Chart of the Day: World Avocado Economics

Interesting graphics from Reuters' Answers ON on the global shortage of Avocados.

Phisix: First Quarter GDP Drop to 5.7% has hardly been about Typhoon Yolanda

“The most disgraceful thing in the world, they think, is to tell a lie; the next worst, to owe a debt: because, among other reasons, the debtor is obliged to tell lies.”—Herodotus: On The Customs of the Persians

In this issue:

Phisix: First Quarter GDP Drop to 5.7% has hardly been about Typhoon Yolanda

-Differentiating Primary from Secondary Cause

-The Link between Typhoon Yolanda and Economic Growth? Coconuts!

-Fishing for Truth

-Construction Slump Amidst a Bank Lending Boom??? Yikes!

Phisix: First Quarter GDP Drop to 5.7% has hardly been about Typhoon Yolanda

Sorry but I have to play again the role of the unpopular spoiler.

I am not supposed to write this weekend but recent developments have been compelling enough for me to deliver a shorter than usual outlook.

Differentiating Primary from Secondary Cause

In the realization of what seems as widespread misinformation that has been unquestioningly accepted and imbued by the public as ‘fact’, such requires some counterbalancing.

Let me state my position clearly. I do NOT deny that Typhoon (Haiyan) Yolanda has contributed to the economic decline.

However my position is that the embedded imputation that the deadly and costly storm accounts for as the main source of the unexpected slowdown in the statistical economy or “The relatively slow growth is expected given the magnitude of destruction by typhoon “Yolanda” to agriculture as proposed by Philippine officials has been patently misguided.

Secondary causes or aggravating factors are not the same as the primary driver.

Of course, officials can be slippery enough to deny such association as shown by this newspaper narrative “while provinces directly affected by Yolanda accounted for a relatively small part of the economy, the damage in those areas disrupted supply chains nationwide, dragging down the entire country” 

The following table is from the National Statistical Coordination Board (NSCB) is a reconstruction of the 1^st quarter GDP intended to reveal the relationship between two important factors: the share contribution and the growth rates of each sector, subsector and the GDP-GNI. Since my concern is of the risks from the supply side, I will focus on the statistical data based on the industrial origin of the GDP methodology. All data in this discussion will be based on 2000 constant prices.

The last column represents the growth data as shown in media: 5.7% GDP growth, .9% growth in Agriculture, 5.5% expansion in industry and the 6.8% outperformance of the service sector which lifted the statistical data.

The prior column shows the difference in the context of the distributional share of sectoral performance of the economic pie. The reason I’d like to exhibit the distribution is to examine whether alleged growth has been inclusive or exclusive. Put differently, to know whether growth has been broad based or concentrated.

The blue colored numbers represent the significant gainers, while the red numbers have been the decliners whereas the black numbers are industries that posted marginal changes.

Let me further clarify that a loss in the share means either that the sector suffered losses or other sectors have outweighed the growth performance of the given industry.

We will have to revert back to the table once in a while.

The faithful crowd will likely construe the following as needless caviling. But remember movements in the stock markets have been anchored in the entrenched conviction that the stock market performance equals economic growth. Even more important is the deeply held misperception that the Philippine economy has reached an immutable and irreversible new paradigm.

So a balanced perspective has to be presented to guide the mature audience why the boom should not only be questioned or doubted, but also to show that such has been founded on an unsustainable model that has been destined to crumble.

The Link between Typhoon Yolanda and Economic Growth? Coconuts!

Mainstream media associates the following figures as related to the claim of “disrupted supply chains nationwide”; “Slowdowns were noted in several key sectors. For instance, agricultural output growth slowed to 0.9 percent in the first quarter from 3.2 percent in the same period last year. The manufacturing industry also suffered, growing by just 6.8 percent from last year’s 9.5 percent. In construction, growth slowed to 0.9 percent from 31.1 percent in 2013, dragged down mainly by the private sector.”

Yet media and domestic officials hardly even exerted any effort to explain HOW this supposed association or supply chain links ever occurred. The connection had simply just been presumed or rationalized.

Let us take on Agriculture first.

Agriculture has been reported to have slowed by .9%. Looking at the table, as a share to the overall economy the industry has declined from 11.15% to 10.64% for year on year even when this sector posted a positive growth. The implication is that growth in the other industries outshined agriculture that resulted to its loss of share.

Meanwhile, fishing represents the only subsector of the agricultural industry. Fishing accounts for 16.63% of the agricultural pie in the 1^st quarter data down from 17.3% during the first quarter of 2013.

The reason for this quarter’s share reduction has been because y-o-y fishing economic activity has posted a substantial loss of 3% that virtually chipped away the 1.7% gain of the land based agriculture industry.

Aside from geothermal industries and the “two of the country’s top dollar earners: the Philippine Phosphate Fertilizer Corporation (PHILPHOS) and the Philippine Associated Smelting and Refinery Corporation (PASAR)” according to the NSCB Eastern Visayas Region branch, Region 8 “is rich in natural resources, including vast agricultural lands with fertile soil, abundant water and wet climate.  Among its major crops are palay, coconut, banana, camote, corn, abaca and sugarcane.  It is the country’s second largest producer of coconut and abaca among the 17 regions.  It is also rich in freshwater fish and other marine resources.” (bold mine)

Let us see how Typhoon Yolanda’s impact on Region 8’s major produce affected the national growth during 1^st quarter by looking at the national performance.

Palay grew by 3.3%, coconut suffered a setback of a considerable 6%, banana gained 1.8%, camote and abaca (perhaps under other crops fell by .8%), corn advanced 1.5% and also sugarcane which jumped by 6.1%.

If there has been any major impact on agriculture, it has mainly been conspicuous in the coconut sector. This is understandable given that Region 8 has been “the country’s second largest producer of coconut”.

Yet with national agricultural data suggesting that losses from the Typhoon have been neutralized for MOST of the crops, then this leaves the fishing industry as the possible other link.

Now let us put into context whether the decline in the agricultural industry has been an aberration. If there is one then this would reveal the extent of the damage from the typhoon.

Typhoon Haiyan slammed the Philippines on November 3-11, 2013, that’s about halfway the fourth quarter period.

Yet agriculture ironically posted gains of 2.3% despite the steep decline in the fishing industry at -4.4% at the last quarter of 2013. So from day zero of the storm’s impact going into the end of the quarter from the impact, the last quarter 2013’s growth rate still posted a positive .9% (blue rectangle). Apparently, the 1^st quarter performance seems like carryover of the last quarter performance. So this hardly looks like a deviation.

Notice too that agricultural-fishing industry has been very volatile. 

Even BEFORE to the storm, specifically during the second and third quarter of 2013, the main agricultural sector posted marginal loss (-.9%) and a very much slower (+.3%) than the 1^st quarter 2014 gains (1.7%). This has also been reflected on the gross value added -.2 and .3, respectively as against +.9%. 

The crowd may blame it on Typhoon “Bopha” Pablo that struck in November 25-December 9, 2012, which Wikipedia.org considers as the most destructive. But this wouldn’t square with robust 3.2% annualized gains during the first quarter of 2013.

So the post Typhoon Yolanda performance has even been STRONGER than the two quarters of output preceding the advent of the calamity.

In short, except for the coconuts, most of the attributions to Typhoon Yolanda as the main source of slowdown in the agricultural sector looks more like a post hoc ergo propter hoc fallacy.

Fishing for Truth

Let us proceed to fishing.

Based on the data from Philippine Fisheries Development Authority, commercial fishing volume of fish unloading in the first quarter on major fish ports* has shown an 8% growth in terms of metric tons (left pane). Note there has been no major port from Region 8.

Metro Manila’s Navotas Fish Port Complex (NFPC), which posted a decline of 5%, has been toe to toe with General Santos Fish Port Complex (GSFPC) whose growth offset the loss in Navotas, as the leader for the largest drop off point for commercial fishing.

This is in contrast to processed products which posted a sharp a decline. The reduction of output in Zamboanga can be traced to the three month fish ban on sardines and red herring.

*Navotas Fish Port Complex (NFPC), Sual Fish Port, Lucena Fish Port Complex (LFPC), Camaligan Fish Port, Iloilo Fish Port Complex (IFPC), Davao Fish Port Complex (DFPC), Zamboanga Fish Port Complex (ZFPC) and General Santos Fish Port Complex (GSFPC)

There are two other categories in fishing; this is the field of municipal fisheries and aquaculture. The latter seems the most likely candidate for Region 8’s potential given the description of “rich in freshwater fish”. Unfortunately I don’t have access to the other data to determine the depth of link between Region’s 8 contributions to the national economy in the context of these areas.

But such data would not be necessary. The region’s GDP would be enough.

If we look at Region’s GDP based on NSCB data, in 2011, the fishing sector contributed to only 4% of the region’s output. Region 8’s fishing output represented about 4.6% of the national fishing industry (see page 9 of the link) for the same period. So it would be difficult to explain how 4.6% will have a material spillover effect on the 95.4%.

If the far larger agricultural sector, where Region 8’s share of the national has been at 5.67% based on 2011 data, has been outweighed by the national performance, then the same dynamics should apply to the much smaller fishing industry. Therefore the decline in the fishing industry must have been less likely from Region 8 but from elsewhere.

Meanwhile, the manufacturing sector accounts for the largest share of the region’s economy at 26.8% in 2011. From the national level, the sector’s contribution has been a puny 3%! So I am also at a loss to see or comprehend how 3% would have “disrupted supply chains nationwide”.

The same holds true with construction industry where in 2011, the sector generated 5.3% of the region’s output. In the context of the national level, the region’s construction activity only accounted for 2.63% level in 2011. So to assume that 2.63% would have a significant supply chain drag on the national level would seem quite perplexing for me.

I hope officials can enlighten us on this supposed causal chain of flows. But I suspect that they won’t.

I am even more confused to see how construction has not taken off in the region despite the reported whopping 34 billion peso worth of donations which accounts for 22% of the 2011 regional GDP. 

What happened to all those contributions?

Construction Slump Amidst a Bank Lending Boom??? Yikes!

Both media and officials have sparsely treated the unforeseen plunge in the construction industry which obviously has been meant to downplay the message.

The construction activity on the national level has shriveled to a still positive but miniscule .9% growth. The public’s sector’s substantial 22.3% gains have barely lifted the industry from an evolving slump! This is because of the astonishing 6% dive by private sector spending which provided the heft of construction activities at 77% share in April. 

Yet with buzzing of the construction activities going on here in the metropolis, how can this be?

Has government construction spending been ‘crowding out’ private sector spending or has government been using resources at the expense of the private sector?

Viewed from annualized q-o-q changes from 2012, each time private sector grew, the public sector contracted and vice versa (left pane).

Such are signs of the tradeoff between the competing use of resources by the private and the public sector.

Nonetheless, what seems troubling is that the deterioration of private sector spending seems to have been mirrored in the in the decline in the gross value added in the construction industry, which apparently peaked in Q4 2012. This reveals an ongoing loss of productivity coming in the face of a supposed boom.

Even more baffling has been the still blistering pace of bank lending growth to the construction and real estate sectors.

The drop in construction activities has been rationalized as government tightening.

Media quotes Philippine officials as saying that “prudential measures implemented by the Bangko Sentral ng Pilipinas (BSP) aimed at keeping banks’ exposure to the sensitive real estate sector could have constrained lending to property companies”

Perhaps they are right.

Bank lending to the construction industry fell from an average of 51.82% [FIFTY ONE PERCENT] in the 1^st quarter of 2013 to an average of 46.64 [FORTY SIX PERCENT] in the first quarter of 2014 (right window)! Despite the 5% drop, FORTY SIX percent would still be about SEVEN times the economic growth rate of the 1^st quarter! Some constrain huh?

And this juggernaut in bank credit expansion to both the real estate sector and construction industry has still been apparent based on the latest April BSP lending data.

Bank lending to the real estate industry still hovers at 20% (20.18% in April; see left pane) while construction loans have fallen to 40.53% (FORTY Percent).

This comes even AFTER the April 4^th implementation of the first series of the twin One Percent increases in the banking system’s reserve requirements.

As a side note: I told you so (!), reserve requirements under the modern central banking system will barely constrain bank lending. General loans even climbed to 18.8% in April (y-o-y) from 18.07% last March. The BSP and the government will not tolerate the end of the subsidies to the government from financial repression policies. They have been incredibly HOOKED to it.

This validates my view of the bluff pulled by the BSP which has been embraced by the clueless and gullible public.

Well folks, that’s how the government defines “macro prudential” or “keeping banks’ exposure to the sensitive real estate sector” constrained.

But don’t worry, the public or the crowd so agrees with them.

Yet despite the FOURTY SIX percent bank issued loans to the construction industry and TWENTY percent loans to REAL ESTATE companies, PRIVATE sector construction output FELL SIX percent???

Huge loans producing negative growth, why? What’s been going on??!!

Not only has bank lending been roaring as output have been in a sharp decline in the construction industry, money supply as of April continues to stagnate(!), as shown by the chart above, thereby galvanizing my suspicions of a fast expanding use of debt in-debt out.

No systemic risk eh?

Let me tell you that the recent downturn in the construction industry may represent the initial signs of fissure from stagnating money supply growth. If these events persist, as stated last week, then this will mark the process reversing this illusory boom where the new paradigm will be faced with gravity from planet earth.

Going back to the GDP table, it has been notable that the drop in the share of the construction sector has more been covered by the gains of the real estate sector. Notice too that the share of the bubble sectors (excluding the hotel) have gained from 38.27% to 38.38% as the share of agriculture, electricity, and others have shrunk.

This again translates to a growing concentration of risks.

Watch it though, the trade (wholesale and retail) sector seem to be showing signs of fracture! While y-o-y growth posted 5.5%, the share of trade has contracted along with the construction industry.

Hmmmm…

At the end of the day, massaging of data would hardly bring about the relevance or connection between the partialities of Typhoon Yolanda—bank ending “macro prudential measures” rationalization against the slowing economic growth.

Oh, the Phisix fell 2.4% this week for its first official correction.

Eyes on money supply growth now!

Expect euphoria to segue into a deep acrimonious denial phase. This means that IF the statistical economic slowdown persists, then finger pointing will become the du jour talking point. There will clarion calls by the public for the government to do more and more interventions that will only deepen the predicament.

Let me end with a quote from English enlightenment writer François Marie Arouet or more popularly known by his nom de plume “Voltaire” (1694-1778)

"Prejudices are what fools use for reason."

Enjoy the weekend!

Graphic: Global Distribution of Livestock Supply

Interesting data from the Economist

THE world’s average stock of chickens is almost 19 billion, or three per person, according to statistics from the UN’s Food and Agricultural Organisation. Cattle are the next most populous breed of farm animal at 1.4 billion, with sheep and pigs not far behind at around 1 billion. China’s vast appetite helps make it the world leader in the number of chickens, pigs and sheep, whereas beef-loving Brazil and cow-revering India have the greatest number of cattle. Expressed as livestock per person, New Zealand lives up to its reputation as the world’s most productive shepherd, with 7.5 sheep for each New Zealander. It is also the second biggest cattle herdsman, with the equivalent of 2.3 cows per person, second only to Uruguay's 3.7. For chickens, Brunei rules the roost, counting 40 birds for every person.

That’s the supply side. It’s interesting to see how global trade coordinates these supplies to meet with demand. Global trade of Livestock in 2005 was reported at $33 billion

Are Food Shortages The Result of Extreme Weather?

This news from yahoo says so,

Deadly riots in the streets of Mozambique over sharply higher food prices have left 13 dead. Anger is growing in Egypt and Serbia as well. Panicked Russian shoppers have cleared the shelves of staple grains. And the devastating floods that have left as many as 10 million Pakistanis homeless are also raising concerns about the country's ability to feed itself.

A series of isolated disasters? Not at all. The common thread: extreme weather, which is putting pressure on food supplies around the globe.

Like any politically biased article, this seems focused on a post hoc fallacy (after this, therefore because of this) argument.

Extreme weather conditions has exacerbated but not caused the existing imbalances or shortages.

In almost every instance, shortages happens when the price mechanism isn’t allowed to function.

And because agriculture is one of the most, if not the most, politically sensitive sector in any economy, it has been the least open to international commerce, hence, the inherent imbalances from the lack of trade and investments which extrapolates to reduced output or the lack of supply. In short, supply constrains have been caused by government policies which has distorted the price mechanism.

This is especially accentuated in developing economies whom lacks capital to develop idle lands which has been aggravated by aforementioned protectionist measures.

Subsequently this has resulted to a massive loss in productivity from the underlying mismatch in the yield gaps and the land availability (abundance of fallowed lands) as shown below by the most recent World Bank Study Rising Global Interest In Farmlands.

Of course, the law of demand and supply has always been at work, such that in the recent episode where food prices spiked in 2007-8 combined with the recent trends of globalization, governments have used current dynamics to exploit on these gaps by allowing for crossborder investments (seen below).

So obviously the answer to the problem of shortages is to allow markets to function, which hopefully the du jour acceptance of globalization might diffuse openness into the world’s agriculture sector.

And of course, no one has been talking about the way global governments have been printing money which has been artificially boosting demand for food and obversely depreciating value of currency relative to real goods.

For the mainstream, what is NOT sensational but real, hardly matters.

Will Vertical Farming Prevent A Food Crisis?

I chanced upon an article about growing food in buildings which piqued my interest. It's called vertical farming.

The following are the illustrated conceptual framework of vertical farming....

Now this article from CBC Canada,

``Is it an elegant solution to pressing problems related to the food supply, or another example of putting too much faith in technology?

``That's a tough question to answer. But what is clear right now is that vertical farming is in its infancy.

``The idea is to grow food inside buildings — not conventional greenhouses, but multi-storey buildings, quite likely in cities — in closed ecosystems using hydroponics rather than soil, and without the use of pesticides.

``So far it has only been tried on a very small scale. Paignton Zoo in South Devon, U.K., for example, is growing produce to feed some of its animals.

``But advocates of vertical farming — notably Dickson Despommier, a Columbia University professor of public health — envision towering gardens in the heart of a city. Despommier, who is working on a book on the idea, sees vertical farming as part of the answer to global warming, water shortages and inner-city health problems.

The key arguments for vertical farming are these:

• Conventional farms waste water. Despommier says irrigation accounts for 70 per cent of worldwide water use, and much of that is wasted as runoff, but because it's contaminated with silt, pesticides and fertilizers, it can't be captured and reused. Vertical farms would grow crops hydroponically, in a water-and-nutrient solution, or perhaps aeroponically, using a mist of nutrient-laden water. The approach could grow the same crops with as little as 10 per cent of the water used in traditional agriculture, Despommier argues.
• Vertical farms would make it easy to grow food without chemicals. There is growing concern about the environmental effects of pesticides and fertilizers used in traditional agriculture. Some see organic farming as the answer, others argue organic farming can't deliver the yields necessary to feed the world. But vertical farming would virtually eliminate the need for pesticides because air coming in could be filtered to keep pests out, and whatever fertilizers were used could be kept within the system and out of lakes and rivers.
• Growing fresh produce in cities would make it more accessible to poor city-dwellers. As a public-health professor, this one particularly interests Despommier. "It's very difficult to find fresh produce in inner cities," he said, so people who live there tend to eat less nutritious foods. "The data is overwhelming," he added: If healthier food is available, people will eat it.
• Growing food close to where it's eaten would reduce transportation needs, which would cut greenhouse-gas emissions. Reduced use of fossil-fuelled farm machinery would also help cut emissions.
• Vertical farms would improve air quality in cities by consuming carbon dioxide and releasing oxygen.

``All this sounds too good to be true — and some people argue that it is.

``The arguments against vertical farming aren't as numerous as those for it, but one of them in particular stands out: Urban land is just too expensive for vertical farming to be commercially viable in cities."

This last statement appears to be reading present conditions into the future. Should a food crisis erupt, this equation will be radically altered-farm lands will likely be more expensive than urban lands.

Vertical farming seems designed for nations that lack agricultural lands than addressing a food crisis. That's why it is technology dependent.

As how will vertical farming impact the world today, Grant Buckler of CBC writes, ``We have never suggested that it will replace conventional agricultural systems," Bradford says.

``And whatever potential vertical farming has, it won't be realized overnight. Even Despommier, probably its most enthusiastic proponent, says the idea could take 50 years to take hold — but he does expect some significant experiments in the next couple of years."

Bottom line, we can't seek salvation from vertical farming should a food crisis emerge.

Smelling Signs of Inflation: Stubborn High Food Prices and Shrinking Supplies

As we have been saying, media and experts have been insisting to us of the mutually reinforcing feedback loop of falling demand=falling prices centered on a global deflation theme.

But, we have been getting additional evidence of the obverse side, falling prices=falling supply!

This makes the entire episode a race to the bottom.

Courtesy of New York Times

The chart above shows of the stubbornly high food prices despite falling prices in the commodity sphere. Yet, food prices are projected to remain high next year even under an expected recessionary environment.

From the New York Times,

``Now, even though costs for ingredients like corn and wheat have dropped, meat and poultry providers say they still have not raised prices enough to cover their increased costs. And packaged food manufacturers are unlikely to lower prices because commodity costs remain relatively high and they are still trying to rebuild eroded margins.

``Michael Mitchell, a spokesman for Kraft Foods, said that the company’s food ingredient costs this year were running $2 billion higher than in 2007, a 13 percent increase, but that the company had raised its overall prices by only 7 percent.

William P. Roenigk, senior vice president and chief economist for the National Chicken Council, said his industry had been losing money for more than a year. Chicken producers are now trying to recover those costs by reducing production, which will eventually alter the balance between supply and demand. “The time is coming when we’re going to see a very significant increase in the retail price of chicken,” he said….

``When costs go up for livestock producers, they are often unable to immediately raise prices because those prices are set on the open market, which is dictated by supply and demand. Instead, they begin reducing the size of their herds or flocks, which eventually leads to less meat on the market and higher prices. But reducing livestock production can take months to years, and in the interim it can actually suppress prices as breeding animals are slaughtered to reduce production.

``The prospect of more food inflation is inflaming a debate over its causes. Many food manufacturers and economists maintain that one culprit is government policies promoting the use of ethanol fuel made from corn.

``About a third of the corn crop is used for ethanol, putting ethanol producers in competition with livestock farmers and food manufacturers. The result, they contend, is that prices for corn are now higher and more volatile.”

So aside from the unintended consequences from ethanol subsidies, news accounts omit the fact that global government has been throwing tons of money to rescue the global financial system and the world economy and should likely impact food prices overtime.

Same account of falling prices and tighter credit equals falling supply in Brazil.

This from Bloomberg (all highlight mine),

``The collapse of global credit markets that is pushing the U.S., Europe and Japan into simultaneous recessions for the first time since World War II also threatens farmers in Brazil, the world’s biggest grower of coffee, oranges and sugar cane, the second-largest producer of soybeans and third-biggest of corn. Smaller harvests in Brazil may increase costs of commodities next year, said Andre Pessoa, an analyst at Agroconsult who conducts the country’s broadest crop survey.

``Reduced fertilizer use will lower Brazil’s soybean output as much as 2.7 percent, while corn may decline 7.3 percent, the government said Nov. 6. Brazil’s coffee harvest may drop 26 percent next year, said Lucio Araujo, the commercial director at Cooxupe, a cooperative representing 11,000 growers in the Guaxupe region.

``Brazilian growers were short of at least 15 billion reais needed to invest in crops, Agriculture Minister Reinhold Stephanes said Oct. 9. Banks and financial companies worldwide, suffering from $969.5 billion of losses and writedowns since the start of 2007, are restricting credit as they struggle to replenish reserves, according to data compiled by Bloomberg…

Ah, high Fertilizer costs has also been aggravating the supply woes, the same report from Bloomberg,

``Fertilizer costs remain high, even as funding dries up and prices fall. The price of the nitrogen-potash mix that Terra, the coffee grower, uses has more than doubled in the past year to 1,800 reais a metric ton, he said. Terra usually buys about 10 tons for his trees. This year he’ll go without.

``The lack of sufficient fertilizer will compound an already smaller crop in Brazil as trees enter the lower-yielding half of the two-year cycle for coffee harvests.

“A lot of people are ceasing to plant because it’s not viable,” the corn association’s Barbieri said. “People have lost hope.”

So of the two competing reflexivity feedback loop premises one will be umasked as a false premise.

Our guess: prepare for inflation.