While we can argue all day long about whether the United States has significant "non-core" inflation in food and energy prices—it does —there is no doubt at all about what is happening in China. Tom Stevenson of the Telegraph (UK) reported on the situation.
Although headline prices in China rose by 4.4% in October compared with a year earlier, the food component of the CPI (by far the most important in a low-income country like China) jumped by more than 10%.
Even that probably understates what is going on. The Xinhua news agency reported last week that a basket of 18 staple vegetables was 62% higher in the first 10 days of November than in the same period last year.
Foods that have caught the attention of speculators have risen in price even more quickly. Garlic has almost doubled. Ginger is up 90%. In the well-fed West, this would be an inconvenience if it was noticed at all in the overall supermarket bill. In the developing world it has the potential to overthrow governments.
Nothing instills the fear of God in a Chinese leader more than soaring food prices, which may be followed by food riots and general chaos in the streets, which may be followed by the Guillotine. Not lacking motivation, China's leaders are implementing price controls, subsidies and cracking down on hoarding. Unfortunately for them, China's economy is overheating and right now there appear to be more problems than China's government can reasonably be expected to handle. But that's the subject of another post. I will stick to their food problems today.
First, we see that real (inflation-adjusted) world food prices are the rise again.
Source: The Economist. I added a rough trend line. From the Economist: "Food prices have risen sharply this year according to The Economist's food-price index... The world should prepare for “harder times ahead” according to the UN's Food and Agriculture Organisation unless production of food crops increases significantly next year. China's government is even considering price controls on food (and energy) to tame inflation and head-off popular discontent. Yet as our index shows, in real terms food is still cheaper than it was 30 years ago."
The Economist reassures us that food is still cheaper than it was in 1980 (when there was an oil supply shock) but their smug explanation ignores FAO data on how many hungry people there are in the world.
Graph from the UN's Food and Agriculture Organization (FAO).
Societe Generale's Albert Edwards uses the FAO graph, and goes on to explain—
One consequence of the Fed trashing the dollar is that commodity prices have been surging...
China is rightly concerned by this. It remembers the events of 1989 when runaway 28% inflation contributed to the unrest in that year and threatened the regime's grip on power. Hence you are seeing the Chinese authorities respond aggressively to this inflation threat, not only tightening monetary policy more rapidly (which seems pretty pointless to us) but about to introduce food price controls and crack down on those old scapegoats, "the speculators".
But the threat of social unrest goes wider than China. The FAO estimates that the majority of the world's undernourished people live in developing countries. Two-thirds live in just seven countries (Bangladesh, China, the Democratic Republic of the Congo, Ethiopia, India, Indonesia and Pakistan) and over 40% live in China and India alone.
Asia stands out as particularly vulnerable to rising food prices because that is where the overwhelming majority of the hungry reside (see chart above).
Soaring food prices in China will exacerbate their already considerable hunger problem, but Edwards made an even more important point as reported by Tom Stevenson in the Telegraph—
More interesting, I think, is what will happen to food prices in the longer term. Société Générale recently drew a comparison between what is happening in global food markets today and the dramatic and permanent hike in oil prices in the 1970s.
The conventional wisdom has it that oil shot up because of the embargo triggered by the 1973 Arab-Israeli war. Had that been the main cause, however, it is likely that the price would have fallen back to pre-war levels just as quickly as it had risen. The permanent rise in prices suggests a different cause and SocGen points the finger at the peak of US oil production in the early 1970s and a consequent rise in US dependence on oil imports.
Something similar is happening with regard to China's grain import dependency today, a result largely of a mismatch between inadequate land and water resources and a growing population. Rapid industrialisation and stagnating agricultural productivity have compounded the problem.
Imports of grain as a proportion of total consumption in China fluctuated between zero and 5% for 40 years between 1960 and 2000. Since the turn of the millennium, however, the dependency ratio has risen to 15%. If the rise in US demand for imported oil since the 1970s is the right model, then food prices could remain permanently elevated.
Imported oil is America's Achilles' Heel, but we have lots of grain. But China must now import 15% of its grain each year, and they have a growing imported oil dependency as well. There are lots of reasons to think that China's overheated economy is in trouble in the short-term, but the added stress brought on by "elevated" food prices may lead to longer term instability there. Tech Ticker's Aaron Task interviewed Adrian Day, who has studied the food crisis in China. Here's a quote and the video.
Set aside for a moment questions about the accuracy of [China's CPI] data—or whether inflation in China is the result of Ben Bernanke's QE2 or China's own easy money policies, and consider:
- An estimated 200 million migrant workers have moved from rural areas to Chinese cities in recent decades, with another 400 million predicted to follow suit in the next 20 years, according to The Independent.
- China had an urban population of 620 million by the end of 2009, which was 46.6 percent of the nation's total population, China Daily reports. Urban residents are expected to comprise about 52 percent of the Chinese population by 2015, and 65 percent by 2030.
That's a lot of mouths to feed and a big reason why Adrian Day of Adrian Day Asset Management is "extremely scared" about the potential for food price spikes to lead to rioting—and even wars in the coming years.
Death by a Thousand Cuts:
http://witsendnj.blogspot.com/2010/11/death-by-thousand-cuts.html
There is going to be a food crisis EVERYWHERE next year, not just in China, because the inexorably rising level of background toxic air pollution is destroying crops. There's a wager at the end of that post - food riots by July 2011...if anyone wants to place a bet - pile on!
Posted by: Gail | 11/28/2010 at 06:17 PM