So far this year ordinary people in Algeria, Tunisia, Egypt, Jordan, Yemen, Oman and Iran have taken to the streets. In all of them the demands have been for greater democracy. Not one of the protests has had the “Death to America”, “Death to Israel” so beloved of the Fox News knuckle heads.
So this wave of unrest is not radical Islam rising. Neither, however, I will argue, is it the triumph of Western Democracy. So then what is it and how might it develop?
The first questions, of course, are: why those countries, if Islam is not the common factor then what is, and why now?
Well, only in Jordan, was the price of food the main and declared cause. All of the rest took to the streets to demand more democratic freedoms and perhaps even a little substance to their democracy instead of just the trappings of it. So no one can deny that so far these protests have been more about democracy than radical Islam.
So why now?
Last year Wheat prices doubled and since mid November have risen a further 35%. But can we really say food prices are a major cause of unrest in all these nations? Egypt is the world’s largest importer of Wheat at over 6300 metric tonnes but the other big importers are Japan, (no.2), Brazil (no.3) and Indonesia (no.4). and there have been no uprisings in those countries.
But if we simply look at imports per capita this happens,
| # 1 | United Arab Emirates: | 370.659 thousand metric tons per | |
| # 2 | Libya: | 242.803 thousand metric tons per | |
| # 3 | Israel: | 238.968 thousand metric tons per | |
| # 4 | Jordan: | 173.611 thousand metric tons per | |
| # 5 | Algeria: | 101.439 thousand metric tons per | |
| # 6 | Tunisia: | 89.33 thousand metric tons per | |
| # 7 | Yemen: | 86.8432 thousand metric tons per | |
| # 8 | Egypt: | 81.284 thousand metric tons per | |
| # 9 | Iraq: | 76.7018 thousand metric tons per | |
| # 10 | Cuba: | 70.5032 thousand metric tons per |
(Per million population)
Now simply weed out the UAE on the grounds that it is rich with oil and you have everyone accounted for except Oman which I think we can fairly put down to straight forward contagion of enthusiasm.
“Financial crises, like epidemics, kill the unhealthy first. “
The same writer concludes that what is happening with Wheat and food generally is that the Arab poor have been priced out of the market by India’s and China’s middle class joining ours at the front of the queue. And in part I agree. Only I think there are further very nasty compounding factors.
Neither China nor India are huge Wheat importers. China and India consume a great deal of Wheat but produce a great deal of it themselves. (These are not up to date figures but are still useful) . Thus neither is a massive importer. China is virtually self sufficient. So what is pushing up Wheat prices so fast and so far above the small decline in supply that it is destabilizing country after country?
For an answer we need to turn to the other major thing that has happened in the last year and that is the massive printing of money. Trillions of dollars, pounds, Euros and Yen have been printed and pumped into the banks. This money has been looking for a profit. There has been little profit to be had sitting at home and so most of the money we have printed and borrowed has been funneled abroad. Where it has flooded into ’emerging’ markets causing huge price volatility as bubbles form and burst and form again.
Now those who defend the markets from people like me, who don’t have PhD’s, will tell you this: Those who are slandered by being called ‘Speculators’ are actually only middle men who facilitate the smooth flowing of prodcts from producer to consumer. As such they can’t effect the price that the actual consumer will pay. Speculators CAN’T be driving prices up because speculators can’t actually buy the physical stuff – imagine, they say, how silly it is to think of a bank taking delivery of thousands of tonnes for Wheat! The very notion!
The ‘market’ sets the price, the middle man just helps. And if there are lots of middle men chasing contracts, all that will do is force them to keep what they charge for their middle-man service, as low as possible. The very picture of an efficient market.
Let’s take these one at a time. First, it is silly to imagine banks taking physical delivery. As silly as imagining that every property speculator had to live in every house he bought. Or worse arguing that he simply couldn’t buy them because he couldn’t live in them all (take physical delivery). Silly indeed. The property speculator flips the houses. He buys and before the paint is even dry he sells it on. So too the food speculator doesn’t have to have the Wheat delivered to his desk. He buys and flips the sale. If necessary he can pay for the grain to be stored in a warehouse until the ownership is switched. JP Morgan owned Oil in tankers moored off shore for a while.
The food speculator buys contracts and options on the expectation of a rising price and then if the price does rise, flips those contracts to someone who really does want the physical stuff. If the price doesn’t rise he closes his ‘position’ at a loss. Which if he has hedged well, will be a small loss. The speculator also buys derivatives which will pay him IF the price rises. And then he can set about encouraging that very price rise. In a bubble market this works particularly well. So the ‘physical delivery’ argument does not stand up.
What of the second objection, that no matter how many speculating middle men there are, no matter how much money they have, they can’t raise the price above what the end consumer will pay? Text book stuff. Which is why I don’t recommend them.
Imagine the situation we have, of markets flooded with cheap, printed up cash. The banks and dealers holding that cash are desperate for a profit. They see a small decline in Wheat supply. A chance of a rising price. Dealers buy up contracts. What will they be willing to pay for these contracts? Text book says, the glut of buyers can do nothing to raise the ‘market’ price which is set by the end consumer.
Reality is otherwise. The middle men have in recent years become the market. There are so many of them, with such buying power, on so few markets all of which are in instant communication, that the middle men can have a vast effect. In fact they are the market taht counts NOT the end consumer. The middle men, the specualtors have begun to dictate to both the producers and the consumers.
IF there is a huge real glut of product, then that glut will as per teh text books, keep the price down. But if there is even a 2% shortage, then the amount of cheap money around can easily buy up the bulk of what produce there is with little fear of losing. It’s not as if the farmer can say, “Oi, over here, I’ve got stuff for less.” The middle men have the contracts, the contacts and cash.
Now the obvious, objection is that those middle men in the end will have to sell to the end user. Surely the end consumer will just find a dealer who will sell for less? But why would a dealer sell for less? Why not sell up at whatever the other dealers are selling for. Don’t forget the ‘middle men’ control almost all the market and except in years of real over-supply, especially as we work towards the back of the queue, there will not be lots of spare produce.
Once you see that in most years the middle men, the speculators, are the market, then you can see a whole dynamic of this new market, taking control. There will be lots of middle men, with lots of cash chasing a limited amount of produce. There will be more money around than produce to buy or profits to be made. Thus the money will compete to buy in to the commodity that is rising. They will bid it up, not down.
To put it simply everybody becomes desperate for ‘a piece of the action’, and will pay over the odds to get it. Especially in a volatile and rising, bubble market . This is simple bubble economics. It is how bubbles form. Wheat speculators see that prices will rise a little. They buy in at the front of the queue. Each would like to get a piece of the action and there is not enough wheat for everybody to get a piece. So they will bid each other up. This will make prices of Wheat futures rise. that rise will attract more money looking for some action.
While this is going on counties and people still need to eat. They can’t simply wait until the speculators calm down. So people buy the inflated prices. How do we know they do? Because the price doubled on only 2.4% supply constriction. The Wheat market is very volatile and this is why. And I as wrote in the post on volatility. volatility itself is what the modern market trades in.
Speculators can and do bid up prices. The take a small short fall and amplify it so as to maximize what markets do, which is make profit from demand.
So now, finally, what of the future?
According to the FAO China’s main Wheat growing belt, which produces two thirds of its Wheat, is facing the worst drought in 60 years, and in some parts, the worst in 200 years (How they know this last figure I don’t know). Nearly 13 our of 35 million acres affected. See pictures here. IF the drought continues next year’s harvest will be very small. If it rains the harvest could be huge. China is preparing for the worst and prices are rising.
Climate problems have already caused Russia and Ukraine to suspend Wheat exports and Australia’s harvest too may well be cut. Whether you think global warming is happening or not and is due to man or not, starts to not matter. ( I believe the evidence says it is happening and is man made but that’s another story) Regardless, the facts are that food insecurity IS rising at a time when stupid western governments are flooding their banks with money and those banks don’t really care who starves so long as they make a profit.
To circle back to where we began, climate and food insecurity, plus printed-money fueled speculation is going to mean food prices will continue to be very volatile and very probably will go up further. In those countries where protesters are thinking democracy is going to feed their children they are going to find that democracy has become the market’s bitch and the market does not care. We shold expect more countries, including our own, to feel civil unrest growing as prices and inflation race ahead of employment and wages.
I agree with your anaysis entirely but whereas you normally supply a tentative solution to a problem in this case you do not. Do you have any thoughts on a resolution to this problem ,preferably one that can take effect in the next 12 months ,or are you saying that there is nothing to be done and we must grin and bear it?
reneecharles,
It depends on what level of solution e want to think of.
On the level of the protests. It seems to me we have to decide if we are really pro democratic reform or prefer to opt for repression albeit rebranded.
If we prefer repression to keep the lid on potential unrest then we do nothing and support the regimes in place as they are. I think this is what our leadership will opt for. It is without honour. And it will give teh Wahhabi and their like the opening they desire. It will lead to a radicalism. Which you could say is what the Pentagon would like as well. Job security and all that.
Better would be to act to protect people from food price rises. We could do several things. We could write off debts. We could and should stop printing money and giving it to the banks. We could purge ourselves of the banks and their malignant influence. Both of these would help stop the flow of money creating bubbles in commodities.
We must not allow the proposals for the new UK corporate tax regime to come in to being. But short of taking to our own streets I do not see us being able to do this.
Whatever eh case I do NOT advcate grinning and bearing it. I support taking to our streets and facing down our financial elite as they have done in Egypt and Iceland. WIll we? Not yet.
cont.
When I asked Merrill Lynch's spokesman to comment on the charge of causing mass hunger, he said: "Huh. I didn't know about that." He later emailed to say: "I am going to decline comment." Deutsche Bank also refused to comment. Goldman Sachs were more detailed, saying they sold their index in early 2007 and pointing out that "serious analyses … have concluded index funds did not cause a bubble in commodity futures prices", offering as evidence a statement by the OECD.
Abolished regulation?!?
As my own case shows, even when there is an official regulator in place, this does not mean that any regulations are enforced. Ask UniCredit Ireland. They know.
Regards,
WhistleblowerIRL
http://whistleblowerirl.blogspot.com/
Here is the link to Independent article –
http://www.independent.co.uk/opinion/commentators/johann-hari/johann-hari-how-goldman-gambled-on-starvation-2016088.html
Sorry, first part vanished:
Golem, your posting made me think of some forgotten headlines re Goldman Sachs –
Johann Hari: How Goldman gambled on starvation – The Independent (UK), July 2010
…Earlier this year I was in Ethiopia, one of the worst-hit countries, and people there remember the food crisis as if they had been struck by a tsunami. "My children stopped growing," a woman my age called Abiba Getaneh, told me. "I felt like battery acid had been poured into my stomach as I starved. I took my two daughters out of school and got into debt. If it had gone on much longer, I think my baby would have died."
Most of the explanations we were given at the time have turned out to be false. It didn't happen because supply fell: the International Grain Council says global production of wheat actually increased during that period, for example. It isn't because demand grew either: as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent. Other factors – like the rise of biofuels, and the spike in the oil price – made a contribution, but they aren't enough on their own to explain such a violent shift.
To understand the biggest cause, you have to plough through some concepts that will make your head ache – but not half as much as they made the poor world's stomachs ache.
For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk. Farmer Giles can agree in January to sell his crop to a trader in August at a fixed price. If he has a great summer, he'll lose some cash, but if there's a lousy summer or the global price collapses, he'll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked.
Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into "derivatives" that could be bought and sold among traders who had nothing to do with agriculture. A market in "food speculation" was born.
So Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that contract can be sold on to speculators, who treat the contract itself as an object of potential wealth. Goldman Sachs can buy it and sell it on for £20,000 to Deutsche Bank, who sell it on for £30,000 to Merrill Lynch – and on and on until it seems to bear almost no relationship to Farmer Giles's crop at all.
…In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world's frightened investors stampeded on to this ground.
So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.
“But short of taking to our own streets I do not see us being able to do this.”
I wonder if the catch-cry of public protests and demonstrations of the future, the world over(not just the arab world) will be,
“Remember the Egyptians, it took 18 days!”
Western commentators seem to be analysing the popular uprisings and calculating likelihoods and probabilities of unrest spreading, solely in relation to the middle east, whereas, my instinctive response was, this could be the template for people protests now in the west.
Governments don’t acquiesce in the face of a Saturday afternoon march, what do they care, it’s an inconvenience. Remember the anti Iraq invasion protests. War criminal Blair and his cronies took note and then carried on regardless.
What governments most fear most, is what happened in Egypt, sustained, massive, public protest. What to do? The system grinds to a halt. Then it’s a game of chicken to see who relents first.
Of course we’re simply not yet hungry or dispossessed enough to insist governments actually yield to the will of the people.
We still have too much to lose.. unemployed, pensioners, students will be in the front lines.
Some interesting comment, "..soldiers with cell phones stopped the massacre.", found here on a Robert Fisk article relating news coming to light on the Egyptian revolution.
"The critical moment came on the evening of 30 January when, it is now clear, Mubarak ordered the Egyptian Third Army to crush the demonstrators in Tahrir Square with their tanks after flying F-16 fighter bombers at low level over the protesters.
Many of the senior tank commanders could be seen tearing off their headsets – over which they had received the fatal orders – to use their mobile phones. They were, it now transpires, calling their own military families for advice. Fathers who had spent their lives serving the Egyptian army told their sons to disobey, that they must never kill their own people."
one medium term solution, (for countries with fertile land, like the UK at least) is obviously to start growing more of our own food locally. Cuba has been leading the way in this because they had to completely restructure their society in the 90s after the soviet union collapsed and subsidies to Cuba suddenly collapsed.
There's a brilliant film about this called 'The Power of the Community' which I've just noticed you can watch on-line here
Try to watch it, it's one of the most genuinely uplifting and inspiring things I've ever seen (even allowing for some of it being propaganda)
Why Isn't Wall Street In Jail?
Sorry Golem, I don't see this. You seem to be arguing that the development of the financial industry acting as powerful middlemen in the wheat market causes poorer consumers to end up with less wheat than if the financial industry were uninvolved. Remember, middlemen or no middlemen, the starting point is that wheat production has fallen; someone is going to be eating less wheat. That might be rich consumers (i.e. the developed world) or poor consumers (an inconvenience for the former, or starvation for the latter). Most likely, it's combination of the two, and we're just interested in the ratio.
I agree completely with your analysis of why it's poorer consumers who end up experiencing higher price rises and eating much less wheat. What I don't understand is why that's more likely in a market with powerful middlemen than a market without them. Even without them, there's less wheat to go around, and I think your analysis does a good job of explaining how that shortfall gets shared out (the rich pay a bit extra and continue to eat all that they need; the poor face more significant price rises, and many starve). I don't think the financial industry's involvement makes much difference in terms of who gets the wheat. Whatever money they're squeezing out of the wheat market is most likely coming from lower profits for farmers or the previous lot of middlemen. There might also be some ersatz "profits" generated from the usual funny money derivative trading amongst themselves that they're so fond of, but that's their own problem (until we bail them out again) and doesn't affect actual wheat distribution.
Let's get back to blaming the financial industry for the huge problems they've actually caused, not for a problem caused by falling wheat production.
@magicalsushi
Good points, although finance can (and does) exacerbate problems of distributing food fairly.
I think the more important relationship between finance and food is related to the production of food. Farmers traditionally need loans to cover them until harvest season. A famous example of this going horribly wrong would be all those American farms that went bankrupt during the great depression.
magicalsushi,
Thanks for your thoughtful comment.
I am, as you say, arguing that the middlemen are making the price rises far worse. If I'm wrong – I'm thinking my way forward just like you – then what you have to answer is how and why you get a price doubling in response to a supply short fall of only 2.4% ?
And remember this doubling has not been just for those at the back fo the queue but for all of us. You, we, have to answer how and why that happened. 50% rise from 2.4% supply shortfall.
My answer is that the middlemen, in large part due to our policy of flooding the markets with printed money, have sudenly found they have far more money than is needed to buy up all the available wheat supply. As a consequence not all of them can have a piece of the market. Thus they compete among themselves to get a piece of the action.
No one any longer claims the flood of money is not causing price bubbles. It is. All I am doing is exploring teh actual dynamic of one such bubble in Wheat.
Dealers with too much cheap cash want in to the Wheat market because there is a slight short fall and prices are going to go up with or wthout them. As you point out. But as the middlemen compete to get their piece of the action they will quite naturally bid up the price.
Now I don't see this happening at the level of the first purchase from the farmer. If it happened at that point we would see farmers making huge profits. Therefore it must be happening in the secondary markets where contracts are 'flipped' and traded. Where derivative bets help inflate optimism about price rises and further fuel speculative price rises.
I hasten to add that I'm not the only one thinking this.
But if, as you feel, this isn't right then we are still left having to explain 50% price rises from a supply short fall of only 2.4%.
David,
"we are still left having to explain 50% price rises from a supply short fall of only 2.4%"
You are right about the manipulation. Similar shifts in oil price can occur with only modest changes in supply.
One thing is for sure though, is that even real demand is there to meet it. They are merely testing the price elasticity, to see how far they can push it.
I suspect that shifts like these are only feasible amongst essentials such as fuel, food & energy because we need (crave) them.
Same reason why Gvts put up tax on cigarettes & alcohol. It doesn't actually dent demand. The chumps pay up.
Excellent post Golem.
I think I find myself between yours an magicalsushi's position. It's not so much the middle men as the market distortions caused by Fed/ECB/BOE printing allowing the middle men this option. Crony Capitalism again.
Re your point
"There has been little profit to be had sitting at home and so most of the money we have printed and borrowed has been funneled abroad. Where it has flooded into 'emerging' markets causing huge price volatility as bubbles form and burst and form again."
as my previous comment would indicate this makes sense to me but do you know anything or can you elaborate on the mechanism for this.
In my very layman's understanding the the Fed presses a key and lots of dosh ends up on investment banks books. Are they then free to do with that dosh what they please?
Anyone have a more "technical" explanation I'd be grateful to hear it 🙂
One of the positives that I see coming from these "food price revolutions" is a poke in the eye for neo-classical economics; the basic theory of which is "comparative advantage" whereby if your neighbour can grow wheat cheaper than you and you can make shoes cheaper than your neighbour then you should stick with making shoes and sell them to your neighbour and visa versa. While this is a nice story and seems to make intuitive sense, it misses out a couple of important points. One is that countries are more complex. And two is that, uncertainty, when it lands on your doorstep, may well trump the small gain you may have made by specialising.
One thing the present tells us very clearly (and with the greatest respect for the best efforts of the WTO) is that countries should pursue diverse and food-secure economies, even if economists with PhDs tell them they are misallocating resources.
The Green Revolution of the 70s brought great benefits and cheap food to most of the world. But in the developing world, families still spend most of their income putting food on the table. (Well it puts our asset price bubbles in perspective anyway).
Am much in agreement with Hawkeye’s comment.
trying to clarify my thoughts here…
Two Very interesting concept at play:
(i) Slight shortfalls of supply versus demand can result in disproportionate price hikes
(i) Shortfalls are unevenly distributed, disproportionately affecting a minority
Key factors(affecting middlemen & end user):
– How essential is the resource/commodity/product/service (somewhat irrelevant to markets)
– & how much money is available to chase that reduced supply
If I think of it as a big cake(limited slices) and it is truly an essential commodity(think: food; fuel; shelter), then only through collective co-operation does everyone agree to a smaller slice to accommodate the supply shortfall. However, collective co-operation is anathema to middlemen & market speculators, everyone wants their normal slice(or bigger – aka ‘growth & profits’) and nobody wants to be left with an empty plate. Consequently the sky is the limit for prices as people will beg, borrow & steal from the future to pay for today’s essentials.
Or perhaps, the people’s breaking point really is the limit – Tunisia & Egypt.
Do I have this right, there seems to be two dynamics at play the speculators/middleman's market and the enduser's market, or am I muddled by text book stuff?
@ John
A further perversion of globalised trade with its 'comparative advantage' and specialising idiocy is boomerang trade whereby ships and lorries pass in night carrying near identical (and sometimes identical) goods in opposite directions. Andrew Simms talks about it in his book, Ecological Debt. (the link is to an great article by him in the guardian)
I think the middlemen have been there for a while now without causing crises. What this says to me is that there are many people closer to the bread line (no pun intended) than we may think. Speculators are financial locusts and swarm in on any volatility until it is exhausted before moving onto the next thing. Stocks, property, currencies, no upward trajectory there. Wheat it is.
ahimsa,
No I don't hink you're muddled. I think you are right on the case. There are several variables and how they interact is complex. But I think their interaction is key in a way the text book onsense is not.
As for compafrative advantage theory I think it has been an almost unmitigated disaster from start to finish. Certainly it completely ignoress all environmental costs and disnmisses them as externalities. On taht ground alone it is a evry poor theory.
You can thrash you brain into a frenzy trying to find a rational response to this marketing idiocy – the fact is, as with all the financial products,
there isn't one.
There are no 'free markets' only the freedom of gamblers to speculate on them.
The response shouldn't be in the streets but in the boardrooms and for those arrested to have all assets stripped from them and charged with crimes against humanity.
After all, they're not that efficient. All these deaths by starvation without harvesting the organs for the transplant market.
By jove in my day they'd have been called losers.
Golem, another excellent piece!
It strikes me that your analysis fits the Oil price situation a couple of years ago that was probably the trigger for the property/related financial 'products' bubble bursting as quickly as it did.
Economist Michael Hudson talks about the now huge & disproportionate size of the 'FIRE' sector – finance, insurance, real estate. There are simply not enough resources in the 'real' (productive) economy for all this wealth (sucked up to the top) to find investment/profit. The +only+ way this sector can achieve growth in wealth when real economies are stagnating is to play speculation games where the real economy has little choice but to pay.
Something that most people simply don't understand is the mindset of business people whose activities is largely 'trading' in commodities. They are +always+ looking for the supply/demand squeezed situation. I worked briefly (on the logistics side) in the electronic components & datacomms equipment markets & it was quite an eye-opener. The name of the game in 'trading' is to find markets that are far from 'free' & manipulate them if possible to create them. This is where the big profits are. The internet & superfast comms have revolutionised the ability to play at the same time as the world is awash with funds in fewer hands.
A financial sector of this size is like a leech on the back of the real economy. What we are seeing is the acceleration of the +inherent+ positive feedback loop of running the economy this way. As more wealth is sucked to the top, that wealth needs to find more manipulative ways of drawing off the real economy.
Whatever the solution, it must entail rebalancing the concentration of wealth with respect to the rate at which the real economy can grow.
This is ever more urgent as the real economy itself is facing serious challenges in its ability to grow – a finite planet. But of course 'wealth' has largely captured all the institutions that should be working in the wider public interest, but aren't – politics, public service, media, economics etc.
Morning Mikehall,
I agree that Oil is another sector where speculators enjoy themselves. Our system of governance, including the media have been very largely captured. Our challenge must surely be to rid ourselves of a ruling class and system which is harming us.
This comment is by – Magicalshushi –
He had trouble posing it so I have posted it for him/her.
Cheers for the various responses to my comment. I started working on
a reply this lunchtime but had an epiphany and have chucked most of it
away. Golem, I think you may be right that the speculation has
contributed to the price increases for consumers, although I do still
think they'd be substantial even without it.
Basically, I'd not really been thinking in terms of harvests. People
need to eat every day, so I'd just pictured wheat being produced every
day, but of course, it's not. It's produced twice a year (once per
hemisphere), then stored. That changes everything, as it gives the
banks nearly half a year of control over the wheat supply before
another harvest occurs. I'd been thinking that, whatever might happen
in the wheat derivatives la-la-land that the banks are busy creating,
the sale of actual wheat to the consumer wouldn't be affected. The
derivatives bubble caused by the banks' speculation would inflate
harmlessly, without affecting the real life market, until eventually
it would burst (and banks would demand a bailout, but that's another
issue). But I think I was wrong about this.
The housing market was perfect for the finance industry's speculation
shinanigans. Because people don't need to buy or sell houses very
often, the bubble could float far, far away from reality for a very
long while before it finally burst. In a market where consumers
*need* a product every day, and producers are able to produce it
immediately, I don't think it'd be possible profit from speculation.
People need wheat (or some sort of food) every day, but unfortunately
it's only produced twice a year. In the meantime, a bubble created by
traders *will* affect prices for consumers. Each bubble will probably
burst before the next harvest, but until then, there's plenty of time
for people to starve.
I think this shows how desperate the banks are though. They'll only
be able keep the bubble growing if they hoard masses of grain while
people are dying of malnutrition, and that's not going to endear them
to anyone, including politicians. If it's come to this, then
opportunities for other scams must be scant indeed.
My explanation for the price rises would otherwise have been due to
the very high price inelasticity of demand that myopia mentioned. In
particular, wealth is distributed in a pyramidal fashion – for any two
levels of income, there'll be far more people at the lower level than
the higher level. While we're starving the very poor, the prices
won't rise by much. Once we start to starve the slightly less poor,
the prices have to rise by quite a bit more, since it takes a bigger
price rise to affect the same number of people, as each "layer" of the
wealth pyramid is smaller. If a 2% fall in wheat production means 2%
of people are going to starve (although I expect that's a gross
oversimplification), I don't find it unimaginable that that could lead
to a 50% price rise (even without distortions due to speculation).
But I think you're right that it's not the full story here.
@ Magicalshushi
"…and that's not going to endear them
to anyone, including politicians…."
The politicians could care less so long as they can persuade us, or more often simply throw enough mud on the issue. They get a lot of help from the media. Just 'sow the seeds of doubt' – confuse – is the standard tactic. This was the very phrase – PR instruction – of a tobacco industry executive when he knew full well of the medical evidence for harm by using his product.
This is followed by all similar campaigns since then, notably including the fossil fuel industry's PR efforts to reduce efforts to stop Climate Change.
The politicians & media have a highly co-dependent relationship. The media are in competition for the story. Any journalist who speaks too critically will not get access in future. In fact this principle applies to all powerful institutions where regular 'news' is derived which media need to report. The most recent one highlighted by this is the Metropolitan Police in the phone hacking scandal. Both Murdoch's media & the Met did not want to upset their cosy relationship, so the Met's investigation was less than stellar to put it mildly. The only reason investigations have apparently 'reopened' recently is because individuals whose phone messages were hacked are taking private court actions against the News of the World. (A lot of out of court settlements, complete with gagging clauses have been made also.) Law? Justice? Public Interest? All depends how much money you havew…
Anyone notice the preponderance of Prof Larry Meade in the media recently with his work-for-welfare proposals? Meade was invited to Downing Street last June & has had considerable contact with Tory insiders. He's a Professor of Political Science, not Economics, but there's no doubt he's been chosen to give the Tories extreme program an 'academic' gloss'. He's a member of the US right wing 'think tank' American Enterprise Institute & was a speech writer for Henry Kissinger. Both Newsnight & BBC News have giving this guy free reign to air his views. His credentials & history are selectively reported & what passes for 'balance' is interviews with far less articulate benefit claimants mostly. Ludicrous statements by the Professor like "..the jobs are there.." pass without any challenge or recourse to actual evidence. We know that in the UK alone 1.5 million people who +were+ working 2yrs ago don't have jobs now.
As John Pilger & Noam Chomsky put it, it's a process of 'normalisation' of the extreme right wing interests of wealth. But look who finances politics & media? Why would we expect anything different?
As an addendum to my earlier post:
So I mentioned the factor of how essential is the resource/commodity/product/service.
Now Magicalsushi has raised the issue of frequency of both supply and demand.
Growing seasons, harvests, oil ‘production’, etc. whereas food and fuel are daily requirements.
Which naturally leads on to the idea of stores or reserves to cover shortfalls. But when systems are really stretched to their limits(um, like now – financial crisis, climate change, food production, population growth, peak-oil) then reserves run dry and you enter into dangerous territory.
Again, now the effects of slight shortfalls can be highly disproportionate and non-intuitive indeed exacerbated by the interconnected interdependence of globalised systems running at full steam ‘efficiency’(think ‘just-in-time delivery’ of our food to supermarkets) in a smooth predictable steady state with little or no margin or appetite for unpredictable turbulence(I think David refers to this in his film, ‘High Anxieties – The Mathematics of Chaos). All in all a recipe for disaster. Sorry, the engineer’s systems analysis angle is kind of a pet subject of interest for me.
If you are interested:
Tipping point
Schumacher lecture
I agree wholeheartedly with your analysis of the causes of food price rises.
What other explanation can account for a trpling in the price of rice between January 2007 and June 2008?
Here's an interview with Jayati Ghosh an economics professor from JNU in Dheli where she predicts this new bubble.
I have just sent a link to this article to BBC World Briefing because they keep peddling prices on the Russians crop losses and others.
The interesting factor to bring into play here is the price the producer gets compared with the price paid by the producer of the final product.
If the table could include shipping and storage costs, as a legitimate oncost, we would have an idea of how much it's costing us, and the producers, by letting the speculators in on the act.
In many instances the product is grown in third world countries with farmers on subsistence farming.
It's the canary principle; by cheep in the third world sell cheep relatively speaking in the first world, but with a huge margin in between.
Whether in agriculture or manufacturing this keeps the third world poor and unemployment up in the first world which gives the added bonus of keeping wages down.
A quick update from Jordan.
Popular mood is heating-up and is spilling over into the political.
So far, activists are bending over backwards to underscore their allegiance to the crown but are making it clear they are not happy with the wife of the crown holder. Once activist in particular has asked publicly for the crown holder to let the government do what the government does without interfering. This prompted the crown to speak out to say that ministers and politicians in charge should not hide behind the excuse of instructions being handed down from above and that each one of them will be held personally accountable for and success/failure henceforth.
One ugly item. There was a peaceful demonstration last week that was disrupted by thugs wielding sticks. Scores of injured. Rumors making the rounds have people believe the thugs were seen boarding a police bus. This is not good. The crown holder has promised a full investigation.
In light of a number of local circumstances, my sense is that the thugs were provocateurs…
To be continued…
Looks like 2011 shaping up to be the year of the wake up call.
Middle eastern/arab world instability pushes oil prices even higher. Economies can't grow with $100+ oil. Forecasts & programmes of growth & recovery scuppered.
European banking/sovereign situation still unresolved and the debtbomb continues ticking. Likewise in US. (And Japan)
When it blows, next round of financial crisis and people start recognising it for the economic depression it is.
Climactic extremes, rising oil prices, overpopulation aren't helping food harvests. What'S going to happen when these people'S revolutions can't deliver on lower food prices & employment?
Anyone noticed the people are even on the streets in the US now – Wisconsin.
guidoromero,
Thank you for the update. It is really good of you to give us some on the ground perspective.
Jordan does strike me as being critical. It is seen, I think, as the stable and reliable partner and also a moderating force to counter the perceived belicosity of Syria. I don't know if you think that sentiment is at all accurate. But I have heard it expressed here.
As far as provocateurs are concerned I would be amazed if at least some of the thuggery isn't official. It is elsewhere. Ugly is the word.
Keep us posted if you can. Thank you.