The current issue of the Economist has an article on global food prices, which I excerpt below. It underscores the difficulty China is going to have in reining in food inflation. It seems that help will not be coming from abroad.
THE long cycles of agriculture are seldom associated with gripping suspense. But on September 12th farmers, grain traders and investment managers around the world will be awaiting news that is generating greater excitement the higher grain prices rise. The monthly report of America's Department of Agriculture (USDA) is so sensitive that department staff go into what they call a “lockup” period for days in advance, often working all night just before its release.
Prices of global wheat futures hit records during the first week in September, about double what they were a year ago. Corn (maize) prices have also surged. Consumers are already paying higher prices, forking out more money for products ranging from bread to noodles—although the cost of something in the shops has many components in addition to the price of a commodity. Wheat, for instance, accounts for only about 5% of the cost of an average loaf of bread. But although a jumble of subsidies clouds the precise picture, a long period of higher food prices is beginning to show up in inflation numbers around the world...
...Crop prices are increasingly intertwined because they influence what farmers decide to plant. Higher wheat prices are driving up the price of corn, which is even more sought-after as an animal feed when wheat is too pricey to be a substitute. Corn prices are also pushed up by growing demand for biofuels. In America, one of many countries encouraging the use of such alternatives, biofuel distilleries account for about one-fifth of the corn crop—thanks in part to subsidies. The lack of acreage for other crops, such as soyabeans, pushes their prices up too.
Given the price volatility, the upcoming USDA report is keenly awaited. The data's impact was particularly acute earlier this summer when the department reported that farmers planted 19% more land with corn this year than last, while soyabean acreage fell by 15%. Markets briefly sent prices of these two commodities in opposite directions. The report covers all the big exporting and importing markets. No one else does such a comprehensive job and it is hard to guess the outcome. However, dearer food is likely to be on the menu for some time yet.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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October, 2007
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