Tuesday, April 08, 2008

Of rice bowls and dust bowls

So far, it appears all the bad news in the economy has been "purely" financial. It has been a credit crunch, a housing bust, a borderline recession, but not the conflagration that was the Great Depression.

In the US, the Great Depression coincided with the Dust Bowl, a financial melt-down hammered down some more by coincident drought and hunger and unemployment and more hunger. In Europe it was aggravated by the social strife resulting from the pay-back demands of the victors of WWI and the ensuing hyper-inflation and political turmoil that WWI failed to settle. And across the world trade barriers were erected to "protect" local markets, leading to trade wars and then real ones.

Maybe we're lucky this time and the subprime mortgage meltdown, which was not contained to a small corner of the mortgage markets as we were told it would do, would nevertheless manage to contain itself to the financial markets and get bailed out by the likes of Hank Paulson and Uncle Ben.

But suppose the credit boom coincidentally occurred together with a commodity boom? Would that begin to look more like the events of the Great Depression? Would the addition of hunger and political turmoil overlay a complexity to this "merely" financial mess with a resultant wider and more serious social default?

Guambat is beginning to feel deep down in his not insubstantial gut that there is something brewing and it ain't at Starbucks. And Guambat feels that if we fall into the trap of those whose thinking goes along the lines of "if you ignore the price of food and energy there is no inflation", we will get blindsided by our own myopia.

Deep Throat goaded the journalists to "follow the money" to unveil the little story of the Nixon administration's shenanigans that led to his downfall in the Watergate Tale.

In this tale, we need to begin to follow the grains, as in the grains of rice in the rice bowls and the grains of sand in the hour glass.

Guambat begins the context for this tale by referencing a children's book, One Grain Of Rice: A Mathematical Folktale, by Demi.

Guambat hasn't read the book, but did notice this "analysis" of the book by some rather Austrian-schooled economist type economist at Kids Econ Books dot com. This analysis has provided a happy ending to the following stories by instructing us that the happy rice farmers will simply produce more rice and Uncle Ben can rest easily on the sidelines (whilst ignoring their own summary, which Guambat reckons is the real moral of the story: "Luckily, a young maiden develops a plan to get the rice back from the raja.")

Guambat wanted to give you the theoretical happy ending before presenting the not-so-happy news items appearing in the last few days, weeks and months, such as:

High Rice Cost Creating Fears of Asia Unrest by Keith Bradsher (NYT March 29):
The price of rice, a staple in the diets of nearly half the world’s population, has almost doubled on international markets in the last three months. That has pinched the budgets of millions of poor Asians and raised fears of civil unrest.

Rice is unusual among major agricultural commodities in that most of the major rice-consuming countries are self-sufficient or nearly so. Only 7 percent of the world’s rice production is traded across international borders each year, according to figures from the United Nations Food and Agriculture Organization in Rome. [Nevertehless,] “The market has pretty much ground to a halt for the past few weeks,” said Ben Savage, the managing director for rice at Jackson Son & Company, a commodities trading firm in London.

Shortages and high prices for all kinds of food have caused tensions and even violence around the world in recent months. Since January, thousands of troops have been deployed in Pakistan to guard trucks carrying wheat and flour. Protests have erupted in Indonesia over soybean shortages, and China has put price controls on cooking oil, grain, meat, milk and eggs.

Food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. But the moves by rice-exporting nations over the last two days — meant to ensure scarce supplies will meet domestic needs — drove prices on the world market even higher this week.

This has fed the insecurity of rice-importing nations, already increasingly desperate to secure supplies. On Tuesday, President Gloria Macapagal Arroyo of the Philippines, afraid of increasing rice scarcity, ordered government investigators to track down hoarders.

Vietnam’s government announced here on Friday that it would cut rice exports by nearly a quarter this year. The government hoped that keeping more rice inside the country would hold down prices.

The same day, India effectively banned the export of all but the most expensive grades of rice. Egypt announced on Thursday that it would impose a six-month ban on rice exports, starting April 1, and on Wednesday, Cambodia banned all rice exports except by government agencies.

Governments across Asia and in many rice-consuming countries in Africa have long worried that a steep increase in prices could set off an angry reaction among low-income city dwellers.

“There is definitely the potential for unrest, particularly as the people most affected are the urban poor and they’re concentrated, so it’s easier for them to organize than it would be for farmers, for example, to organize to protest lower prices,” said Nicholas W. Minot, a senior research fellow at the International Food Policy Research Institute in Washington.

Several factors are contributing to the steep rice in prices. Rising affluence in India and China has increased demand. At the same time, drought and other bad weather have reduced output in Australia and elsewhere. Many rice farmers are turning to more lucrative cash crops, reducing the amount of land devoted to the grain. And urbanization and industrialization have cut into the land devoted to rice cultivation.

In Vietnam, an obscure plant virus has caused annual output to start leveling off; it had increased significantly each year until the last three years.

Until the last few years, the potential for rapid price swings was damped by the tendency of many governments to hold very large rice stockpiles to ensure food security, said Sushil Pandey, an agricultural economist at the International Rice Research Institute in Manila.

But those stockpiles were costly to maintain. So governments have been drawing them down as world rice consumption has outstripped production for most of the last decade.

Together with rising prices for other foods, like wheat, soybeans, pork and cooking oil, higher rice prices are also contributing to inflation in many developing countries. Retail rice prices have already jumped by as much as 60 percent in recent months in Vietnam, trailing increases in wholesale prices but leading a broader acceleration in inflation. Prime Minister Nguyen Tan Dung of Vietnam announced Wednesday that the government’s top priority now was fighting inflation. Overall consumer prices are more than 19 percent higher this month than last March. The inflation rate has nearly tripled in the last year.

The government of Thailand, the world’s largest rice exporter followed by Vietnam, has not yet limited exports. But a national debate has started in Thailand over whether to do so ,and Thai exporters have already practically stopped signing delivery contracts, Mr. Savage said.

Even before Friday’s export restrictions by Vietnam and India, bids for commonly traded grades of Thai medium-grain rice had doubled this year to $735 a metric ton. Vietnamese medium-grain rice had almost doubled to more than $700 a ton, with most of the increase coming in the last four weeks. Bids jumped as much as $50 a ton on Friday.

Governments have been reluctant to tell farmers to sell their rice at low fixed prices, for fear that farmers would hoard rice or not bother to grow as much as they could. On Friday, China, which is virtually self-sufficient in rice, raised the minimum prices for rice and wheat that it guarantees to farmers.

Egyptian Workers Riot Over Rising Prices by AP (NYT April 6)
Thousands of demonstrators angry about rising prices and stagnant salaries torched buildings, looted shops and hurled bricks at police who responded with tear gas Sunday in a northern industrial town as Egyptians staged a nationwide strike.

About 150 people were arrested and 80 were wounded in the gritty Nile Delta town of Mahalla el-Kobra, where riots broke out among residents and disgruntled workers at the largest textile factory in Egypt.

Protesters stormed city hall, burned tires in the streets, smashed chairs through shop windows and ran off with computers. At least two schools were set ablaze and facades of banks were vandalized, police said.

Nearly 100 others were arrested elsewhere across Egypt, officials said, as thousands skipped work and school and hundreds protested over the rising cost of food and deteriorating working conditions.

A call for a nationwide strike Sunday was the first major attempt by opposition groups to turn the past year's labor unrest into a wider political protest against the government of President Hosni Mubarak.

The strike and riots in the north came two days before key elections for local councils, causing jitters in the government, which last week lifted import duties on some food items in an effort to soften economic discontent.

Nearly 40 percent Egypt's 76 million people live below or near the poverty line of $2 a day. The prices of staples such as cooking oil and rice have nearly doubled in recent months, amid widespread shortages of government-subsidized bread.

Inflation Is Real Risk, So Forget Bear Stearns by William Pesek (Bloomberg April 7)
Forget Bear Stearns. Ignore what Ben Bernanke and Henry Paulson are up to. Take your attention away from which hedge fund is about to blow up. Think about rice.

How Federal Reserve Chairman Bernanke and U.S. Treasury Secretary Paulson tend to the credit crisis may pale in comparison with surging costs of vital foods. The price increase of rice, the staple food for about 3 billion people, to a record last week, is the real crisis in the fastest-growing region.

That's not all. "Food is just the tip of the iceberg," says Ifzal Ali, chief economist at the Asian Development Bank in Manila. "We see signs of overheating emerging everywhere in Asia."

There are two other forces behind Asia's inflation surge, both of which have been building for years. One is asset-price gains that have their roots in low-interest-rate policies from Washington to Tokyo. The other is wages as Asians command higher pay and companies encounter skilled-labor shortages.

It's a kind of horror scenario. Yet what's most noteworthy about it is how surprised many investors and economists are.

What may surprise many is how rising food prices are less of a cyclical phenomenon than a secular one. For economists like Ali, who have been warning about this for years, it's disheartening to see so little focus on increasing investments in agriculture techniques and technologies.

And yet today's bout with inflation could markedly set back a region that has spent 10 years recovering from the Asian crisis. Central banks will have little choice but to raise interest rates, a dynamic that would slow growth and hurt equity markets.

The rise in commodities since the start of the decade has been largely masked by subsidies and export controls. That's becoming too expensive now as prices soar and leaders have a grim choice to make: vastly increase debt levels or let the public bear the brunt.

Food costs alone are a clear and present danger. In many Asian countries, Ali says, food and edible oils account for 60 percent of the consumer-price index. Even before recent increases, Asian families on average shelled out 50 percent of income on food. That portion is rising at this very moment.

Economists in the U.S. and Europe often focus on "core" inflation, which excludes food and energy. That's impossible in developing Asian economies. Looking at core CPI only masks what Ali calls a "pauperizing effect" knocking back hard-won gains in living standards.

For most people in the world, filling a gas tank is a choice. If speculators drive oil prices higher, you find a way around it as best you can. If gold prices surge, you buy silver. When it comes to the costs of food that can't easily be substituted, like rice, wheat, corn, soybeans, pork and palm oil, Asia has a problem.

"This inflation issue has a direct impact on basic well- being," Ali says. "That's why it is so politically and socially explosive."

Grains Gone Wild by the not-Austrian-school economist Paul Krugman (NYT April 7)
Over the past few years the prices of wheat, corn, rice and other basic foodstuffs have doubled or tripled, with much of the increase taking place just in the last few months. High food prices dismay even relatively well-off Americans — but they’re truly devastating in poor countries, where food often accounts for more than half a family’s spending.

There have already been food riots around the world. Food-supplying countries, from Ukraine to Argentina, have been limiting exports in an attempt to protect domestic consumers, leading to angry protests from farmers — and making things even worse in countries that need to import food.

How did this happen? The answer is a combination of long-term trends, bad luck — and bad policy.

Let’s start with the things that aren’t anyone’s fault.

First, there’s the march of the meat-eating Chinese — that is, the growing number of people in emerging economies who are, for the first time, rich enough to start eating like Westerners. Since it takes about 700 calories’ worth of animal feed to produce a 100-calorie piece of beef, this change in diet increases the overall demand for grains.

Second, there’s the price of oil. Modern farming is highly energy-intensive: a lot of B.T.U.’s go into producing fertilizer, running tractors and, not least, transporting farm products to consumers. With oil persistently above $100 per barrel, energy costs have become a major factor driving up agricultural costs.

O.K., I said that these factors behind the food crisis aren’t anyone’s fault, but that’s not quite true. The rise of China and other emerging economies is the main force driving oil prices, but the invasion of Iraq — which proponents promised would lead to cheap oil — has also reduced oil supplies below what they would have been otherwise.

And bad weather, especially the Australian drought, is probably related to climate change. So politicians and governments that have stood in the way of action on greenhouse gases bear some responsibility for food shortages.

Where the effects of bad policy are clearest, however, is in the rise of demon ethanol and other biofuels.

The subsidized conversion of crops into fuel was supposed to promote energy independence and help limit global warming. But this promise was, as Time magazine bluntly put it, a “scam.”

This is especially true of corn ethanol: even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains. But it turns out that even seemingly “good” biofuel policies, like Brazil’s use of ethanol from sugar cane, accelerate the pace of climate change by promoting deforestation.

And meanwhile, land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuels are a major factor in the food crisis. You might put it this way: people are starving in Africa so that American politicians can court votes in farm states.

Oh, and in case you’re wondering: all the remaining presidential contenders are terrible on this issue.

So is there anything YOU can do about it? Probably not much.

But if you're feeling both erudite and possessed of a
caring externality (see definition here), you may benefit from a trip to the Free Rice project's website, and by playing their wordsmithy game. Guambat reckons Guambat's Mom, should she happen upon this post and get this far down into it, will go mad until she bests the "rare" 48 level.

Better yet, maybe become one of those "anonymous donors" who sponsor the site, perhaps even a non-anonymous one.

For every word definition you get right, those worthy sponsors donate
20 grains of rice to the world's hungry. And like as not drive up the price ever higher, but the bulk of the world's economists will be none the Ludwig von Miser.


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