Connecting The Dots: food prices, inflation, unemployment, revolutions and peak oil

Connecting the dots


The revolt in Tunisia ushered in 2011, when Mohamed Bouazizi set himself on fire in front of the administrative building in the city of Sidi Bouzid. And in doing so lit the fuse that has detonated Egypt and threatens to topple the political order of the Maghreb, Yemen, and beyond. The reason people commit such acts is always the same – a feeling of social humiliation and a kind of resignation to reality.

Tunisians thought of themselves not as of Arabs but rather as of a Mediterranean nation. They compared their country with Spain, Greece and Italy. Many of them have been to Europe. The gap between the better life they envisioned for themselves and the reality inspired this wave of unrest.

The ruling elite were the crucial factor in both countries. The army essentially sided with the demonstrators, refusing to shoot at the crowd and offering no resistance, which allowed the situation to escalate. So the events in Tunisia were a result of a combination of psychological factors and a conflict between the army and the police on one side and the government on the other.

The situation and causes of the uprising in Egypt are very different to the contributing factors that caused the crises in the Tunisia; tensions in Egypt were already wound tight as last autumn Egypt held parliamentary elections where the opposition was suppressed.

In the 2005 the Muslim brother hood, despite being a banned organisation, ran candidates as independents winning 55 out of the 450 parliamentary seats, but five years later in the 2010 elections they did not win any seats, did the regime become very popular? Already evident tensions and the example made by the Tunisian people led to the protests in Egypt, but their causes were different, in Tunisia they were social and psychological in character, and in contrast the causes in the Egyptian protests were economic combined with deteriorating ruling elite.

As the jubilance of the Egyptian peoples admirable success in removing a dictator wears off, Egypt will most likely be the epicentre of a wave of protests permeating across the globe in the coming months.

The protests spread

Already in many countries in the Arab world have security forces violently dispersed demonstrations, inspired by or in solidarity with Egypt’s democracy protestors.

Palestine

On January 30th and Palestinian authority security had shut down a solidarity demonstration taking place in front of the Egyptian embassy in Ramallah, the next day Hamas authorities quashed a solidarity demonstration, arresting six women and threatening to arrest a further twenty more, who had responded to a call on face book for a demonstration.

Syria

In Syria five young demonstrators were detained during a series of solidarity protests with Egypt and to protest against corruption.

In old Damascus, on February 2nd twenty people in civilian attire beat and dispersed demonstrators who had assembled to hold a candlelight vigil for their Egyptian comrades. Two days later the police detained Hassan al-Najjar, an elderly leader of a small group called the Islamic Democratic Current, after he issued public calls for Syrians in Aleppo to demonstrate for more freedom in their country.

Between 30 and 50 demonstrators were detained in Jeddah, Saudi Arabia, after noon prayers by Saudi security forces on January 28th after a Saudi dissident living in London called to protest against the lack of a competent reaction to the chaos caused by recent heavy rains which led to deaths and electricity cuts.

Sudan

Sudanese authorities used excessive force during largely peaceful protests on January 30 and 31 in Khartoum and other northern cities to call for an end to the National Congress Party (NCP) rule and government-imposed price increases, with the protest ending with the death of a student.  The majority of those arrested were released within hours, but more than 20 are still missing and believed to be held by national security forces

Algeria

Riot police officers stifled a protest held in Algeria’s capital on February 12th by hundreds of people voicing the same demands that have toppled two of the regions autocratic governments in the past month. Demonstrators who had gathered in the central may 1 square, chanted “Bouteflika out!” referring to president Abdelaziz Bouteflika, who has ruled Algeria with a hard hand since 1999, maintaining command of the country through elections which the opposition claim were rigged.

Serbia

Mass anti-government protests have erupted in the Serbian capital Belgrade as thousands of Serbs demand early elections.

Opposition to the government, the Serbian Progressive Party, called for the rally and at least 55,000 people turned out in front of parliament.

Concerns over the country’s economy have progressed as Serbia moves towards membership of the EU, as prices have increased at a higher rate than salaries.

Opposition party leader Tomislav Nikolic gave the government two months to call polls or face a civil disobedience campaign.

Serbia is currently governed by a 10-party coalition that took over in 2008, united around EU integration and led by Prime Minister Mirko Cvetkovic and President Boris Tadic and the next general election is not scheduled until 2012.

Police said 55,000 attended the protests, while AFP news agency reported 70,000 as the city centre was closed for the demonstration

Step back to see the bigger picture

Like most social upheavals in the 21st century there are always economic factors that contribute, and the turmoil in the Arab world is no different, one thing the wave of social unrest in the Middle East have in common is rising food prices and the widening income gap between the very wealthy minority and impoverished majority.

Income inequality is a major factor that played a role in both the Tunisian and Egyptian revolutions. Egypt is ranked as the 90th most unequal country and Tunisia is ranked 62nd, with a Gini Coefficients of around 34.4 and 40 respectively.

The gini coefficient is used to measure inequality: the lower a country’s score, the more equal it is in terms of income.

There are also many desperately poor people in the country with an average per capita income of just $6,367 (IMF numbers) or $6,200 (CIA World Fact Book). World food prices have soared since 2009, with wheat up 114%; corn up 88%; soybean up 56% amongst a myriad of other soft commodities. In January the United Nations food and agricultural organisations world food price index rose to around 231 some 8% above its previous peak in 2008.

The squeeze may have gone unnoticed in the western world, as the price we pay for food is largely determined by packaging along with marketing from the food companies, also historically what consumers spend on food as a percentage of their income has remained relatively constant in the 20th and 21st century. With consumers in the US spending an average of 11% of their income on food and consumers in the UK spending an average 13% of their income on food.

But for the majority of the world’s population an average of 60% of their daily income is being spent on their daily bread, and when their daily bread increases by even 20% they have automatically moved straight into the ranks of the “food insecure”. In 2009 for the first time in history the number of hungry people increased an abysmal 1.02 billion, which is a conservative estimate.

To understand how we have reached this dreadful point in human history one must look back and appreciate the sequence of events and decisions that lead us here.

In the US food companies and their suppliers [farmers] wanted to maintain the stability of their business, even if prices spiked for wheat, corn or any other agricultural commodity. Bets were hedged and futures contracts were signed to lock in prices for some point in the future, the price stability of the soft commodities was maintained, for a long time, by the equilibrium between the amount of sell orders and buy orders as well as long positions of investors being relatively equalled by the short position taken by investors. Speculators helped putting enough money in the system to keep it liquid.

Franklin Delano Roosevelt recognized and appreciated that speculators could drive up the price of commodities by betting on commodity future contracts which could destroy the very stability future contracts were created to provide. So president Roosevelt signed into law what are called ‘position limits’ which limited the amount wall street can bet on futures contracts . For a long time the price of real food on the real food markets were driven by real forces of supply and demand such as fundamental elements like the weather.

In 1991 the food markets took an ominous turn, when no one was paying very much attention. That was the year [surprise, surprise] Goldman Sachs rested its ever hungry eye onto the food markets and decided that our daily bread would make a superb investment opportunity. Goldman Sachs went to the ‘commodity futures trading commission’ (CFTC) and asked if the investment house could have a waver on those positions imposed by FDR after the great depression, the request was approved by Laurie R Ferber, a CFTC appointee, who coincidentally had in the past been head of the derivatives legal group at…[yep, you guessed it]..Goldman Sachs.

Traditionally the agricultural markets had never engaged the attention of the Wall Street banks, as the markets were too stable, and whose great wealth did not come from tangible things such as wheat or cocoa, but from the manipulation of ethereal concepts like risk, collateral debt and credit default swaps amongst other exotic vehicles of investment.

Analysts at Goldman Sachs with great accustomed care, dedication and precision went about turning food, humanities most basic need, into a financial concept.

18 commodifiable ingredients were selected by Goldman’s analysts, which amongst others included cattle, coffee, cocoa, hog and 2 types of wheat. The investment value of each commodity was analysed and scrutinized, and what was originally a complex collection of tangible, real things had been reduced into a mathematical formula that could be expressed in a single manifestation, thenceforth to be known as the Goldman Sachs commodity index now known as S & P GSCI (Standard & Poors Goldman Sachs commodity index)

Goldman’s new channel for revenue generation flourished, prices of commodities began to rise slowly at first then rapidly, investors were thrilled to see their ventures increase, sparking many other investment firms to follow suit. But in stark contrast the rising price of dinner did not align with the interests of those of us who ate. And so the commodity index funds posed problems.

North America is the Saudi Arabia of the cereal world, exporting almost half the wheat harvested. Concentrating on a particular variety of wheat ‘hard-red spring wheat is by far the most important variation of wheat, for it’s the only variation that makes bread, the price of this commodity informs the cost of virtually every loaf on earth.

Hard red spring wheat had long traded between $3 and $6 per sixty-pound bushel (approx 26 kilos), but in 2005 the price of wheat along with rice, oats, corn, soy among others began to rise, in the 3 years between 2005 and 2008 wheat broke record after record. No one was surprised when food-industry giants attributed massive annual profit jumps to wheat trading.

Since Goldman sachs ‘spawned’ its “innovative” index of commodities, hundreds of billions of new dollars overwhelmed the actual supply of and actual demand for wheat, but there was plenty of real wheat, so what was driving prices higher and higher, it’s as if the price in and of itself generated demand – the more wheat cost the more investors were willing to pay.

Traditionally the price stability of wheat in the futures market was a balance between sell orders cancelling out the amount of buy orders, and the amount of long position investment tempered with the amount of short position investments in the futures market. But with the sudden influx of money, more and more investors were taking up long positions(hoping that the price of the commodity would rise thus justifying the position) along with higher amount of buy orders and a diminishing number of sell orders what was happening was something called ‘demand shock’ which pushed up the price artificially.

The speculative frenzy between 2007-2008 not only sparked riots in over 30 nations, including Egypt which is the number one importer of American hard red spring wheat, but pushed over 250 million extra people into hunger making the total number of underfed to an astonishingly disgusting 1 billion. Then like all speculative bubbles, this food bubble burst sending the price of hard red spring wheat tumbling back to its normal levels, but the price consumers pay for food is did not fall as fast, for the food manufacturers along  with retailers maintained higher prices to recoup the heavy losses obtained when the bubble burst.

The damage had been done, it was not only a disgrace what a handful of wealthy men on Wall Street fuelled by their insatiable appetite for money had done to over a billion poor and hungry people in the third-world, but it’s a disgrace that it could be happening again, right now.

But the story of rising food prices in recent times that has sparked social upheaval in the Arab world would be incomplete if the Federal Reserve’s (America’s central bank) actions weren’t taken into account. In the summer of 2010 the fed initiated its program of large scale acquisition of trouble assets from Wall Street banks thus flooding the markets with excess liquidity.

the resulting increase in liquidity in overseas markets – as US institutional investors decide to divert part of their ‘new cash’ to emerging market assets – is causing significant distortions in recipient countries, namely in the form of inflation.

Interestingly, commodities – and not just food commodities – have traditionally been regarded as a safe haven in times of economic uncertainty and turbulent currency values. One key example is gold, which has seen its price increase by around 20% since the start of 2010. Similarly, food commodities such as wheat, corn, cocoa and soybeans, all of which have seen a steady escalation in their prices on commodity markets through the best part of 2010, could become key targets for investors seeking to maximise returns on their newly-acquired liquidity.

Food isn’t the only commodity seeing historic price gains

a cotton farmer sits alone in a room of his conservative house not unlike the rest of the homes in his township of Huji, in the northern province of Shandong province, approximately 200 miles south-east of Beijing. Yu lianmin, has harvested 6,600 pounds, roughly 3 metric tonnes of cotton this year, despite record cotton prices not seen since the American Revolution gaining 36% this year alone, much like the other farmers in the cotton producing region, he did not sell any of it.

The farmers are holding out for prices to rise even more to overcome the rising costs of labour and fertiliser which is up 20% this year alone; fertiliser of course is a chemical-petroleum based product with its price anchored to the price of oil. The amount of cotton being held is unknown, but with 25 million cotton farmers an estimated 9% of the worlds cotton supply is being held in warehouses across china. Expectations that the price for the commodity will rise are driving the stockpiling, which in turn are causing short-term supply shortages and leading to further rising prices.

Jordan lea, chairman of the eastern trading Co., a cotton merchant operating out of Greenville south Carolina says “It’s difficult to know where there’s an artificial short supply in China based on speculation or hoarding, or if there’s a real shortage”

In truth there is no single scapegoat for the rise in cotton prices, increasing demand from emerging markets such as china along with more bullish investors, coupled with supply side pressures such as the devastating floods in Pakistan wiping away a large proportion of that nation’s harvest along with apparent stockpiling of the commodity could all in unison be pushing up the price. One thing can almost be certain the upward trend is likely to continue.

What does this mean for you or me? Well in short, no more cheap clothes.

The average cost of clothes has dropped in the past few year years due to the recession, but that trend looks likely to end, US apparel companies have warned that they cannot continue absorbing the surging price in cotton and will begin passing the adding costs onto the consumer, coupled with ever more volatile oil prices due to unrest in the Arab world adding to transportation and logistical cost along with rising labour costs in china and Asia, this year expect to see a 10-20% hike in clothe prices.

What does the future hold?

Wikileaks recently published diplomatic cables between US diplomats and Saudi oil experts, stating that the capacity Saudi Arabia can retrieve oil have been severely overstated, by about 40%, which is about 300 billion barrels. These revelations come as oil prices soar to above $100 per barrel and growing unrest in Arab states, as protests in Iran cause friction in Israel. With its Foreign Minister, Avigdor Lieberman, claiming that two Iranian warships planned to sail through the Suez Canal en route to Syria and called the move a “provocation”, sending up prices in morning U.S. trade.

With social unrest in the Arab world disturbing global oil supply and provoking crude prices, along with rising prices in the commodities futures markets spurred on by the federal reserve’s unrelenting plan to cover up wall street’s loss’s from the subprime mortgage crises, the coming months could see significant hikes in commodities prices from food to precious metal, oil to energy. And as these increases squeeze the worlds poorest it could release torrents of anger and frustration.

The protests have already spread to Bahrain, Iran, Georgia, Romania and Serbia, could Europe be next? With rising inequality and youth unemployment in many European nation along with price inflation and the utter uselessness of our leaders the stage looks to be set for the same social instability we saw in Egypt and Tunisia.

To quote mark twain- “history doesn’t repeat itself, but it does rhyme

Alarming parallels can be drawn between today’s economic and social situation and the socioeconomic circumstances during the great depression that gripped the world’s population, if this recession is 1929’s depression we all know what happened in 1939.

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