the person-to-person lending market is expected to jump to $1 billion in total funding. By 2017, the market is expected to catapult to $9 billion dollars in total funding. If the trends develop as predicted these peer-to-peer lending organizations could rival some lending institutions.

Even with strong growth prospects in mind, the loans do have a funding limit on most sites currently. As of now, Prosper.com and Lending club both put funding caps on their loans at $25,000. Virgin Money operates a little differently by not putting limits on loans, with the CEO Asheesh Advani stating their personal loans average $20,000 and first mortgages average about $250,000.

Virgin Money USA was formerly known as CircleLending. As the strength of the industry became obvious, British billionaire Richard Branson purchased a majority stake of CircleLending and spun it into another Virgin subsidiary now called Virgina Money USA. Virgin demographic is tightly focused on family and friends lending to each other while providing the formalized loans and documents in the process.

Other sites like Prosper.com encourage friends and family to lend to each other but they also open their market to strangers with stories and in need of help. Prosper boasts 480,000 members in their network. The functionality behind peer-to-peer lending programs are generally the same. A good analogy is the eBay bidding market where average consumers can list products for sale and have others bid on them. The lending markets work the same way by allowing a borrower to post their loan, description and any other information and allow lenders to bid on the loan. The loan listing allows the borrower to state the maximum interest rate they are willing to pay for any loan up to $25,000. Once the loan is up for bid, as many hundreds of people can actually lend to the final loan amount.

Loan increments are usually set at $50 and helps lenders spread their risk. Someone in a tight crunch with a credit card that is facing over-the-limit fees, late fees and more could get a loan to consolidate their credit card debt and find it funded by 50 - 100 lenders. The process is even simpler once funding has been completed. Prosper.com and other peer-to-peer lending institutions act as the middle-man and complete all loan administration throughout the life of the loan. Things that are taken care of by the institutions are things like loan repayment, collections for the life of the loan and reporting to the credit bureaus. After 30 days go by without payment the loans are assigned to a collection agency.

With all of the talk about growth, lending amounts and success it makes you wonder about the dirty side of the business. Defaults and non-payment. The CEO of Prosper.com has publicly stated that Prosper’s default rate hovers around 2.7 percent. A Deutsche Bank report published in July of 2007 states Prosper’s default rate at 5 percent when looking at 6 months of activity. Late payments run at about 10 percent of all the loans in Prosper’s funding history.

With the risk of defaults and late payments comes the reward for lenders. Lenders can earn rates anywhere from 7% - 18% on the money they loan. Many users of the social lending websites boast better returns on their investment than the typical places people invest for their future or retirement.

There is a strong social trend that is driving the success of these peer-to-peer lending websites. With news constantly coming out about Facebook and MySpace and how these sites are changing the world, their effect is now shaking up the peer-to-peer lending idea. Another company that started in peer-to-peer lending in May 2007 has grabbed onto the power of FaceBook and is driving their business growth through a Facebook App. The site uses the proprietary Facebook application platform to connect lenders with borrowers, due in part to Facebook’s Viral nature and the fact that friends trust lending to other friends. Whether Facebook users need to consolidate credit card debt, pay for vacations or wedding dresses they can now beg friends in the social network.

Have you used peer-to-peer lending yet? Do you think this is a future solution to America’s credit crunch or just another way for American’s to get in debt? We’d like to hear from you at our submission form. If you want to speak your mind or you are involved in Peer-to-Peer Lending and want to speak your mind we want to hear from you. Tell us your story and thoughts.

Is the venture industry shrinking? It’s still too early to say, but anecdotal evidence keeps gathering.

Only eight new firms raised money from institutional investors during the third quarter, the lowest number for at least two years, and possibly longer (we’re checking). The data was compiled by Thomson Financial and the National Venture Capital Assocation.

Including existing venture capital firms, some 59 firms raised $6 billion, also a drop from the previous quarter. However, unless we see further drops, this still doesn’t mean much, because venture firms tend to raise money in packs, and the money raised doesn’t suggest any significant serious drop-off — at least, yet. The full analysis, including how early stage firms were well represented this time around, is here.

It’s no secret that the dollar is on a downward spiral. Its value is dropping, and the Fed isn’t doing a whole lot to change that. As a result, a number of countries are considering a shift away from the dollar to preserve their assets. These are seven of the countries currently considering a move from the dollar, and how they’ll have an effect on its value and the US economy.

Saudi Arabia: The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve. This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking “appropriate measures” to protect itself from letting the dollar cause problems for their own economy. They’re concerned about the threat of inflation and don’t want to deal with “recessionary conditions” in the US. Hans Redeker of BNP Paribas believes this creates a “very dangerous situation for the dollar,” as Saudi Arabia alone has management of $800 billion. Experts fear that a break from the dollar in Saudi Arabia could set off a “stampede” from the dollar in the Middle East, a region that manages $3,500 billion.
South Korea: In 2005, Korea announced its intention to shift its investments to currencies of countries other than the US. Although they’re simply making plans to diversify for the future, that doesn’t mean a large dollar drop isn’t in the works. There are whispers that the Bank of Korea is planning on selling $1 billion US bonds in the near future, after a $100 million sale this past August.
China: After already dropping the dollar peg in 2005, China has more trouble up its sleeve. Currently, China is threatening a “nuclear option” of huge dollar liquidation in response to possible trade sanctions intended to force a yuan revaluation. Although China “doesn’t want any undesirable phenomenon in the global financial order,” their large sum of US dollars does serve as a “bargaining chip.” As we’ve noted in the past, China has the power to take the wind out of the dollar.
Venezuela: Venezuela holds little loyalty to the dollar. In fact, they’ve shown overt disapproval, choosing to establish barter deals for oil. These barter deals, established under Hugo Chavez, allow Venezuela to trade oil with 12 Latin American countries and Cuba without using the dollar, shorting the US its usual subsidy. Chavez is not shy about this decision, and has publicly encouraged others to adopt similar arrangements. In 2000, Chavez recommended to OPEC that they “take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers,” or in other words, stop using the dollar, or even the euro, for oil transactions. In September, Chavez instructed Venezuela’s state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies in order to mitigate risk.
Sudan: Sudan is, once again, planning to convert its dollar holdings to the euro and other currencies. Additionally, they’ve recommended to commercial banks, government departments, and private businesses to do the same. In 1997, the Central Bank of Sudan made a similar recommendation in reaction to US sactions from former President Clinton, but the implementation failed. This time around, 31 Sudanese companies have become subject to sanctions, preventing them from doing trade or financial transactions with the US. Officially, the sanctions are reported to have little effect, but there are indications that the economy is suffering due to these restrictions. A decision to move Sudan away from the dollar is intended to allow the country to work around these sanctions as well as any implemented in the future. However, a Khartoum committee recently concluded that proposals for a reduced dependence on the dollar are “not feasible.” Regardless, it is clear that Sudan’s intent is to attempt a break from the dollar in the future.
Iran: Iran is perhaps the most likely candidate for an imminent abandonment of the dollar. Recently, Iran requested that its shipments to Japan be traded for yen instead of dollars. Further, Iran has plans in the works to create an open commodity exchange called the Iran Oil Bourse. This exchange would make it possible to trade oil and gas in non-dollar currencies, the euro in particular. Athough the oil bourse has missed at least three of its announced opening dates, it serves to make clear Iran’s intentions for the dollar. As of October 2007, Iran receives non-dollar currencies for 85% of its oil exports, and has plans to move the remaining 15% to currencies like the United Arab Emirates dirham.
Russia: Iran is not alone in its desire to establish an alternative to trading oil and other commodities in dollars. In 2006, Russian President Vladmir Putin expressed interest in establishing a Russian stock exchange which would allow “oil, gas, and other goods to be paid for in Roubles.” Russia’s intentions are no secret–in the past, they’ve made it clear that they’re wary of holding too many dollar reserves. In 2004, Russian central bank First Deputy Chairmain Alexei Ulyukayev remarked, “Most of our reserves are in dollars, and that’s a cause for concern.” He went on to explain that, after considering the dollar’s rate against the euro, Russia is “discussing the possibility of changing the reserve structure.” Then in 2005, Russia put an end to its dollar peg, opting instead to move towards a euro alignment. They’ve discussed pricing oil in euros, a move that could provide a large shift away from the dollar and towards the euro, as Russia is the world’s second-largest oil exporter.
What does this all mean?

Countries are growing weary of losing money on the falling dollar. Many of them want to protect their financial interests, and a number of them want to end the US oversight that comes with using the dollar. Although it’s not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble.

Obviously, an abandonment of the dollar is bad news for the currency. Simply put, as demand lessens, its value drops. Additionally, the revenue generated from the use of the dollar will be sorely missed if it’s lost. The dollar’s status as a cheaply-produced US export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.

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Hong Kong Fiber Optic Rates Prove Verizon’s FiOS is a Rip-Off
While Verizon is out aggressively trying to sell the country on their FiOS fiber optic web connection packages, which range from $40 per month for 5Mbps to 30Mbps for $180 (extra for TV and phone service!), Hong Kong residents can now enjoy their own fiber optic connections from Hong Kong Broadband Network Limited… which happen to be a fraction of the price and many times faster than what we can get here. Yes, HK residents can now get a whopping 100Mbps fiber optic connection for a mere $48.50 a month. And that’s the entry-level package.

How about 200Mbps for $88.20? Yeah, not quite enough, I agree. You might as well jump up to 1Gbps for $215.40 a month. But hey, you don’t really need that, do you? You should be thanking Verizon for the opportunity to pay them for a pathetic 5Mbps connection. I mean, the US is so far down on the per-country broadband speed chart (the Japanese are enjoying 60Mbps average) that we should just be loving any crumbs the telecoms are willing to toss our way, right? Thanks again, Verizon!

A new crisis is emerging, a global food catastrophe that will reach further and be more crippling than anything the world has ever seen. The credit crunch and the reverberations of soaring oil prices around the world will pale in comparison to what is about to transpire, Donald Coxe, global portfolio strategist at BMO Financial Group said at the Empire Club’s 14th annual investment outlook in Toronto on Thursday.

“It’s not a matter of if, but when,” he warned investors. “It’s going to hit this year hard.”

Mr. Coxe said the sharp rise in raw food prices in the past year will intensify in the next few years amid increased demand for meat and dairy products from the growing middle classes of countries such as China and India as well as heavy demand from the biofuels industry.

“The greatest challenge to the world is not US$100 oil; it’s getting enough food so that the new middle class can eat the way our middle class does, and that means we’ve got to expand food output dramatically,” he said.

The impact of tighter food supply is already evident in raw food prices, which have risen 22% in the past year.

Mr. Coxe said in an interview that this surge would begin to show in the prices of consumer foods in the next six months. Consumers already paid 6.5% more for food in the past year.

Wheat prices alone have risen 92% in the past year, and yesterday closed at US$9.45 a bushel on the Chicago Board of Trade.

At the centre of the imminent food catastrophe is corn - the main staple of the ethanol industry. The price of corn has risen about 44% over the past 15 months, closing at US$4.66 a bushel on the CBOT yesterday - its best finish since June 1996.

This not only impacts the price of food products made using grains, but also the price of meat, with feed prices for livestock also increasing.

“You’re going to have real problems in countries that are food short, because we’re already getting embargoes on food exports from countries, who were trying desperately to sell their stuff before, but now they’re embargoing exports,” he said, citing Russia and India as examples.

“Those who have food are going to have a big edge.”

With 54% of the world’s corn supply grown in America’s mid-west, the U.S. is one of those countries with an edge.

But Mr. Coxe warned U.S. corn exports were in danger of seizing up in about three years if the country continues to subsidize ethanol production. Biofuels are expected to eat up about a third of America’s grain harvest in 2007.

The amount of U.S. grain currently stored for following seasons was the lowest on record, relative to consumption, he said.

“You should be there for it fully-hedged by having access to those stocks that benefit from rising food prices.”

He said there are about two dozen stocks in the world that are going to redefine the world’s food supplies, and “those stocks will have a precious value as we move forward.”

Mr. Coxe said crop yields around the world need to increase to something close to what is achieved in the state of Illinois, which produces over 200 corn bushes an acre compared with an average 30 bushes an acre in the rest of the world.

“That will be done with more fertilizer, with genetically modified seeds, and with advanced machinery and technology,” he said.

WASHINGTON (AP) — Wholesale inflation last year shot up by the largest amount in 26 years while retailers suffered their worst December shopping season in five years as mounting economic woes caused consumers to put away their wallets.

The Labor Department reported that wholesale inflation was up 6.3 percent for all of 2007, reflecting a huge increase for the year in various types of energy costs ranging from gasoline to home heating oil.

Meanwhile, retail sales fell by 0.4 percent in December, the worst showing in six months, the Commerce Department reported. Consumer confidence has plunged, reflecting the worsening housing slump and a lingering credit crisis.

In a third report, the government said that inventories held by businesses rose by 0.4 percent in November, reflecting big increases in stockpiles held by manufacturers and wholesalers. The 0.4 percent rise matched a similar increase in September and was in line with expectations. Inventories had risen by a much smaller 0.1 percent in October.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

WASHINGTON (AP) — Wholesale inflation last year shot up by the largest amount in 26 years while retailers suffered their worst December shopping season in five years as mounting economic woes caused consumers to put away their wallets.

The Labor Department reported that wholesale inflation was up 6.3 percent for all of 2007, reflecting a huge increase for the year in various types of energy costs ranging from gasoline to home heating oil.

Meanwhile, retail sales fell by 0.4 percent in December, the worst showing in six months, the Commerce Department reported. Consumer confidence has plunged, reflecting the worsening housing slump and a lingering credit crisis.

For inflation, the year ended on a more positive note, with wholesale prices falling by 0.1 percent in December. That reflected decreasing costs last month for gasoline and other energy products. It was a significant slowdown after prices had soared by 3.2 percent in November, which had been the biggest one-month increase in 34 years.

The combination of rising inflation pressures and a weak economy represent a dilemma for the Federal Reserve over whether to cut rates to boost economic growth even at the risk of making inflation worse.

Federal Reserve Chairman Ben Bernanke last week sent a strong signal that the Fed is more worried at the moment about weak growth than inflation — given a series of weaker-than-expected data in recent weeks. He is expected to give an economic outlook update on Thursday to the House Budget Committee.

The economy skidded to a virtual standstill in the final three months of last year, raising fears the country could fall into a recession, unable to withstand the multiple blows from the prolonged downturn in housing, a severe credit crisis and soaring energy costs.

Already, unemployment is rising. The jobless rate jumped to 5 percent in December, up from 4.7 percent in November. That was the biggest one-month surge in unemployment since October 2001 in the wake of the 2001 terrorist attacks.

The various economic threats have sent consumer confidence plunging and pushed the economy to the top of voters’ concerns. Political leaders have responded, with President Bush, Democrats in Congress and presidential candidates from both parties putting forward economic stimulus proposals.

The 6.3 percent increase in the Producer Price Index, which measures cost pressures before they reach the consumer, followed a much more moderate 1.1 percent increase in 2006.

It was the biggest annual price gain since a 6.3 percent rise in 1981, a year when the Federal Reserve was aggressively raising interest rates in a successful effort to combat a decade-long bout of stagflation, rising inflation in conjunction with weak economic growth.

The big increase last year reflected the fact that energy prices rose by 18.4 percent after having declined by 2 percent in 2006. It was the biggest annual increase in energy costs at the wholesale level since they rose by 23.9 percent in 2005.

However, core inflation, which excludes energy and food, was better behaved, rising by 2 percent last year, the same as in 2006. The Fed is closley watching core prices for any signs that the price pressures being seen in energy and food are starting to spread to other parts of the economy.

For December, the 0.1 percent drop in overall prices reflected a 1.9 percent plunge in energy and a 1.3 percent rise in food costs. Outside of food and energy, core inflation posted a moderate 0.2 percent increase.