Tuesday, January 6, 2009

Food prices- Take II

Second take on the food price issue. I was just browsing through wiki and came across the documentation of the food price rise issue. Surprisingly, after all that has been said and done, the article still mentions, India and China’s middle class as one of the most important causes for the rise!! The claim has been refuted by the World Bank, FAO and other non-partisan research institutions. Not surprisingly the claim has been upheld by groups fighting for self-interest including the Renewable Fuel Association. There are a few questions that arise in the context of falling prices in the recent days.

1) Not long ago, analysts and consulting reports on Wall Street devoted reams and reams of paper on the commodity story. How crude oil production had peaked and how it might hit $200 (Goldman Sachs). Same with agriculture commodities, how bio-fuels especially corn based fuel was going to be the next big thing, after all with $200 a barrel crude oil, corn based bio-fuel looked very lucrative. What happened to all that? Why is crude oil having a free fall?

2) What about the growing demand for meats in India and China, did food demand pattern which evolves over a long period of time suddenly change that commodities are falling as well?

3) President Bush pledged a $770 million international food aid. While the US farm bill pledges $288 billion aid and subsidies to farmers in United States including those with an annual income of not more than $750,000 or ¾ million dollars! What does that mean? It is a joke being played on the international community and the developing world?

4) Besides, USA is also preventing the cheaper and more eco-friendly Brazilian sugarcane derived bio-fuels, while forcing poor African and Asian nations including India to open up their markets for agricultural goods. This is clear case of the King can do no wrong; What ever be the clauses in WTO, what ever rule might the country apply on other countries, it is simply not applicable to the mighty A!!

Now for the answers

1) Yes Goldman Sachs et al were right when it said oil was going to hit $200. After all they were sitting on cash piles, the stock markets were weak, and emerging markets started showing signs of trouble, so how to make ridiculous profits? Play a game, not very different from that of roulette at Foxwoods! Looking to make money on assets, they started probing the commodities markets. A few reports here and there warning of dooms day scenario and upcoming incredible increase in prices was just a story they all needed. So smart fellow wrote the first report, and the analyst herd follows and lo behold, a lot of money, own and borrowed went into commodity trading. When prices kept edging up and up, those who had prophesised the price rise profited. They made a lot of money. It was self-fulfilling just like the run on a bank. The recipe is very simple… something like this

· Buy crude on commodity exchange

· Write reports on how crude prices will increase, create market hysteria. (Not difficult for market biggies, herd mentality, we all follow them)

· Keep buying till others start buying leading to increase in prices of the commodity already brought

· Once the price is high enough, start selling for a profit; you created a bubble and made profits from it.

· If smart you will stop right there, if not you will keep buying hoping to sell later at a even higher prices, only to loose everything

· Because bio-fuels and crude are substitutes, demand for bio-fuels expected to go up and an identical speculative bubble forms

· Corn and food grains are substitutes, and transmission of price hike to food grains.

Bingo another bubble created. This last bubble turned out to be pretty dangerous, because it affects very survival of millions across the globe. While there were food related riots in Haiti, India, Pakistan and a host of poor countries, Wall Street made profits.

Now what is happening now?

Recession: It is incredible that these intelligent people at Wall Street are waking up to thoughts of recession so late? It is obvious that during recessionary periods the demand for crude is so much lesser given the slow down in industrial production, slow down in transportation etc. So there was bound to be a price reduction and its transmission through to food grains. Were they who wrote all these reports and created this hysteria, not aware of the impending recession? Everyone knew about the recession right in the beginning of 2007, were not we? The only question back then was when we will bottom? So the demand they were forecasting was phoney. Their ‘ceterus paribus’ could not have worked and in all probability they knew it very well. What remains is greed, to make as much as possible before it gets worse. Make as much hay when the even as the sun sets. That is what happened. Thankfully crude did not hit $200, I wonder how much the wall street made and lost just on the crude trade. Hand in glove with crude were corn and its bio-fuels. Bio-fuels naturally became the next big thing. Because corn is a food grain and most food grains are substitutes, the price bubble of corn, quickly spread into other food grains and a vast array of food products including edible oil. Unfortunately, all those people at the helm of the fiasco will naturally go scot free. They have always been unaccounted for and will remain so.

Increased consumption of food in emerging markets: So how did all of a sudden, folks in India and China started eating less and contributed to the fall in prices of food? Wonder what Wall Street Journal has to say about it J. I am still not able to believe that as recent as last week, there was an article in WSJ attributing the food price rise to emerging markets, just like Pakistan in a denial mode even after its citizens were apprehended for the blatant crime in Mumbai!!! The only improvement is that they sort of acknowledge the role of bio-fuel policy as well.

Free Markets! What a joke. It is a situation of ‘Trishanku Swarga’

Those who want to profit will invariably do it whether it is a free market or a restricted market. Just that in a free market, it is legal to do what would probably be legally punishable in a restricted market. It is just this resignation that there are scores of people, here there and everywhere who are easily the victims for no fault of theirs that makes me feel, nothing actually matters….

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