So, here's a new thread to discuss the rising food prices, and the link (if any...) to the current credit crunch. Carried over from the now infamous " Anyone know a lender that considers salary growth potential & other factors" thread.
Yetanotherstudent - I'll put up a considered reply when I get time. Don't hold your breath though it may be a couple of weeks
Continued apologies for not replying, but this is my busy time of year. I am constrained by my teaching commitments until June, when I shall be writing a longish unconventional, possibly hyperbolic piece on this
This is not a subject I am an expert in but I'll give it a go There are long cycles in the commodity markets, partly due to the effect of business cycles and partly due to the cycle of investment in infrastructure. The first real experience I can remember, where the rapid change in the price of commodities affected my life was in 1974 during the three day week. I was at junior school at the time. The rapid rise in oil prices after the Yom Kippur war of Autumn 1973, had brought about a recession in the industrialised economies and lax lending during the Barber boom had brought about a credit crunch. It should be added here that the extent of lax lending and the credit expansion at this period were miniscule compared to the credit expansion and dire lending standards that extended over the period 1982-2007. The culmination of this crisis was the “3 day week” when there was electricity rationing. The price of oil was just part of a worldwide commodity boom which saw nearly all industrial and agricultural goods hit all time nominal highs, but certainly not all time real high prices. I remember my mother complaining about the cost of sugar which saw one of the most spectacular bull markets ever. The reality though was this bull market had its genesis in something that happened in the 1950’s. The colonial powers discovered that the widespread availability of small arms and explosives made guerrilla warfare the most effective form of warfare for the first time since the days of Machiavelli. The cost of maintaining armies and administrative structures was prohibitive and one by one the British, French, Portuguese, Dutch and a few minor powers withdrew from there empires. Predictably as little more had been done in these countries than build a mine, a port and a road from the mine to the port, they fell into political chaos. Many of the shares in companies in Africa and Asia sold for less than the money they had in the bank. The economic chaos that ensued meant that little investment was made in opening mines and oil fields. By the end of the 1960’s supply of metals and energies was beginning to become limited. Things were set for a large rally in industrial commodities. This occurred during the mid 1970’s. Agricultural commodities had a bull market for different reasons. After the second world war, much of Europe saw widespread hunger. When I was postdocing in Germany in 1988/89, they still spoke of the hunger years around 1947. Food security was central to the major industrial powers and they had a cheap food policy by guaranteeing minimum prices and meeting the extra costs over world market prices by subsidies. The problem with agricultural production in industrialised countries is that it lacks comparative advantage relative to agricultural production in non-industrial countries and so North American, West European and Japanese farming were uncompetitive. Subsidising agriculture kept food cheap for two reasons. One the farmer could sell below cost and claim subsidies, but also the encouraged excess production was dumped on the world market which depressed world prices. This however discouraged investment in agriculture in the non-industrialised countries that did have comparative advantage in food production. There was little point in investing to export to Europe, North America and Japan as they had high import tariffs. The thing that really drove world market food prices high in the mid 1970’s was the failure of the Russian harvest in 1974, when the Russian government brought up the worlds reserve stores of grain. The world’s monetary authorities accommodated these price rises as they thought it would allow them to liquidate the lending excesses, without the rise in unemployment that would have occurred if they had maintained more appropriate tighter monetary conditions. Inflation took off and in the severe recession of 73-75, unemployment rose massively anyway. So much for Keynesianism. It is in general much better to liquidate excess and inappropriate borrowing by deflation than inflation. This is because extent of deflation is limited and is therefore self liquidating. That is it will come to an end on its own. Inflation is not self liquidating, in fact it selfreinforcing. The price of accommodating the raw material price rises in the mid 1970’s was an economic crisis which largely lasted until 1982. The severe recession of 1979-82 would have been unnecessary if inflation had not been allowed to run amok in the mid 1970’s. The consequences of high commodity prices in the 1970’s, would be obvious to anyone with an O Level in economics. Loads more crops were planted, and loads more mining engineers and oil geologists started working to open more mines and oilfields. A fantastic amount of investment was made to increase raw material supplies, at a time when the world monetary authorities began to contain inflation by strictly targeting money supply growth in the early 1980’s. The recession at the time reduced demand for commodities and prices collapsed. By 1986 oil was 6 dollars a barrel. Real commodity prices fell until 1998 and precious little investment was made in finding more oil reserves, opening mines etc. At this point the cycle was complete More to come on the present cycle later...
Just as the cause of the commodity boom in the 1970’s can be found in the lack of investment in mining and drilling infrastructure during the collapse of empire, so the commodity boom today has its roots in the collapse in investment in oil and mineral exploration and development from the mid 1980’s onwards. I graduated in 1985 and three geologist friends of mine all got extremely well paid jobs working on rigs all over the world. They all bought the flashiest of cars and developed a taste in the high life until the big price collapse in 1986 when they all lost their jobs and the cars went back. You are all going to see similar things amongst your friends who were silly enough to go into investment banking rather than train as an actuary. Unfortunately training mining engineers or geophysicists is an expensive and time consuming business and if raw materials are cheap, there will be too few of them when prices rise and mining and oil companies begin to invest. This slows down the opening of new mines and oilfields On the demand side the industrialisation of countries such as China and India has also increased demand for industrial raw materials During the 1990’s the support of agriculture also changed from one of guaranteed price to maximise production to one of subsidising farmers not to produce in “set aside schemes”. This reduced the amount of food produced in the industrialised west and prevented some of the worst dumping of excess European and American dumping on third world countries. There were also subsidies to produce ethanol from crops. This must be one of the most stupid things that governments have ever subsidised. Taking oil to make fertiliser to produce crops to make an oil substitute is pure madness. Again weather has played its part with droughts in Australia. This is now blamed on global warming but changeable weather patterns have always played a part in driving food prices. Prior to the “black death” cooler summers reduced yields of crops and the general condition of the populace deteriorated making them susceptible to bubonic plague. I suspect global cooling was not blamed at the time. One probable misleading claim often heard in the media is the increase in demand of meat in china, which takes more grain to produce. Since China has met most of its own increased grain, rice demand this is probably unimportant. The green lobby is also an important factor in driving up energy costs. Generating electricity from low flux sources (ie low energy per unit volume) such as wind, wave, tidal involves massive upfront costs and large subsidies. Far more sensible to open up the coal mines again and build more nuclear power stations but this is opposed by a populace brain washed into believing global warming is caused by CO2 generated by human activity and who think disposal of nuclear waste is problematical. (It is a political problem, not a practical problem). I did my PhD on the infrared spectroscopy of carbon oxygen bonds I can assure you that anybody who is familiar with the group theory and symmetry of molecules will tell you CO2 is not an important greenhouse gas. (H2O is though). More on how the credit crunch is impacting on commodity prices later
