JOURNAL: Food Shocks

Mind bomb: An unregulated global marketplace is now firmly ensconced in the role of the sole superpower. We are going to find its reign harshly capricious (as in rife with vicious black swans against which we have few counters). Here's an example:

“We think we could go into crisis mode in many commodities sectors in the next 12 to 18 months . . . and I would argue that agriculture is key here.” Jeff Currie, Head of Commodities Research at Goldman Sachs.

Comments

[Andy]

This isn't just going to affect the third world.

Food prices in the US are on the rise. The local TV news station had a segment of the rise of food prices and it's not pretty. Heinz just raised their prices again because of commodity shortages.

Grains and corn are going through the roof. The corn industry's lobbying for corn based ethanol has been a nightmare for the rest of America - have you seen how much a box of cereal has increased over the last few months?

Energy prices continue to rise - my BGE bill was $500 despite using 1300 KwH less than the same time last year. That's a $300 increase. Gas is still around $3 a gallon.

When middle class folks like me are starting to feel the pinch, and my expendable income and investments are feeling the strain (basically I can't put anymore into savings/investments), then I wonder how people who aren't making as much as I am can get through these times.

This is starting to look ugly here in the US.

[John Robb]

Agree. I think we are going to soon realize (too late) that we severely damaged a key foundation of the US and the global economy -- the US middle class. The combination of future market shocks and other black swans will make this painfully clear.

IF we do make the transition to a market-state thinking, we will find the key health metric for the any government isn't GDP growth/employment/etc. Instead, it's the growth of median income and quality of life for a country's residents (a soft metric), relative to competitors.

[Duncan Kinder]

So much of the so-called "War on Terror" would be clarified if it simply were renamed "The War to Control Commodities."

The argument that the war in Iraq is "about oil" is incorrect in the sense that oil is the big, bad commodity - hence a focus upon oil alone eclipses the role of other commodities in this overall conflict.

Basically, from about 1980, the West in general and Wall Street in particular has used increasingly sophisticated financial instruments, such as derivatives, to suppress the price of commodities - such as oil or gold. Since about 2000, however, these instruments have not been working - and we have witnessed such fallout as Enron and the housing bubble. This has been associated with an insurgency in many commodity rich areas of the world. The Arabs with their oil have simply been the most vocal.

For some economic background about the status of commodities in today's economy, read Jim Rogers' _Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market_.
http://www.amazon.com/Hot-Commodities-Anyone-Invest-Profitably/dp/0812973712/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1203273248&sr=8-1

[dano]

The Comptroller of the US who is also head of the GAO has resigned because he is not allowed to voice opinions and provide policy input that address the problems and consequences that are addressed in John's theories and this post.

The Washington Post does a poor job of the report, but the Australian news has a good story.
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/15/AR2008021502743.html
http://www.news.com.au/story/0,23599,23223292-23109,00.html

"As Comptroller General of the United States and head of the GAO, there are real limitations on what I can do and say in connection with key public policy issues, especially issues that directly relate to GAO's client - the Congress," Mr Walker said.

He did not elaborate but Walker last year issued an unusually downbeat assessment of his country's future in a report that drew parallels with the end of the Roman empire.

He had warned that the US government was on a "burning platform" of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action was not taken soon.

[yacheritsi]

It is not clear to me how food price controls and export bans, investment controls and inefficient politally motivated desalinization and ethanol plants are examples of an "unregulated global marketplace." The article decries all of these interventions as destabilizing, because they interfere with the market places.

[John Robb]

Yacheritsi, that's a good point. Here's another way to look at it.

You assume that nation-states are not participants in the marketplace. If they are, their actions can't be considered exogenous.

Also, regulation requires some level of control. Is any organization in control of the global economy?

[pm2075]

Aside from "Big Bangs," "Hollowed States," fragile economies and lost cities as a consequence, i came across the thesis by Alan G. about the benefits of the gold standard to dampen the dependence of the economy on business cycles. Rising commodity prices might be the reults of a fsical monetary policy that's gone out of control.

[stevelaudig]

So, if there is a crisis in basic commodities arising which "state" is in the best position to deal with it? Is the "United States" even a "state" anymore? Certainly its constituent "states" aren't. They are nothing more than corporate facilitators. So where are the non-hollowed out states? China comes to mind. Russia, as a state, not a society. Has "Europe" become a "state"? How do the sovereign funds play in here, if at all? It seems to me that "W" will leave the U.S. "state" looking like it did after Katrina. Hollowed out except for its ability to torture and tap, but not take charge. Or am I an optimist?

[yacheritsi]

The South Africans used to build walls around the townships with only one gate out. If the residents rioted, they could park an armored car in the gate and shoot anyone who came close. The residents could then riot all they wanted, but in the words of the authorities, they would "only soil their own nest."

In today's world, state retain the ability to build a wall around themselves and post an armored car pointed at their own citizens trying to get out in various ways. They lack the ability to create much except waste, but they retain the ability to disrupt people's attempts to organize on their own. High-margin low-capital trade like in drugs are harder to disrupt. Activities which require more elaborate public institutions, such as banking, foreign direct investment and conflict resolution are easier to disrupt.

If the voters and legislators want to turn natural gas into corn to be turned into ethanol, the price of corn will go up. How could it be otherwise? If some nation or trading alliance was powerful enough ("in control" enough) to implement world price controls or shut down the international grain trade, that would disrupt things EVEN MORE than a rise in the price of grain caused by an increase in demand.

You might look into the Rwandan coffee policies before and after the genocide for another example.

[John Robb]

Too much control and too little control both present problems. Price controls, etc. create excesses at the macro level. An inability to set boundary conditions and/or keep a highly dynamic system from going non-linear is also a big problem (as in depression/financial panic/illiquid markets/etc.).

Our problem may be a combination of too much intervention at the local level (by lots of different participants), which only adds to the instability of a global economic system which isn't controlled/dampened at the macro level.

[James Bowery]

Degree of control isn't the issue so much as poor architecture.

It should be obvious to the most casual observer that things like the Nolan Chart are fundamentally flawed because they don't let you specify the level of the architecture your control preferences target: global, nation state, city state or household.

More to the point, any controls should be targeted levels of the control architecture matching the range of their human ecology. In a seeming paradox this means that the more you firewall human ecologies from each other, the more freedom people have because there are fewer necessary intrusions by the global levels of control on the local levels of control.

[zenpundit]

"thesis by Alan G. about the benefits of the gold standard to dampen the dependence of the economy on business cycles"

The Gold Standard did not dampen the business cycle, it made political tinkering with monetary policy transparent ( and thus, very difficult for governments to do). At best, we can say the Gold standard prevented governments from aggravating matters with inflationary policies.

[TM Lutas]

What is making things harsh right now is that the old system of governments raising food prices to ensure supply is unwinding. Government intervention unwinds are *always* painful. It's worse that many major government interveners are institutionally incapable of adjusting their policies because they've used those interventions in the past to sew up the farm vote locally thus they're muddling the price signals badly.

We'll plant more acreage. We'll get more fertilizers to foreign fields that haven't used the stuff until now. We'll do all this and eventually the food markets will stabilize and be better than before because farmers will have more places to peddle their crops and a wider variety of crops will be available to them. They'll be more independent of the global system too as they gain the capability of generating their own energy when they need it.

In the long term, bringing capitalism to agriculture more fully will be a good thing. It's riding out the transition shocks to get to that better future that is going to be the problem.