Friday, January 21, 2011
Guest post: Of China and guano
Following the La Niña-related floods in Queensland earlier this month food prices have spiked, adding to an already serious inflation crisis around the world and toppling the government of Tunisia.
And while protesters in Tunis were hardly thinking of Queensland bananas or sugarcane as they mobbed the streets, the changing and dramatic climatic conditions that brought about the floods (which have since moved south to Victoria) were at least partly to blame.
Weather-induced agflation is here, as analysis from the respected Worldwatch Institute and statistics from the Food and Agricultural Organisation amply demonstrate. And you don’t need to believe in global warming to be worried about it either. The current La Niña weather pattern illustrates that disruptions to global trade in agricultural commodities and impacts on crop yields and harvests will continue for months at the very least, giving all the more impetus to those steadily rising futures contracts.
It’s always difficult to predict political events from economic phenomenon (let alone economic phenomenon derived from the weather). The globalised and increasingly finanicalised market for agricultural commodities means that causal relationships happen so much faster and as we’ve seen with Tunisia, what was once a particularly stable, affluent and secure Arab state on the periphery of Europe has dissolved into anarchy. Consider too that Tunisia was never originally thought of as particularly vulnerable to food price shocks either. In investment bank Nomura’s September 2010 index of food vulnerability Tunisia came 18th – a respectable level for a largely desert country. By contrast, Morocco and Algeria came second and third, Egypt came sixth, Sudan eight and Libya sixteenth. Ominously for a country of 164 million and a history of asylum seekers, Bangladesh comes first.
As disturbing as this is, what is of particular concern to this lounge chair dandy is candidate number two: Morocco. Although the Saharan monarchy has not seen the levels of unrest felt elsewhere across the Maghreb (and elsewhere from Oman to The Sudan), it does have a track record of food price riots with 33 killed in a weekend of riots in 1990 and over 100 killed in the ‘Bread Intifada’ of 1984.
It’s a concern that hasn’t gone unnoticed by Aida Alami in the Global Post who writes that despite the unifying symbol of King Mohammed VI, Morocco has high structural unemployment and soaring inflation.
What Alami doesn’t mention however is that Morocco is the one of the world’s biggest producers of phosphate rock, or phosphorite, a mineral with no substitute in fertiliser. If unrest of a Tunisian scale were to foment in the Kingdom the risks to another key agricultural supply chain are stark.
According to the US Geological Survey's most recent data on phosphate rock, Morocco and its unhappily occupied southern neighbour, Western Sahara, lead the world in phosphate reserves, with more than the other two biggest producers – the US and China – combined. Phosphate, which was previously behind the fortunes of Christmas Island and Nauru, is also a dwindling global resource, based on a study by Professor Stuart White and Dr Dana Cordell of the University of Technology, Sydney. Based on White and Cordell’s research, we may see a global peak in phosphate rock reserves within the next three decades.
Add in a continuing insurgency through Western Sahara’s Polisario Front, the regional presence of Al Qaeda in the Maghreb, clan fighting between Arabs and the Tauareg and, more recently, the emergence of a major international drugs trafficking route in the shifting borderlands where Algeria meets Mali and you have a recipe for a food crisis that lasts well beyond La Niña’s final furies.
While this may be music to the ears of a growing investor class bullish on phosphate and potash stocks, it presents a decidedly bearish scenario for virtually everything else.
That is no truer than for China, which although a major phosphate producer in its own right, is increasingly dependent on food imports and is already getting royally squeezed by supply and demand-side inflation, no matter how much its government might force its latest CPI to heal.
And while food price inflation is so much a problem for everyone that it features its own Financial Times landing page (what else better expresses the economic Zeitgeist?) it is a particular problem for China because of how it’s sandwiched its economic model into a reliance on accommodative money supply, a weak Yuan and low priced exports.
China is sailing between the proverbial Scylla of inflation and Charybdis of GDP growth. Ahead of its 18th National Congress in 2012, where the next generation of the Chinese Communist Party will take over the Politburo, it will need to navigate the rising tide of food prices without tipping over. Braver measures will need to be taken than tightening banking reserve ratio requirements or jawboning confidence in Washington summits; a fundamental reorientation of the economic system is required.
This means less debatable infrastructure and more internal consumption. It means cooling the property bubble and finding sustainable ways to raise incomes.
Above all, it means raising the value of the yuan, which contributes to all of these outcomes without the danger of hot money flows chasing rates higher, until we all blow up.
Australia would, in turn, need to wear any costs of lower commodity exports to China in the interests of a more sustainable demand curve, but that is besides the point. If China’s rampant growth continues without heed for inflation or human needs then all the skyscrapers and shopping malls will be a moot point. The roots of the Tiananmen Square protests was in inflation, which came from Deng Xiao Ping’s economic growth of the 1980s.
According to Credit Suisse research, Chinese consumers spend twice on food what they do on housing. Despite arguments that real estate inflation could lead to revolution, it’s food that is the real worry for China’s power elite.
Flashman is a galavanting Australian poltroon working in the funds management sector.