A Prospective Boom in Philippine Agriculture!

``Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world.”-Henry Kissinger

Experts tell us that Philippine government needs to shore up our agricultural sector. While I think they are reading too much of the past to project it well right into the future, I likewise think that they have been underestimating the operating dynamics of today’s macro environment.

A Rush to Hard Assets

Let us look at what’s happening to the world first. While significant parts of the world is now constrained by debt contraction (deflation), consumer price indices continues to march upwards where many countries (especially emerging markets) have been experiencing a surge in food and energy price indices.

Figure 2: Danske Bank: Rising Consumer Prices in G4 Countries against a contracting manufacturing sector

Well it is not actually contained to emerging markets as shown in Figure 2, even G4 countries have seen a spike in consumer prices even as observed by Chief Economist Steen Bocian from Danske Bank ``The past week has brought more surprisingly high inflation figures. In the US, for example, inflation climbed to 4.3% y/y in January. The story is the same every-where: inflation has risen sharply while growth is either already falling or feared liable to fall in the wake of the weaker growth stateside.

``The increase in inflation is still due primarily to rising energy and food prices. Both oil and food prices have continued on upwards in February, and there is therefore a risk of inflation not dropping back as quickly as we anticipated. This could result in an even weaker growth scenario in the short term, as the expectation of gradually falling inflation, and so stronger growth in real incomes is key to stronger private consumption in countries like the US and Japan during the course of 2008.” (highlight mine)

You are probably aware that Crude Oil recently spiked to over $100 anew this week but fell back to $98.8 with a week-on-week gain of 3.52%. Much of the energy markets have likewise exhibited considerable advances too, as Natural gas, US ROB Gasoline and heating oil. Precious metals has also surged, as gold $944, silver $18 and even DR. Copper which now trades only a stone’s throw distance away from its all time high!

Moreover while depressionists insist that the world is recoupling via credit deflation, it looks the opposite is happening-inflation is one factor that appears to be surfacing in most economies. So they look partially right, there is a recoupling-but it is via inflation.

We don’t like to argue against depressionists simply because they could be right, but so far they have yet to be proven accurate. Some of them went on saying that the appearance of stagflation (which generated quite a reaction following the publication of New York Times of “That ’70s Look: Stagflation”), is simply a transition from inflation to deflation and others say that there is not enough meaningful shortages to sustain this dynamic as inflation is a lagging indicator. We beg to differ, as we presented last week, relative to oil prices-if demand slows but supply slows faster then oil prices will spike. It’s not all about demand.

True enough, the high inflation period which marked the 1970s era was followed by an era of a “disinflationary” environment in the 80s until the new millennium. But it was not a global depression though, because boom bust cycles were seen shifting from Japan to Latin America to Asia and Russia then to the US.

We think it is the same dynamic at work; loose liquidity is looking for assets to park into as major global central banks work to debase their currencies to cushion the world economy from a material slowdown. Yes, with socialization gaining momentum, this means a flood of money into the global system. We just hope that protectionism don’t gather momentum.

Some say US monetary aggregates have shown signs of compression (meaning deflation) and thus reinforcing the view of more deflation to come. From the appearance of movements in asset markets, US monetary aggregates seem as an inadequate measure of global liquidity. It looks as if the growth rate of emerging market foreign currency reserves is a better indicator.

Hence, while there is credit deflation in some parts of the world, many parts of the world which have been least affected by the derivatives-securities-mortgage implosion are finding shelter in hard assets as opportunity costs of holding cash or as an alternative store of value.

It is noteworthy too that some equity markets, have already climbed to new record highs mostly found in GCC and African region, such as Kuwait, Nigeria, Oman, Morocco and Tunisia, with a good number knocking on the door of new record highs as Brazil, UAE, Qatar, Egypt, Jordan and Namibia. So what was once touted to as a “recoupling” has not happened so far except during the January 21 meltdown aside from the October decline. Present dynamics suggests of a financial markets “decoupling” or divergence from the US.

Booming Global Agriculture Prices Should Spillover to Philippine Agriculture!

Figure 3: Economagic: Wholesale Price Index, Food and Energy

And the most important development right now is the price surge in agriculture products! In figure 3 courtesy by economagic, shows of the wholesale price (blue) in the US which has been accompanied a broad market surge of soft commodities which includes livestock (red), foodstuffs (green), grains (yellow green) and energy (fuschia pink).

This implies that there is a massive imbalance between the supply and demand dynamics. Since this is a global phenomenon then it means many parts of the world are facing the same conditions. It also tells us that there is a great shortage which means that investors will continue to shift to agriculture investments for as long as price dynamics warrant this.

So in contrast to the opinion of our domestic experts, the Philippines don’t need direct government intervention except to disentangle the restrictions on investments by cutting red tape and facilitate for this upcoming surge of investments.

Philippine agriculture is an underrated but important contributor the Philippine economy. It is one of our ace against global depression. Agriculture accounts for about 16% to the nation’s GDP but employs nearly 35.8% of employed people in 2006. Agriculture exports likewise, contributed 24.54% of total exports during the first half of last year with coconut, banana, and pineapple being top export products. With the soaring prices of agriculture products expect a surge in this sector to support our economic growth.

We have been bullish in Philippine Agriculture as early as 2006, and even devoted an entire article last June 4 to June 8 [see Bond Markets Rout; Signs of Rising Inflation? Bullish on Philippine Agriculture].

There is only one oddity from which our academic experts have long been suspiciously reticent about…among our neighbors, we are the only country that doesn’t have a commodity futures market to support our farmers. Indonesia has Jakarta Futures Exchange, Malaysia has Kuala Lumpur Commodity Exchange and Thailand’s Thailand’s Future Exchange and the Agricultural Futures Exchange of Thailand.

As an agricultural country, future markets will help our farmers hedge their produce from price volatility. Not only that, it allows for savings to be channeled into investments, generates liquidity with the participation of speculators and arbitrageurs and subsequently pricing efficiency, aside from diminished transaction cost.

Of course, not everyone benefits, the role of middlemen will be reduced. But overall, greater profits for the farmers could translate to a lowering of social inequality. All that needs to be done is to set up the infrastructure and teach our farmers the modern way to do farming with financing. The diffusion of technology is a very important factor in addressing this.