by David Malone
So far this year ordinary people in Algeria, Tunisia, Egypt, Jordan, Yemen, Oman and Iran have taken to the streets. In all of them the demands have been for greater democracy. Not one of the protests has had the “Death to America”, “Death to Israel” slogans so beloved of the Fox News knuckle heads.
So this wave of unrest is not radical Islam rising. Neither, I will argue, is it the triumph of Western democracy. So then what is it and how might it develop?
The first questions, of course, are: why those countries, if Islam is not the common factor then what is, and why now?
Well, only in Jordan, was the price of food the main and declared cause. All of the rest took to the streets to demand more democratic freedoms and perhaps even a little substance to their democracy instead of just the trappings of it. So no one can deny that so far these protests have been more about democracy than radical Islam.
So why now?
Last year wheat prices doubled and since mid November have risen a further 35%. But can we really say food prices are a major cause of unrest in all these nations? Egypt is the world’s largest importer of wheat at over 6300 metric tonnes but the other big importers are Japan, (no.2), Brazil (no.3) and Indonesia (no.4), and there have been no uprisings in those countries.
But if we simply look at imports per capita this happens,
# 1 UAE: 370.659 thousand metric tonnes
# 2 Libya: 242.803 thousand metric tonnes
# 3 Israel: 238.968 thousand metric tonnes
# 4 Jordan: 173.611 thousand metric tonnes
# 5 Algeria: 101.439 thousand metric tonnes
# 6 Tunisia: 89.33 thousand metric tonnes
# 7 Yemen: 86.8432 thousand metric tonnes
# 8 Egypt: 81.284 thousand metric tonnes
# 9 Iraq: 76.7018 thousand metric tonnes
# 10 Cuba: 70.5032 thousand metric tonnes
(Metric tonnes per million population)
Now simply weed out the UAE on the grounds that it is rich with oil and you have everyone accounted for except Oman which I think we can fairly put down to straightforward contagion of enthusiasm.
What does this tell us? Well I think it makes clear that food price increases answer both the ‘why those countries’ and ‘why now’ questions. It is poverty not Islam which is the common factor. So far. Should we be happy about this?
The protesters in Egypt have seen the corruption and huge disparity in wealth between leaders and led and concluded that their problem has been one of a lack of democracy. They think democracy will herald a new era of food price reductions. But will democracy do anything about poverty and the disparity between rich and poor? In the West, in the last two decades, democracy has overseen a massive increase in disparity between rich and poor. In the West democracy has come to be synonymous with capitalism-as-we-now-have-it, free market, debt-and-finance capitalism. I think the moderate democrats across the Arab world may be in for a major and dangerous disillusionment.
In most of the nations in which there has been unrest the governments have, in the past, routinely intervened in the market for food and subsidized prices. Something which the IMF, for one, would deplore and put a stop to – under a more ‘democratic’ government that is.
So where does this leave us? I think there are several things we can say. First, in Egypt and in the other countries that force concessions, we will have a honey moon period when protesters will be willing to wait a little on the expectation that things will now get better because they have more democracy. During this time, any groups who do have an Islamic agenda will wait. The Islamic Brotherhood in Egypt are not stupid. They genuinely are, generally peaceful and moderate. They do not need to push their agenda. The Wahhabi, who have the money to put behind any movement that arises can also afford to wait. What are they waiting for? I suggest they will wait until democracy does not deliver lower food prices. I think there is every chance that if food prices stay high or even rise further, that the unrest will not go away. It may go off the boil if concessions are made, but it will start to seethe again when prices do not go down and inflation from Western money printing in fact makes their poverty worse. At the second time around, Arab unrest will be far more likely to be influenced by a disenchantment with Western solutions. Then the Wahhabi will spend their money.
Which brings us to the question of whether wheat and food prices are going to stay high or not?
First we need to understand why food and wheat in particular has gone up in price. The financial world is concerned that you do not think price rises have anything to do with speculation. They want you to believe that prices of commodities are driven by constrictions in supply and rising demand. Natural causes as it were. The seed companies are keen on this too. Monsanto and Cargil are beginning a global push to over come public resistance to GM technology on the grounds that only GM can save the word from starvation.
Let’s look at last year’s price rise in wheat. The price doubled in a year. The human population did not double. Supply did not halve either. In fact the wheat supply dropped by 2.4% in 09-10 (the growing season in question). So what happened? How do we explain these facts?
It is often said that markets ‘meet’ or ‘supply’ demand and that this is how markets work. This is not true. A more accurate description is that markets profit from demand. To understand any market we have to avoid the fallacy of averages. The price of a commodity is not set by simply dividing the total demand by the total supply. Costs are never divided evenly. Those at the front of the queue will always get things cheaper than those at the back. The farmer who grows the wheat will save some for himself and pay costs price only. Those who can pay up front will get a discount. As each group who can pay takes their portion from the total. Those who are left are competing for a shrinking pot.
So let think again about our mere 2% short fall in supply. The farmer takes his share and doesn’t care. The wealthier bulk buyer buys at a 2% price rise, but still takes as much as he wants. He can afford it. Importantly he does not take 2% less. So that 2% shortfall is still there but now concentrated among those trying to buy what is left. The original shortfall will grow as a percentage of what is left after each purchase is made. You can see that the shortfall will concentrate on those at the back of the queue: those who can least afford it. And that is what happens in any market. It is the reality of how free markets actually work in the real world.
Supply and demand does not spread itself into average prices. As this writer in the Asia Times puts it, “Financial crises, like epidemics, kill the unhealthy first. “
The same writer concludes that what is happening with wheat and food generally is that the Arab poor have been priced out of the market by India’s and China’s middle class joining ours at the front of the queue. And in part I agree. Only I think there are further very nasty compounding factors.
Neither China nor India are huge wheat importers. China and India consume a great deal of wheat but produce a great deal of it themselves. (These are not up to date figures but are still useful.) Thus neither is a massive importer. China is virtually self-sufficient. So what is pushing up wheat prices so fast and so far above the small decline in supply that it is destabilizing country after country?
For an answer we need to turn to the other major thing that has happened in the last year and that is the massive printing of money. Trillions of dollars, pounds, euros and yen have been printed and pumped into the banks. This money has been looking for a profit. There has been little profit to be had sitting at home and so most of the money we have printed and borrowed has been funnelled abroad. Where it has flooded into ’emerging’ markets causing huge price volatility as bubbles form and burst and form again.
Now those who defend the markets from people like me, who don’t have PhDs, will tell you this: those who are slandered by being called ‘speculators’ are actually only middle men who facilitate the smooth flowing of products from producer to consumer. As such they can’t affect the price that the actual consumer will pay. Speculators can’t be driving prices up because speculators can’t actually buy the physical stuff – imagine, they say, how silly it is to think of a bank taking delivery of thousands of tonnes for wheat. The very notion!
The ‘market’ sets the price, the middleman just helps. And if there are lots of middlemen chasing contracts, all that will do is force them to keep what they charge for their middleman service, as low as possible. The very picture of an efficient market.
Let’s take these one at a time. First, it is silly to imagine banks taking physical delivery. As silly as imagining that every property speculator had to live in every house he bought. Or worse arguing that he simply couldn’t buy them because he couldn’t live in them all (take physical delivery). Silly indeed. The property speculator flips the houses. He buys and before the paint is even dry he sells it on. So too the food speculator doesn’t have to have the Wheat delivered to his desk. He buys and flips the sale. If necessary he can pay for the grain to be stored in a warehouse until the ownership is switched. JP Morgan owned Oil in tankers moored off shore for a while.
The food speculator buys contracts and options on the expectation of a rising price and then if the price does rise, flips those contracts to someone who really does want the physical stuff. If the price doesn’t rise he closes his ‘position’ at a loss. Which if he has hedged well, will be a small loss. The speculator also buys derivatives which will pay him IF the price rises. And then he can set about encouraging that very price rise. In a bubble market this works particularly well. So the ‘physical delivery’ argument does not stand up.
What of the second objection, that no matter how many speculating middlemen there are, no matter how much money they have, they can’t raise the price above what the end consumer will pay? Text book stuff. Which is why I don’t recommend them.
Imagine the situation we have, of markets flooded with cheap, printed up cash. The banks and dealers holding that cash are desperate for a profit. They see a small decline in wheat supply. A chance of a rising price. Dealers buy up contracts. What will they be willing to pay for these contracts? Text book says, the glut of buyers can do nothing to raise the ‘market’ price which is set by the end consumer.
Reality is otherwise. The middlemen have in recent years become the market. There are so many of them, with such buying power, on so few markets all of which are in instant communication, that the middlemen can have a vast effect. In fact they are the market that counts not the end consumer. The middlemen, the specualtors have begun to dictate to both the producers and the consumers.
If there is a huge real glut of product, then that glut will, as per the text books, keep the price down. But if there is even a 2% shortage, then the amount of cheap money around can easily buy up the bulk of what produce there is with little fear of losing. It’s not as if the farmer can say, “Oi, over here, I’ve got stuff for less.” The middlemen have the contracts, the contacts and cash.
Now the obvious objection is that those middlemen in the end will have to sell to the end user. Surely the end consumer will just find a dealer who will sell for less? But why would a dealer sell for less? Why not sell up at whatever the other dealers are selling for. Don’t forget the ‘middlemen’ control almost all the market and except in years of real over-supply, especially as we work towards the back of the queue, there will not be lots of spare produce.
Once you see that in most years the middlemen, the speculators, are the market, then you can see a whole dynamic of this new market, taking control. There will be lots of middlemen, with lots of cash chasing a limited amount of produce. There will be more money around than produce to buy or profits to be made. Thus the money will compete to buy in to the commodity that is rising. They will bid it up, not down.
To put it simply everybody becomes desperate for ‘a piece of the action’, and will pay over the odds to get it. Especially in a volatile and rising, bubble market. This is simple bubble economics. It is how bubbles form. Wheat speculators see that prices will rise a little. They buy in at the front of the queue. Each would like to get a piece of the action and there is not enough wheat for everybody to get a piece. So they will bid each other up. This will make prices of wheat futures rise, that rise will attract more money looking for some action.
While this is going on counties and people still need to eat. They can’t simply wait until the speculators calm down. So people buy the inflated prices. How do we know they do? Because the price doubled on only 2.4% supply constriction. The wheat market is very volatile and this is why. And I as wrote in the post on volatility, volatility itself is what the modern market trades in.
Speculators can and do bid up prices. They take a small shortfall and amplify it so as to maximize what markets do, which is make profit from demand.
So now, finally, what of the future?
According to the FAO China’s main wheat growing belt, which produces two thirds of its wheat, is facing the worst drought in 60 years, and in some parts, the worst in 200 years. (How they know this last figure I don’t know.) Nearly 13 out of 35 million acres are affected. See pictures here. If the drought continues next year’s harvest will be very small. If it rains the harvest could be huge. China is preparing for the worst and prices are rising.
Climate problems have already caused Russia and Ukraine to suspend wheat exports and Australia’s harvest too may well be cut. Whether you think global warming is happening or not and is due to man or not, starts to not matter. (I believe the evidence says it is happening and is man made but that’s another story.) Regardless, the facts are that food insecurity is rising at a time when stupid western governments are flooding their banks with money and those banks don’t really care who starves so long as they make a profit.
To circle back to where we began, climate and food insecurity, plus printed-money fueled speculation is going to mean food prices will continue to be very volatile and very probably will go up further. In those countries where protesters are thinking democracy is going to feed their children they are going to find that democracy has become the market’s bitch and the market does not care. We should expect more countries, including our own, to feel civil unrest growing as prices and inflation race ahead of employment and wages.
David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: http://www.debtgeneration.org/index.php