Posted by: Dr Pano Kroko | April 18, 2011

Butterfly systemic risk

In case you haven’t noticed, wheat prices are steadily rising.

The only other commodity that follows this meteoric rise of wheat is — wait for it — gold.

Yet bullion’s peak price rise curve is now lagging well behind the wheat price rise and certain other grains rising price curves.

And gold is at record prices. Wheat is not.

But wheat may reach peak one year or one growing season behind gold, based on historical trends. As a matter of fact most other grains and staples are skyrocketing also.

That and the constant increases in the price of rice in China fuels fears of revolution and inflation is a no brainer.

But that this also happens in Japan is a more complex econometric equation.

And the countries respond differently to the crisis also.

Japan’s agriculture is potentially ravaged for many years, due to radiation and the increased price of rice will naturally reflect that, is a non-sequitur because of the surpluses that Japan has built as reserves.

But exports of Japanese rice will surely fall and still the price of rice will rise dramatically – never mind that large parts of the country’s agricultural land is now irradiated.

China on the other hand has got very little in the way of rice reserves. Is that a consumerist or a communist folly? But they’ve woken up and started buying reserves fast, thereby contributing to the problem they are trying to address.

How is that for an oxymoron?

Still here things aren’t as dramatic because the Japanese are saved by the mountains of rice the Ministry of Rice has accumulated for the ”seven lean” years…. to come, and China has the cash reserves to be able to afford the mountains of rice it needs to feed it’s people.

That’s wisdom…

Why?

Maybe because the world is on the verge of a global food crisis or not… And the Ministry has seen that because surely they couldn’t have foreseen the tsunami nor the nuclear plant meltdown in Fukushima. These are top notch bean counters and risk disaster analysts. So please, don’t discount their prescience… because they have been far better at recognizing and preparing for systemic risk than the Wall Street and the City bankers ever had.

And at some point, this crisis will affect everyone, including you and your family too.

Look at North Africa and the Middle East. Almost everyone rushed to excitement thinking that these revolutions are a Democratic manifestation of Internet tools of communications with Twitter and Facebook and all taking the credit… In reality the food price hikes are the reason these revolts took hold and blossomed as people at the top became richer and the bottom simply couldn’t afford to eat or simply felt that the coming food crises required a more suitable representative government to sort it out. And that is the future butterfly effect when the people see the history coming and decide to do something about it. Very prescient crowd sourcing that is…

And it’s an issue as old as the Nile and the frequent overthrows of the Pharaohs who failed to heed the people’s well being. And maybe we learn something here too for the most developed societies too. Because although the reasonable capitalist banker wankers manage to export the phenomena of collapse, to the peripheral geographies, the chicken have a way of coming home to roost eventually. Maybe the poverty rates will skyrocket in the ”PIIGS” economies and their people will suffer just as surely as the bottom of the pyramid ones in the third world, but the impact will be felt more severely in the first world. After all the higher they are the harder they fall — or so goes the old saw.

So rest assured, these things will affect you too. No matter how insular your Life seems to be. These things tend to multiply in unseen ways and the butterfly effect from China and Japan or South Sudan, might just get you in sunny Manhattan and in wet City of London too.

Certainly You will be affected, no matter how wealthy you might be or how insured you feel from the global effects of a runaway food crisis and the resultant negative and few positive effects.

It may not be today, and it may not be tomorrow, but it is going to happen.

Crazy weather and horrifying natural disasters have played havoc with agricultural production in many areas of the globe over the past couple of years.

Meanwhile, the price of oil has begun to skyrocket too.

The entire global economy is predicated on the ability to use massive amounts of inexpensive oil to cheaply produce food and other goods and transport them over vast distances.  Without cheap oil the whole game changes.

But we can’t decouple the economy from the environment yet either… and the warming planet throws us for a loop.

Because topsoil is being depleted at a staggering rate and key aquifers all over the world are being drained at an alarming pace.  Freak storm weather has increased by a factor of ten. The regular Monsoon and the El Nino effect have gone nuts and their regularity is by no means guaranteed anymore. Drought alternated with floods and little in between does not make for a Farmer’s almanac type of weather.

And on the Chicago Mercantile exchange we see the same as we see across the Mercantile exchanges from Shanghai to Minsk and from Canberra to London: Global food prices are already at an all-time high and they continue to move up aggressively.

So what is going to happen to our world when hundreds of millions more people cannot afford to feed themselves?

According to the World Bank, 44 million people around the globe have been pushed into extreme poverty since last June because of rising food prices

Most Americans and Western Europeans are so accustomed to large hypermarkets — absolutely packed to the gills with massive amounts of really inexpensive food — that they cannot even imagine that life could be any other way.

Fortunately or unfortunately, that era is ending.

Times are a-changing…

There are all kinds of indications that we are now entering a time when there will not be nearly enough food for everyone in the world.  As competition for food supplies increases, food prices are going to go up.  In fact, at some point they are going to go way up.

Let’s look at some of the key reasons why an increasing number of people believe that a massive food crisis is on the horizon.

The relative inflation and the naturally following signs that a global food crisis is coming are hard to miss and it’s water that is the key issue here. It’s not oil. And that’s why we at the EP have a Ministerial Water Conference in Nepal’s Kathmandu with the UN,  later this year on October 15th 2011. Come there, learn and share your knowledge too.

China just announced the fourth rate hike of this year. In the first quarter that is… The People’s Bank of China will up the reserve requirement ratio by 50 basis points to a record 20.5%. This was expected after 5.1% consumer price inflation blew away expectations last week. Now how is that for a popular sign of food inflation with a one and a half Billion consumers paying more for their food?

Stories like that are hard to miss, because you see them occasionally on the news but you find them boring. And if they happen to be too graphic with naked skeletal children — You simply turn the control fast to other happier topics. But when with water tables all over the globe are being depleted at an alarming rate due to “overpumping” from the underground water table and even from the fossil water, that’s what you’ll see. Even in the United States, the systematic depletion of the Ogallala Aquifer could eventually turn “America’s Breadbasket” back into the “Dust Bowl” same as it was in the Grapes of Wrath horrible 1930’s.  Keep in mind the sequence of events that took place in the early 1920s and 30s, and see how these replay today — albeit on a global scale:

In the 1920’s American farmers saw several opportunities for increasing their production. New technology and crop varieties were reducing the time and costs-per-acre of farming, which provided a great incentive for agricultural expansion. This expansion was also necessary to pay for expensive, newly developed industrialized farming equipment, such as mechanized tractors, seeders, listers, combines and motorized plows that were often purchased on expensive credit, and required to hire special labourers while still paying back loans needed to offset the losses from the years of plenty and low crop prices following World War I.

Clearly cyclical behaviour…

When the national economy went into decline in the late 1920s because of the Great Depression, agriculture was even more adversely affected. In addition, a record wheat crop in 1931 sent crop prices even lower. These lower prices meant that farmers needed to cultivate more acreage, including poorer farmlands, or change crop varieties to produce enough grain to meet their required equipment and farm payments.

When drought began in the early 1930s, it worsened these poor economic conditions. The depression and drought hit farmers on the Great Plains the hardest. Many of these farmers were forced to seek government assistance. A 1937 bulletin by the Works Progress Administration reported that 21% of all rural families in the Great Plains were receiving federal emergency relief. However, even with government help, many farmers could not maintain their operations and were forced to leave their land. Some voluntarily deeded their farms to creditors, others faced foreclosure by banks, and still others had to leave temporarily to search for work to provide for their families. In fact, at the peak of farm transfers in the summer of 1933–34, more than one in ten farms changed possession, most of these through Bank repossession and auction. That’s the combined effect of capital debt, the economic depression and the drought…

Today this happens all over the world… For example look at Saudi wheat production that was a highest strategic priority for the nation and brought even exports of Saudi wheat to other countries in Africa and even India and the West… Things have clearly changed.
It has now being agreed at the highest Al Saud government level that there are no more resources to fight the desert. There will be no more wheat production in Saudi Arabia by the year 2012. Next year there will be no more wheat planting. This despite the costly mirage in the desert efforts at food self sufficiency, and the trillions of  dollars spent on it. And this simply has come about because it has become impossible to find the required water as the underground aquifers are completely exhausted. Now Saudi Arabia is massively buying land in Sudan — several chunks of land each one bigger than Belgium — hoping to subjugate the people and make them indentured slave farmers for producing the coveted Saudi wheat…

Is it Daft or just a Colonial practice ? It remains to be seen.

In the US, ethanol subsidies, cause almost a third of all corn grown within the United States to now be used for fuel and that further increases the costs of food… Imagine what happens in other countries like Brazil and Latin America – where corn is the main food staple – now that one third of the world’s cropland is losing topsoil faster than new soil is forming through natural processes, according to Foreign Policy writer Lester Brown. According to the World Bank, along with the one and a half to two Billion people now in abject poverty another 44 million people around the globe have been pushed into extreme poverty since last June because of rising food prices…

India is dealing with an annual food inflation rate of 18 percent. Get this 18% per year in the country with the poorest of the poor. The Bottom of the pyramid are screwed here. Period.
To top it all, various diseases such as ”wheat rust” are wiping out increasingly large segments of the world’s food supply.

And according to the United Nations, the global price of food was up 2.2% this month alone — a new all-time high. That is in this year’s second month alone – February of 2011 – while the clock is still running. The Food and Agriculture Organization said in a statement that its food price index was up 2.2 percent in February, the highest record in both real, inflation-corrected terms and nominal terms since the agency started monitoring prices two decades ago.

According to the World Bank, the global price of food has risen 36% over the past 12 months. The commodity price of wheat has approximately doubled since last summer. The commodity price of corn has also about doubled since last summer. The commodity price of soybeans is up about 50% since last June.

There are about 3 billion people around the globe that live on the equivalent of 2 dollars a day or less and the world was already on the verge of economic disaster before this year even began.

Revolutions have swept across the Middle East, the United States has gotten involved in the third major war and now bombs in the middle of the civil war in Libya, Europe is on the verge of a financial meltdown and the U.S. dollar is dying or is it the Euro that is dying… One can never tell. Japan is imploding and it’s stores cleared of usable food, many signs of collapse, and the blasted mayan calendar calling for a permanent Time out… The Finns having a tea party (???)

Sometimes I wonder — How much bad news can this world take?

But then I start thinking, of what it all means and how we can avert this crisis?

For many years, many “doom and gloom merchants” have been yelling and screaming that a food crisis is coming. The ”end is nigh” cry is as old as mankind.  You know this when you travel in the developing world as it seems to resemble time travel, sometimes. Blame it on jet lag and poor quality booze… but the alarmists seldom got it wrong. In history always in food crises people get affected majorly. People starve. Really.

Go today and see. Go see Southern Sudan border areas and Darfur and Chad and then come back to tell. It’s like you’ve been in Biafra in the 1970’s. Now that’s time travel…

Well, up to this point there hasn’t been too much of a reason for You to get alarmed, because the Bottom of the pyramid poor have absorbed the shock before it hit you. Because they are the shock absorbers if you will of the global food system. Food prices in the US and in the EU have started to rise, but the truth is that our stores are still packed to the rafters with gigantic amounts of relatively cheap food. Contrast that with the places where people only eat if manna drops from the sky and come back to tell.

As a consumer who cares to pay attention, there is a way to track these things but most people don’t. However, you would have to be blind as an investor not to see the signs of an incoming food catastrophe. Yet for some it will be a profit centre and for others a Life loss – but who is counting?

And it isn’t going to happen today, and it probably isn’t going to happen tomorrow, but at some point a major league food crisis is going to strike.

Yet it’s not all gloom and doom.

Because we have ways to avert this crisis and also built resilience in the global food and governance system… and certainly in the food supplies.

But that’s another story.

Yours,

Pano

PS:

Still the Environmental Parliament persists on it’s quest to establish as a Human Right the right to adequate food. And we have a Conference on Food Security this August 15th in Istanbul where the smartest minds will gather to visualize a new Human RIght: ”Sustainance for all.”

A simple subsistence amount of nutrients for all. Once we establish this as a human right, the work of food security will be far easier for a future fair for all.

That should stall things from going haywire and it’ll remove some inadequacies from the market and reduce inefficient profiteering on the back of poor, innocent, and starving children.

The incoming crisis is solvable and preventable well before it appears on your plate. That would be good governance. As a matter of fact it’s all about getting this to be a sustainability priority for governments across the globe. Look at Japan’s Ministry of rice.

There is no secret to it. And for those of you who read and believe the secret… Well f___ you too, because it is not the fault of the starving millions that we export our economic crises to the world’s poorest until after the last asset class – sovereign debt – gets devalued and then we hit back the people’s food. Trust this and be smart about it. The systemic risk barriers are not moved — just reshuffled around towards the bottom of the pyramid and the edges of the periphery. But that can;t last and because of it, we are better off to steer the problem before it becomes. Sorting this for the lesser folks is to our advantage first and foremost. Figure this out and you can apply to challenge the degree in Quantum Physics.

Somewhere along the intersecting lines of physical action at a distance and the vaunted theory of chaos and moral sentiment in economics lies the answer. The answer of why we have to act as a benevolent entity to cushion the bottom of the pyramid from the incoming food crisis lies in our own self interest. Period.

And the silver cloud in this food crisis, is that the obesity epidemic hitting our communities and our waistlines might be over.

As it was in Cube when the collapse of it’s patron and the oil crisis hit at the same time. Cuban lovelies – famous Rubenesque lovers – became even lovelier and definitely slimmer walking down the Malecon and somehow a sustainable permaculture took over Havana. The two are certainly related and the fringe benefits clearly visible understood and enjoyed. Green and Lovely the capital of Cuba is now.

We better get ready for a slimmer make-over although we will be the lucky ones….


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