Tuesday, August 12, 2008

Food, Fuel Price Relief Coming for South Asians

Wheat is down from a record high of $900 per ton earlier this year to $300 per ton today. For December 2007 delivery, Pakistan paid an estimated import price of $380-400 per ton, exclusive of transportation. Earlier in April-May 2007, Pakistan had exported wheat at the then-prevailing price of $225 per ton.

The rising oil import bill has been the biggest budget buster for Pakistan and other developing nation which must import oil. Pakistan's dollar reserves have dramatically dropped from $15.5b to $10.5b this year. The fact that oil is down from the peak of $145 a barrel to $114 a barrel is good news for Pakistanis and South Asians. Since June 30, oil on the New York Mercantile Exchange has fallen 18%, and natural gas has sunk 37%, to $8.349 a million British thermal units.

The pullback has spread to other commodities as well. Since the end of June quarter, gold is down more than 11%, and several industrial metals also have tanked. Agriculture has pulled way back, with a 31% drop for corn, a 24% drop for soybeans and a 5.9% drop for wheat.

While the demand has eased off slightly due to recent record prices, the biggest impact on commodities has been due to the threat of U.S. Congressional action, the credit crunch and bearish sentiments in noncommercial speculation by the likes of hedge funds. So-called noncommercial oil traders, which include players such as hedge funds, have been reversing once-bullish bets. Wall Street Journal says that independent energy-market analyst Stephen Schork pointed out Monday that as of Aug. 5, according to regulatory data, noncommercial traders moved to their largest bearish view in oil futures since February 2007.

The credit crunch has made it harder for such traders to carry bullish commodity futures bets as the market has turned, because of the collateral, or margin, traders must post to stay in the game. What's more, many are bailing out of positions as the U.S. Congress debates a legislative overhaul of commodity markets that could reduce the size of bets speculators can make, according to Wall Street Journal.

The recent strength of the US dollar has contributed in bringing down food and fuel prices as well. The US dollar has risen to a 24-week high against the euro and and stayed near a seven-month high against the yen.

These recent declines of world food and fuel prices should help ease retail inflation in Pakistan which has surged by 24.33 percent over the same period last year. The food prices have risen by 33.81 percent, significantly eroding the purchasing power of the people, according to Federal Bureau of Statistics. Wholesale prices in India have also grown by 11.89% in the year to the end of June, the fastest rate since the measure began in 1995.


Anonymous said...

The Iran's N-Bomb fantasy will cost us a lot. If they remain obstinate with their enrichment programme, the Israelis will go ahead and bomb them. Then crude oil price is expected to hover around ~$300 per barrel and that will be the end of good times for ordinary ppl of the world outside oil rich countries.

Riaz Haq said...

Israel is likely to coordinate its actions in Iran with the US, particularly the US Navy to keep the oil supply lines open in the Persian Gulf. In the event of an Israeli attack on Iran, the oil will temporarily jump as a result of jitters and speculation, but will come back down quickly if the supply through the Gulf is not disrupted. Meanwhile. Iraq is starting to raise its production of oil.

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.