Correlation Isn't Causation: Food Prices and Global Riots

The IMF says that the string of antigovernment protests worldwide are all about rising food prices.

The Wall Street Journal blog writes, (bold emphasis original)

100%: The increase in antigovernment protests associated with a 10% rise in global food prices

Despotic leaders, entrenched inequality and new forms of communication have all played their roles in the political turmoil now shaking the Middle East. But new research by economists at the International Monetary Fund points to another potential contributor: global food prices.

Looking at food prices and instances of political unrest from 1970 through 2007, the economists — Rabah Arezki and Markus Brueckner — find a significant relationship between the two in low-income countries, a group that includes Tunisia, Egypt, Sudan and Yemen. To be exact, a 10% increase in international food prices corresponds to an added 0.5 antigovernment protests over the following year in the low-income world — a twofold increase from the annual average.

Rising food prices represent a symptom and NOT the cause of these riots.

People aren’t too dumb to protest on food prices alone, they attribute events to politics (e.g. inequality and etc...) to markets (e.g. speculation, hoarding, et.al.) to economy (e.g. emerging market growth) or to other exogenous causes (climate change etc...).

While all of the above have some grain of truths in them, they aren’t reflective of the entire picture or the bigger force driving these.

In other words, rising food prices serves as the trigger to the unrest from long built in domestic imbalances.

But here is the bigger picture...

US Adjusted Monetary Base has been exploding!

Chart from St Louis Federal Reserve

US Federal Reserve balance sheet has also been ballooning!

Federal Reserve of Cleveland

Bank holdings of US government securities have also been exploding. US Banks have been speculating more than lending. (chart from St. Louis Federal Reserve)

Stock Market leverage has also been ramping up (chart from Pragmatic Capitalism)

Unless money printing has no impact at all, then all these won’t matter. But obviously, money isn’t neutral, and all these money printing have been absorbed somewhere in the financial markets or the real economy.

Surprisingly, the Bank of Japan (BoJ) recognizes this government induced phenomenon. They write,

Globally accommodative monetary conditions have become unprecedented. The relative size of global money stock (M1) measured against the real GDP has surpassed its historical trend (Chart 14). This sustained global excess liquidity not only increases physical demand for commodities thereby affecting fundamentals, but also amplifies speculative factors, both of which are contributing to the sharp rise in global commodity prices.

Incidentally they have been big practitioners of inflationism too. This seems to be a case "where right hand doesn't know what the left hand is doing".

And this only proves how the mainstream economic perspective has been utterly wrong.

In other words, monetary policies by the US, as the de facto foreign currency reserve of the world, have been filtering throughout the global financial system and to the global real economy.

And surging food prices has been aggravated by the shared central bank practice of inflationism and artificially suppressed interest rates by OTHER nations, most especially by the OECD economies.

And in terms of supply side, another key factor behind surging food prices has been due to the restricted international trade of agriculture. Agriculture has been the least globalized among other sectors.

In short, protectionism from the political toxin called “self-sufficiency” has been responsible for the aggregate imbalances of food economics globally.

Chart from Guinness Atkinson

Of course, it is equally nonsense to attribute rising inflation to China as attributed by some observers.

China isn’t the world’s foreign currency reserve. While China is an important driver in the global consumption equation, (in as much as the supply side) China hasn’t been inflating as much as the developed economies. In short, China has only served as an aggravating factor to the main dynamics behind the world’s food price triggered riots. I might add that China has also been plagued by her domestic bubble policies.

Only the politically (and or mathematical formalism) blinded people can’t see anything wrong done by the state. Their knee jerk response is to lay the blame on the doorsteps of either the marketplace or to other nations, for what actually is truly a failure in domestic policies.

To quote Forrest Gump: Stupid is as stupid does.

US-China Pork 'Imbalance'

Here is another interesting development in the international "Pork" market.

There seems to be an ongoing divergence in China and the US.

In China, pork prices seem to be collapsing.

This from the Wall Street Journal, (bold highlights mine)

``Pork prices have fallen 14 weeks in a row according to China’s Ministry of Agriculture, their lowest level in four years, and cheaper even than some vegetables. In the first week of April, the average hog price was 9.43 yuan ($1.38) a kilogram.

``The porcine price plummet has forced the government to add to its much vaunted frozen pork reserve, a series of icy warehouses around the country it set up a few years ago to stabilize pork prices.

``One Chinese press report, citing government statistics, says live pig prices have dropped 21% this year. Another report says pork prices have fallen below the lowly lentil.

``The hope is that by adding to the frozen pork hoard, the government demand will take enough meat off the market to drive prices back up.

``Why does the government want higher prices? Farmers are complaining. According to several stories in the Chinese press too many slaughtered pigs are coming to market, driving farmers to despair.

``Pork plays a vital role in China’s commerce. There are almost half a billion pigs in China, one for every three people. In gross terms, like in humans, China dwarfs other countries in pigs. And there’s no India of pigs to rival China. The next biggest producer is the U.S., which has 65 million pigs, according to the United Nation’s Food and Agriculture Organization. In fact China produces more pigs than the next 43 pork producing countries combined."


And here is why Pork supplies ballooned in China, back to the WSJ,

``The cause of the recent glut of pigs was a reaction to a shortage just a few years ago. An epidemic of blue pig ear disease wiped out pigs across the country and sent pork prices skyrocketing, leading inflation to dangerous levels. The virus attacks pigs’ reproductive systems.

``After the 2007 and 2008 price spike, the government set up the frozen pork reserve and offered subsidies to pig farmers to get the pig population back up. It seems to have worked too well.

``A Ministry of Agriculture report also says changes in the economy have also curbed the growth in the nation’s pork appetite. Demand for pork from migrant workers in big cities has ebbed as more country folk stayed home after the economic slowdown."

In short, markets reacted to the surge in prices by dramatically adding to supply, which had been exacerbated by government "subsidies".

So a pork "bubble" may have developed, which apparently could have just imploded.

At the other side of the continent, in the US, pork prices are going into the opposite direction.
Pork futures (lean hogs) seem to be skyrocketing! (chart courtesy of ino.com)

I have little clue on the status of the global pork trade, except for the following

-the global agriculture market remains one of the "closed" areas.
-the US became a net pork exporter since the mid 1990s.
-Chinese reportedly will reopen to US exports following a ban due to concerns over H1N1 virus.
-current rise in US futures is due to 'tight supplies'

I would suspect that such imbalances could have been mostly due to the distortions brought about by trade restrictions.

This means that the global pork market could be alot inefficient hence the immense disparity in the prices. Otherwise, in a free market, allocative adjustments through price signals would have approached the law of one price.

To add, there seems hardly a cross currency factor here influencing trade ("no 'low' yuan makes us poorer" meme here; move along nothing to see here).

Worst, closed markets, plus government interventions seem to give rise to miniature boom-bust patterns.