Intersection

The regime in Egypt probably has about 24 hours before forced to flee.  The president has already sent away his family.  Live coverage from the Egyptian street via CNN International, Al Jazeera, and others, shows two very important aspects of this revolt that makes a leadership change inevitable.  First, the protesters have been taking time to say their prayers in the middle of the protests.  One might think that means the protesters are religious extremists.  Quite the opposite.  These people are mostly unarmed and praying as usual, they are regular people.  Extremists see injuring riot police during prayer time as a better way to praise God than praying.  Of course so do labor leaders, who have been unsuccessful in their efforts at revolt throughout the region over the past two weeks.  Like in Tunisia, this is a revolution, characterized by the participation of the general population, and not a revolt organized by extremists on either side.  The second important aspect is the behavior of the country's highly respected military.  They are out among the people, doing nothing.  The riot police, completely loyal to the regime, are on their own.  Either the regime is unwilling to ask the military for help, or the military has been asked and declined.  Whichever is the case, this signals the beginning of the end.

The rapid development of the revolution in Tunisia was a huge surprise, and caused quite a bit of angst in France, where support of the monarchy was designed to support stability and repression of extremists. The United States has long been in a similar position respecting Egypt.  Three days ago when he expressed support of the movement in Tunisia, could the president have possibly known that we would be here today, dealing with an Egyptian revolution?

Most of the reporting on this issue deals with the political repression in these countries.  But then we must ask the question: "If political repression has actually lessened over many years (especially in Egypt), why are the people rising up now?"  The answer is that economics has triggered this revolution, the same way economics triggered riots in Greece last year, and large protests in Jordan last week, on and on.  The opening lines of "All Quiet on the Western Front" are instructive:

Yesterday we were relieved, and now our bellies are full of beef and haricot beans. We are satisfied and at peace. Each man has another mess-tin full for the evening; and, what is more, there is a double ration of sausage and bread. That puts a man in fine trim.

In this scene the narrator's German army unit has returned from a fortnight of battle at the front, with half their men left dead on the field.  The cook was shocked at the heavy losses, and had prepared rations for twice the number, which means the survivors enjoyed double.

Staple commodities like wheat have doubled since last June, and many countries like Algeria and Jordan allowed their supplies to tighten to wait for the prices to decline.  Where the average person pays half their income for food (contrasted with around 10% in the US and Canada), governments must play this dangerous game.  They naively believed that prices must retreat since world food supplies are tightening but still plentiful, and demand cannot increase where 20% of the population is unemployed.  They didn't learn the lesson of 2008: The Banksters are in charge, and the only number that matters is their profit margin.  Prices have surged in the past two weeks as several governments have placed huge grain orders from U.S. exporters in order to build their stocks.

The U.S. GDP number reported today was largely influenced by agricultural exports.  The saving grace of our economy in the past quarter was capitalizing on the rising prices of commodities, which has led to revolution in places where the government has encouraged stability for decades.

Where bellies are full, a few will rule.

Actions Have Consequences

According to this Reuters article, the FAO report of record food prices that I wrote about yesterday is no big deal.  The article notes that in Kenya the population has changed its diet from corn and wheat products to rice, potatoes, and amaranth.  This was inevitable, and a phenomenon that I don't think western traders will understand.  When I was in Brazil this past month I heard the same thing, locally grown cassava flour is being blended with bread products due to the high wheat price.  Some African countries are now mandating a 10% cassava blend in bread.

The current food commodities bubble is able to account for some varying inventories reports, because there is always a short-term future fear to counter with, like this year's La Nina weather pattern.  If production in the wheat market, for example, outstrips demand by 10-15% more than what is already priced into the desired trading range, because millions of people have shifted their diets since the last bubble, hold onto your hat.

Wheat plantings are up 10% in the US since last year.  A 10-15% supply-demand difference could turn out to be extremely conservative.  The USDA is likely selling its insurance at somewhere around the $7.50 per bushel range.  This market has the potential to freefall by late summer, which would nearly bankrupt the crop insurance program.

The Dynamic Duo: Sarko and Dilma

Most of the work conducted during the G20 summit of the most powerful twenty economies in the world takes place behind the scenes.  The actual meeting marks more of a deadline for identifying major topics and assembling coalitions.  It appears that food insecurity is so far dominating the agenda for the next summit.  However, there are a few worrying signs that we may not get to June before this issue reaches crisis levels.

As this Marketwatch article reports, the UN's Food and Agricultural Organization (FAO) says world food prices reached a record in December.  The relevant comparison here is the price shock of 2008, which saw $12/bushel wheat (recently $8), for example.  One worrying aspect of this story is the nugget that the previous record of 2008 was partially influenced by crude oil commodities prices (a component of the FAO's agricultural commodities price index), which peaked at around $140 per barrel.  Crude oil has risen recently and has been trading for the past few weeks around $90 per barrel.  It should be noted that the US Dollar has strengthened against the Euro since that time.

This Washington Post article suggests that there is room for prices to rise further.  Looking at the charts presented in this Globe and Mail investor article, that is absolutely true.  It appears that in 2011 continuing price rises will be supported by a combination of fear about the weather and previous market highs that were outrageously unsupported outliers, with lip service given to supply and demand fundamentals, just like last year and 2008.

This issue may reach crisis levels far ahead of the summit, in part as food riots spread from North Africa to other third world countries, and also due to the influence of two powerful G20 players.  French President Nicolas Sarkozy, as head of the G20 in 2011 has put this issue front and center.  Meanwhile, newly installed Brazilian President Dilma Rouseff's administration has warned of a looming trade war over currency manipulation, which hurts Brazilian agricultural exports.

Rouseff (pron. Hoo-SEFF-ee) is an economist, whose domestic agenda is to continue former president Lula's efforts to increase economic opportunities for the roughly 40% of the Brazilian population that lives in poverty.  Despite her past affiliations with radical leftists, she is also a pragmatist who knows that this agenda will halt if the relative gains being enjoyed by the new Brazilian middle class are wiped out by external financial pressures.

In addition, Dilma campaigned on maintaining Lula's economic agenda in total, which is very popular with the Brazilian people.  It is generally viewed as pro-free market.  However, as the first female Brazilian president, Dilma must be able to lead on the economic issues which are her strength, or risk her legacy being only symbolic.  Lula was a social politician who wisely embraced economic pragmatism.  Dilma is an economic pragmatist who will become a social politician only if she is successful at managing a looming financial crisis.  Trade war saber-rattling is her first shot across the bow (even though this language is similar to recent pronouncements by Lula).  How her administration handles this issue in the coming months may well define her presidency.

Sarkozy is extremely ambitious, and a legacy that includes solving the world's food insecurity issue would suit him.  He is a controversial figure in France for many things other than the financial expertise that has characterized his long career.  The G20 summit of 2011 is for Sarko a great opportunity.

Brazil and France have enjoyed a healthy relationship in recent years.  While Brazil's membership in the BRIC (Brazil-Russia-India-China) trade and security coalition has been the western media's focus of late, the dynamic duo of Sarko and Dilma may be the big story of 2011.