The first thing Muammar Gaddafi did after taking over as ruler of Libya over 40 years ago was to invent a word with which to name the new country: Jamahiriya. It is based on the Arabic word meaning "state of the masses." Apparently the state of the masses in Libya, er Jamahiriya, is... angry. Again Al-Jazeera's coverage of the events is making Western media look foolish, as this time our "gatekeepers" are covering the 1,900 person royal wedding guest list (and speculating about Kate Middleton's gown!).
Here continues the series on the increase in food prices and its consequences. It is worth noting that in his rambling, threatening communique on state television yesterday, Gaddafi's son perfectly described the economy of the country. "How will you obtain flour," he asked, "when a civil war comes and the petrol is burned." My previous post showed that Libya not only imports all of its wheat, but a large amount of wheat flour also. The country has been so badly mismanaged that there is not even a viable milling industry. Libya is the most extreme, but not nearly the only example of an absurd oil-for-food trade scheme that was destined for failure. The rapid food price increase is the tipping point.
I am focusing on wheat in this series even though food price increases are being driven by the rise in all major food commodities except rice. There are good reasons for this. Wheat is mostly consumed by humans, and largely in the form of bread, in stark contrast to soybeans and corn, which are both increasingly used in transportation fuels and non-food products, and beef production. When prices rise as fast as they have in the current period it makes sense to focus on the bare essentials. This is not only practical; since bread can be stored and transported easily as the food of last resort, access to it is also psychological. If a country cannot provide a steady and affordable supply of the absolute basics, is there any reason to leave its leaders in place? We are seeing the answer to that question all across North Africa and the Middle East.
This first chart is the historic wheat price, not adjusted for dollar exchange trade value (that is coming), since 1981 (courtesy World Bank via Index Mundi).
In the chart below I used the historic wheat price and coded the peaks and troughs. I then divided the negative or positive percent change by the number of months it took to get there. As you can see from the chart above, the price for wheat in 2008 remains an all-time high. But the price increase from it's trough in the current bull market has been more rapid. This chart shows that in the current run-up, the average price increase per month is over 15%.
Many countries across the region had diminished wheat stocks at the end of last year, even though the US wheat stocks were three times larger than in 2007. They must have believed that prices could not be sustained and were waiting for them to start declining in February (historically the beginning of the seasonal price down-trend). These countries have recently been buying huge amounts of wheat at or above the current peak price. At the end of last week the wheat price plummeted as traders noted that there simply were not any buyers. So much for the "growth-led" exponential demand pressures and bad weather we keep hearing about. It should be clearer by now, and will be by the end of this series, that wheat prices since the mid-90's have been driven by conditions in the equities, treasuries, and non-food commodity markets, not supply and demand fundamentals.
We are in unchartered territory here. When prices rise this fast, hoarding will take place and regimes will soon realize that their chances of remaining in power are better if they withhold food instead of giving it away. The only prediction we can be confident about is that the increased volatility in the wheat markets since the mid-90's will continue. As I will show, volatility, not price peaks is the root of the problem, and the culprit is obvious and identifiable.
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