Interesting nuggets from Tim Price on the dual rise in energy and agricultural commodity prices.
Will the rising prices of food and fuel dismantle the growth story in Asia, he asks? UBS estimates that China’s foreign currency reserves, which are currently the world’s largest, could be cut in half over coming years if grain prices were to double again from existing levels. Until recently a grain exporter, China is forecast to be importing the equivalent of 40 per cent of US corn exports by 2010.
Niels Jensen at Absolute Return Partners writes in his latest letter that the emerging markets - where food takes a much greater share of household expenditure - will have to grapple with more significant feedback from food inflation to non-food inflation than their OECD peers.
Most investors seem to believe that headline inflation will gradually come back to core inflation levels over the next year or so. Few investors seem to think the unthinkable — that core inflation will gradually rise to headline levels.
Even fewer seem to realise that if oil prices and agricultural prices continue to run amok, the Asian miracle story, upon which so many investors have pinned their hopes for the next few years, may, in fact, turn into a nightmare. The reason is simple enough. Asian countries are large importers of both oil and food staples. Very large!
In fact, he adds, Asia is the only region in the world today that is a net importer of both crude oil and food staples.
So if it’s not just about the ‘haves’, and ‘have nots’ - where are the ‘have boths’?
In fact, few countries are net exporters of both oil and foods on a large scale. Come to think about it, it is less than a handful. And no Asian country is on the list. So who is on it? In the old world only one — Canada. In the grey zone (emerging economies but not necessarily young and dynamic populations) perhaps two — Russia and Kazakhstan. And amongst full blooded emerging economies? No one today, although Brazil has the potential to turn itself into a winner and so does Africa, if it can sort itself out.
The Canadian stock market, by the way, has just hit a record high, surpassing the level it reached pre-crunch helped by commodities stocks and the Blackberry.
Jensen adds a whimsical afterthought:
Should we be tempted to create OGEC — the Organisation of Grain Exporting Countries — with the objective of ensuring overall resource stability, i.e. food will only be exported to oil producing countries provided they deliver oil to us at a reasonable price?
The largest wheat exporters today are (in order of rank) the US, Canada, Russia, the EU, Argentina, Kazakhstan and Australia. Most of these countries happen to be net importers of oil. Is it unreasonable to apply a ‘tit for tat’ approach? My heart (as does my bank manager) tells me yes but my gut feel says no. The world has always been a better place when government interference has been kept at a minimum. The problem we face in this particular situation, though, is that not everyone plays by the same rules. If that could be fixed, the world would indeed be a better place.
Related links
Rate cut hopes fade as inflation surges to 3 per cent - FT.com
When is food not food? - FT Alphaville, March 08
