Tuesday, February 26, 2008

Wheat Price Up 400 Percent

Wheat Price Touches $900 Per Ton
Triggered by wheat export curbs by Kazakhstan and the lowest world inventory in 26 years, wheat price hit a new record at $25 per bushel or about $900 per ton. This translates into Pakistan Rs. 55 per kilo for raw wheat in bulk excluding transportation, milling and bagging. It represents a 400% increase in less than a year. According to the U.S. Department of Agriculture's Foreign Agricultural Service, Kazakhstan is the sixth-largest exporter of wheat, behind the U.S., Canada, Russia, Argentina and the European Union. Kazakhstan is in the belt of wheat production that stretches from Ukraine through southern Russia. It already has exported nearly seven million tons of grain, of the available 10 million tons from the 2007-08 crop, Agriculture Minister Akhmetzhan Esimov said.

Price Doubled Since Dec, 2007
In my January 15, 2008 blog post Wheat Flour Shortage in Pakistan, I wrote as follows: " Former Prime Minister Shaukat Aziz announced in Sept, 2007 that the Pakistani government would import one million tons of wheat, stating that this action was necessary to “maintain a reasonable buffer stock for the future.” The export price for Pakistani wheat during the April-May export window was approximately $225-232 per ton. For December 2007 delivery, Pakistan is now looking at an estimated import price of $380-400 per ton, exclusive of transportation." Well, here we are in February 2008 and the price of wheat has more than doubled yet again since Dec, 2007. In fact, the inflation of wheat prices now exceeds all other commodities including oil, gold, metals etc.

Implications For Pakistan
Like most developing nations, the average person in Pakistan has very low discretionary spending,with the bulk of his or her income spent on food, clothing and shelter. The dramatic increases in commodity prices, particularly food, is very troubling for the vast majority of populations living in the developing countries such as Pakistan, India, China and the African nations. The exceptions, of course, are the nations with their own significant production of food and fuel and other natural resources. The nations producing and exporting food, fuel, and metals actually benefit from this trend of higher commodity prices.
The incoming government in Pakistan will face a very difficult challenge in containing tremendous inflationary pressures on basic commodities such as food and fuel. A failure in this effort can lead to significant instability and has the potential to threaten the future of democracy in Pakistan.

1 comment:

Riaz Haq said...

Someone has to stop the Federal Reserve before it crushes what remains of America’s Main Street economy, argues former budget director David Stockman in a piece for Marketwatch.com:

n the last few weeks alone, it launched two more financial sector pumping operations which will harm the real economy, even as these actions juice Wall Street’s speculative humors.

First, joining the central banking cartels’ market rigging operation in support of the yen, the Fed helped bail-out carry traders from a savage short-covering squeeze. Then, green lighting the big banks for another go-round of the dividend and share-buyback scam, it handsomely rewarded options traders who had been front-running this announcement for weeks.

Indeed, this sort of action is so blatant that the Fed might as well just look for a financial vein in the vicinity of 200 West St., and proceed straight-away to mainline the trading desks located there.

In any event, the yen intervention certainly had nothing to do with the evident distress of the Japanese people. What happened is that one of the potent engines of the global carry-trade — the massive use of the yen as a zero cost funding currency — backfired violently in response to the unexpected disasters in Japan.

Accordingly, this should have been a moment of condign punishment — wiping out years of speculative gains in heavily leveraged commodity and emerging market currency and equity wagers, and putting two-way risk back into the markets for so-called risk assets.

Instead, once again, speculators were reassured that in the global financial casino operated by the world’s central bankers, the house is always there for them—this time with an exchange rate cap on what would otherwise have been a catastrophic surge in their yen funding costs.

Is it any wonder, then, that the global economy is being pummeled by one speculative tsunami after the next? Ever since the latest surge was trigged last summer by the Jackson Hole smoke signals about QE2, the violence of the price action in the risk asset flavor of late — cotton, met coal, sugar, oil, coffee, copper, rice, corn, heating oil and the rest — has been stunning, with moves of 10% a week or more.

In the face of these ripping commodity index gains, the Fed’s argument that surging food costs are due to emerging market demand growth is just plain lame. Was there a worldwide fasting ritual going on during the months just before the August QE2 signals when food prices were much lower? And haven’t the EM economies been growing at their present pace for about the last 15 years now, not just the last seven months?

Similarly, the supply side has had its floods and droughts — like always. But these don’t explain the price action, either. Take Dr. Cooper’s own price chart during the past 12 months: last March the price was $3.60 per pound — after which it plummeted to $2.80 by July, rose to $4.60 by February and revisited $4.10 per pound.

That violent round trip does not chart Mr. Market’s considered assessment of long-term trends in mining capacity or end-use industrial consumption. Instead, it reflects central bank triggered speculative tides which begin on the futures exchanges and ripple out through inventory stocking and de-stocking actions all around the world — even reaching the speculative copper hoards maintained by Chinese pig farmers and the vandals who strip-mine copper from the abandoned tract homes in Phoenix.

The short-covering panic in the yen forex markets following Japan’s intervention, and the subsequent panicked response by the central banks, wasn’t just a low frequency outlier — the equivalent of an 8.9 event on the financial Richter scale. Rather, it is the predictable result of the lunatic ZIRP monetary policy which has been pursued by the Bank of Japan for more than a decade now--and with the Fed, BOE and ECB not far behind.