Maseratis in Moline

I could write many words about the current food price commodity slide and provide many links and charts to show that the price action in those markets over the past year was a massive bubble that is now bursting.  Instead I'll just share this segment from CNBC today.  The best part is a trader who has been short the market lately and is making a killing on the slide.  That starts at about 2:20.

Enjoy.

Bring On Normal

Sniping at Federal Reserve Chairman Ben Bernanke is nothing new, but I predict that the generally flattering treatment he has received from Wall Street and its media acolytes will cease pretty much immediately.  As noted today at Forbes.com, at an afternoon presser Bernanke basically said he's clueless as to why flooding the market with free cash made bankers richer, but didn't create jobs for Joe Sixpack.

I don't think that before today the market believed the Fed was really going to withdraw from its unprecedented interference in the economy.  But after today's sober assessment from Bernanke and reiteration that Quantitative Easing II is over, beginning tomorrow Wall Street will sound like a cacophony of jilted lovers.

Meanwhile, the price of wheat is in a free fall, with some folks reporting that demand is not there to support anywhere near the current Quantitative Easing II-inflated price.  Now where have I heard that before?

Farm Aid 2011

The annual Farm Aid concert and event will take place on August 13 at the brand new LIVESTRONG Sporting Park in Kansas City, MO.  The local food movement has strengthened quite a bit in only the last year.  Even more significant than the growth in farmers markets and local produce production is the shift in staple food consumption.  Late last year whole wheat bread product sales surpassed white bread sales for the first time in history.  Dog food is now being advertised as corn and wheat-free.

Farm Aid is obviously about farmers, but it's really about food.  The point is to re-connect farmers to folks.  That is happening, and Farm Aid has been a big part of the movement.  Look for updates here.

Down Goes the Prophet of Jamahiriya

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.

Here Comes the Bad News

Today we'll look deeper at some numbers to understand why the current unrest in the Middle East and North Africa is food-based.  First, below are two maps from the FAO that present two important features of the food marketplace in the region.

The first titled "Dietary Energy Consumption" shows that per capita daily calorie intake in all of the countries in the region except Yemen is over 3,000.  That is on par with Australia and Spain, for example.  Egypt, specifically, is better off than the other countries in the neighborhood.  This makes sense if you look closer at the table of largest wheat importers from yesterday.  Third on the list was Egypt in dollar value, but in terms of total volume they are first.  They just get a really good per unit price on their wheat (I can't imagine how that happened).  In general, the people in these countries have enough to eat.  The situation is much different throughout the rest of Africa, India, and in parts of South America.

The next map entitled "Net Trade in Food" shows us the balance of food exports and imports divided by  consumption.  The dark green countries consume quite a bit, as the map above shows, but they are the production powerhouses that export huge amounts of food, especially staple commodities.  The orange areas in North Africa indicate a huge negative balance.  If we look at the map above again and recall that those countries have enough food to consume, the negative balance must mean that they are big food importers.  Egypt is better off than others in the region because they export a lot of high value fruit crops.

So we know that the countries in the region have plenty of access to food, but that they are highly reliant on imports to meet those needs.  Why does this matter?  Think about it this way.  Joe lives in a relatively modern country with plenty of access to food even though he is poor and spends a large percentage of his income on it.  Nancy lives in a developing country where food scarcity is common, she is also poor and spends a lot of her income on food.  In both countries wheat prices have led to significant disruption in food distribution and huge retail prices increases.  If you are a dictator, which country would you rather rule?  My answer: the country where technology does not make organizing protests really easy, and where people are accustomed to being hungry.

Below is a chart showing percentage expenditures on food in various countries, sorted by percent expenditure on cereals, like wheat and corn.  This is not a comprehensive list, rather representative countries that illustrate the trade imbalance in staple foods between Western countries and those in the subject region. 

First note the difference in percent food expenditures between countries like Egypt and Morocco, and Germany and Australia.  The yellow hi-lighted countries spend a relatively small percentage of expenditures on food, and we see that the types of food they import are items like wine and cheese, not staple foods.

This data was compiled by the USDA's Economic Research Service, and it is based on a 1996 survey.  I added to it the 2008 top three food imports from the FAO database, and the last column on the right is the percentage of wheat consumption that was produced in the subject country.  Those percentages only appear for countries where wheat was the number one import (also hi-lighted in green).  All of the green hi-lighted countries are in the subject region, wheat is their number one import, and they spend a large percentage of income on both cereals and all foods.  The countries with red hi-lighted text are those that spend over 1/3 of their income on food, and import over 1/2 of their wheat.

Turkey and Iran are very close to that threshold, and Spain and Italy should be on the watch list as all their numbers are creeping up, and they import a lot of soybeans and wheat, respectively.  They are also two of the Mediterranean countries having major financial problems.

All of the countries hi-lighted in green have experienced recent protests or revolutions sparked by sharp increases in food prices.  Algeria, with its very large wheat imports, could be next.  Even if countries subsidize bread and other basic foodstuffs, they can only maintain those emergency measures for so long.  What we saw last year was pure speculation, but what we'll see now will be actual hoarding.  Prices will continue to rise with scarcity, and unrest will continue.  Of course, most of the countries on this list also import large amounts of corn and soybeans.  The prices of those two commodities has risen sharply, but those increases began a few months after wheat.  Just wait until those increases begin to affect retail prices.

Policy makers can wring their hands about who will take over in these countries in the near term, but it won't matter.  Tunisia set off a food-based economic death spiral in the region that will not end with current leaders being deposed.  Anybody who wants to step forward and occupy the palace had better sleep with one eye open.

Suicide's Easy, What Happened to the Revolution?*

As talking heads debate the future political power structure of Egypt, one constant remains as it did before the crisis began (hint: it is not the Muslim Brotherhood).  As I have noted in this blog many times, the staple foods commodity markets are experiencing an artificial bubble (yes, I am disagreeing with Ben Bernanke) that will have serious consequences.

The most stark examples of this are the revolutions in Tunisia and Egypt.  But if this is an economic phenomenon, we need to ask some important questions.  First, what other countries are experiencing problems due to rapidly rising food prices?  Second, where are they?  Third, in the context of their broader economy, does it matter?  Fourth, what are the long-term implications?

In the series of maps and tables I present over the next several days, I will try to answer all of these questions.  Instead of putting myself in the position of arguing an obvious point with a trained economist who is probably a genius, I will present straightforward data from the UN Food & Agriculture Organization (FAO) which both shows how Tunisia and Egypt arrived at this place, and how several other countries in the region are likely to suffer the same fate.

First up, the most recent data (2008) for wheat imports.  Look who's 3rd.

Rank	Area	Quantity (tonnes)	Flag	Value (1000 $)	Flag	Unit value ($/tonne)
1	Japan	5780710		3291570		569
2	Algeria	6913570	R	3055210	R	442
3	Egypt	8327790	R	2461720	R	296
4	Italy	5443040		2277540		418
5	Indonesia	4497190		1975480		439
6	Brazil	6032700		1873590		311
7	Iran (Islamic Republic of)	5197370	R	1801340	R	347
8	Morocco	4083580		1609100		394
9	Turkey	3708000		1483190		400
10	Spain	4655980		1430390		307
11	Netherlands	4304570		1389950		323
12	Republic of Korea	2682310		1274360		475
13	Mexico	3217030		1246900		388
14	Iraq	2963320	R	1242860	R	419
15	Belgium	3114540		1151470		370
16	United States of America	2516500		1080410		429
17	Yemen	2126630		956364		450
18	Philippines	2251970	R	936905	R	416
19	Germany	2582770		910089		352
20	Tunisia	1762440		811114		460

FAO Stat Wheat Imports 2008

*Black Rebel Motorcycle Club

Song: Berlin

Album: Baby 81

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.

Farm Aid 25

This Saturday in Milwaukee is the twenty-fifth annual Farm Aid concert.  Farm Aid has become much more than just a concert.  It is now an organization that promotes sustainable family farming, serving as a resource to link local and family farming organizations throughout the country.

The lineup looks great.  Old standbys Willie Nelson and Mellencamp will be there, as will headliners Dave Mathews and Norah O'Donnell.  Further down the line, Jeff Tweedy does excellent solo sets, and Band of Horses has been a favorite since I saw them at the Granada in Lawrence, KS, when me and about nine other people knew they existed.  Two years later they opened for The Killers in a much bigger venue in Kansas City.  That was an odd pairing.

You can catch the concert on DirectTV or stream it from the Farm Aid website.