Food prices at record high - to stay high for extended period

[TomAtAlki]

"If the US government is serious about these imbalances, introduce tariff barriers."

AMEN

 

[gouchobob]

You just don't geddit. No-one was complaining about their exchange rate when multinationals hadn't set up shop there. When multinationals set up shop to take advantage of low wages (which indirectly means a favorable exchange rate) and were instrumental in creating the trade imbalance, then the powers-that-be hypocritically start shrieking that the Chinese have rigged things in their favor.

Instead of disparaging the links I give, try reading them. Particularly the one by Paul Craig Roberts. The corporate-controlled US government wants to eat its cake and have it too: the corporations get fat and sleek off labor arbitrage but China makes a convenient scapegoat and lightning rod. Ah, the stench of hypocrisy .... If the US government is serious about these imbalances, introduce tariff barriers.

Post something from a credible source that makes sense and I will read it, the National Inflation Association and Paul Craig Roberts don't cut it.

 

[gouchobob]

"If the US government is serious about these imbalances, introduce tariff barriers."

AMEN

Tariffs have been tried in the past and don't work. Just look at Argentina, the poor quality of local goods, the high cost of imported goods. This only makes matters worse in the long run. What needed is not tariffs but balanced trade between China and the rest of the world.

http://economics.about.com/cs/taxpolicy/a/tariffs_2.htm

 

[Ries]

I am not convinced China is going to collapse due to a few empty buildings- the economy of China is only 1/5 the volume of the USA, but they are much more efficient in terms of spending 1/5 the money and getting far more bang for the buck- more bridges, roads, power plants, high speed trains, and cities.

As for US corporations- many of them have gone way past using cheap chinese labor to sell in the USA- that model is at least 5 years old.

The new model is -

Use Chinese labor to sell to the Chinese.

GM sold more cars in China than it did in the US last year, and there is no reason not to expect that that trend wont continue.

Caterpillar has close to ten factories in China- and the vast majority of the production is sold in China, not exported, although they do export the big machines from the US to China still.

Lincoln Welding is up to 5 or so factories in China- with most production for domestic use.

The list goes on- most big multinationals are starting to sell more in China than in their "home" countries.

The export to the USA thing is getting smaller and smaller as a piece of the pie.

China is currently the number one market, worldwide, for Rolls Royce, Mercedes, Buick, and most consumer luxury goods.

 

[gouchobob]

I am not convinced China is going to collapse due to a few empty buildings- the economy of China is only 1/5 the volume of the USA, but they are much more efficient in terms of spending 1/5 the money and getting far more bang for the buck- more bridges, roads, power plants, high speed trains, and cities.

As for US corporations- many of them have gone way past using cheap chinese labor to sell in the USA- that model is at least 5 years old.

The new model is -

Use Chinese labor to sell to the Chinese.

GM sold more cars in China than it did in the US last year, and there is no reason not to expect that that trend wont continue.

Caterpillar has close to ten factories in China- and the vast majority of the production is sold in China, not exported, although they do export the big machines from the US to China still.

Lincoln Welding is up to 5 or so factories in China- with most production for domestic use.

The list goes on- most big multinationals are starting to sell more in China than in their "home" countries.

The export to the USA thing is getting smaller and smaller as a piece of the pie.

China is currently the number one market, worldwide, for Rolls Royce, Mercedes, Buick, and most consumer luxury goods.

Well not quite, shifting their focus to domestic from exports is new. Its much easier said than done. In fact in the last 10 years production for the domestic Chinese market has gone from around 50% to 35% the exact opposite of where they say they want to go. It's not clear how they would make this happen and there are bound to be a lot of problems with a transition of this magnitude. It is clear the current economic model they have been using can't work much longer.

 

[Ries]

Your 35% figure is for "domestic PRIVATE consumption".
That is the western model, where, in countries like the USA, virtually the entire economy is individual buying crap they dont need.

the 35% does not include hundreds of billions of dollars spent on infrastructure, or R&D- the chinese spend more on R&D alone than the entire economies of many countries.

So the 35% figure does not tell the whole story.

The chinese domestic markets for everything are huge.

In the first six months of 2010, Apple alone made $1.3 Billion dollars of sales in China.
And right now, the apple products are nowhere near market leaders in china- most people there buy cheaper stuff.
Yet the middle class in China is so huge that even if you are only selling to a sixth of the population, which can afford an I phone, that sixth is still bigger than the entire population of the USA.

Certainly, China has a long way to go to bring more of its people up from poverty, but the chinese economy is not to be ignored, and the multinationals are NOT, believe me.

The Chinese are contributing heavily to the rising of food prices worldwide. If an additional ten or twenty million people a year in China break thru into their lower middle class, that is a huge market for Washington Apples, or Russian Wheat, or other exports from a wide variety of countries.

Same thing with India- my wife was just there teaching, and the increase in luxury consumption from even three years ago is noticeable- and, when luxury means going from 1000 calories a day to 3000, suddenly thats tripling the food demands. And thats not a very big jump, in terms of the economy. If China and India keep at 10% growth rates, their food consumption could easily triple again in a few years.

Thats what I mean by pent up food demand.
When somebody lives on a dollar a day, and wages go up to three- it doesnt have much affect on Apple, or Caterpillar, or Boeing. But it has a huge affect on grain, rice, and soybean demand and prices world wide.

So you are looking for HUGE changes in China and India, but in reality very small changes will have a big effect, when multiplied by 2.5 Billion people.

 

[barnaby33]

Ries, if the US doesn't matter, or matters less and less then answer me this question: why keep the peg? Its as basic a question as why the Fed talks about inflation, but fights deflation. In the long run I don't disagree with most of what you say, but the rise in food and oil cost (which is I believe a reflection of oil pricing more than anything) begs the question of why now? Is it coincidental to low stocks of food and growing demand? Or is it rather more driven by a sea of Fed induced liquidity. I agree with the premise that the Fed has wet dreams about being able to control things as well as its detractors give it credit for. Its too neatly coincidental that the Fed starts pumping both loan volume and quantitative easing and whammo commodity prices explode. The lag was about a year.

The trends you are talking about are there, potentially. I'd be willing to debate China's and India's continued ability to maintain growth in the face of peak oil over a few drinks if you'd be so inclined.

That being said the original title of the thread was about increasing food prices. I still say the direct observable evidence is that the flood of liquidity that the Fed has release is the prime driver of this. The Fed prints it, but doesn't control where it goes. Of course neither you nor I will ever be given access to that level of information, too many people would figure out the emperor has no clothes. That however is an entirely different discussion.

 

[Ries]

Because oil is priced in dollars.
As are most other commodities.

So its more about the entire chinese economy than the relatively small amount that is direct trade with the US.

And pegging to the dollar has been a very sound business decison for the Chinese- it has made them money.

When you say, "why now"- does that mean you somehow think that food prices have not been rising for many years?

because mine sure have.
Oh, yeah, we did have a relatively slow period of inflation which was financed by Bush borrowing ten Trillion or so- but that was obviously short term.

Historically, food prices have been going up for quite some time. This is nothing new.

I still want to know- how can the same mechanism- the Fed printing dollars- do the same thing to food prices for food that is grown or made both in the USA, and elsewhere?
If the dollar goes up against the euro, then american products become more expensive to europeans, and euro priced products cheaper to americans.
And if the dollar goes down, the reverse happens.

That means that one market gets cheaper Dutch Gouda, while another market gets more expensive Rainier Cherries-
The food market is not monolithic, and US exchange rates cannot affect the whole thing the same way.

 

[bigbadwolf]

Because oil is priced in dollars.
As are most other commodities.

...

I still want to know- how can the same mechanism- the Fed printing dollars- do the same thing to food prices for food that is grown or made both in the USA, and elsewhere?
If the dollar goes up against the euro, then american products become more expensive to europeans, and euro priced products cheaper to americans.
And if the dollar goes down, the reverse happens.

You're answering your own question. We're talking about the dollar price of globally traded agricultural commodities like rice, wheat, and corn. Not the euro price, or the price in grams/ounces of gold. Inundating world markets with dollars (i.e., speculators using easy-to-come-by printing press dollars) is going to cause dollar prices of agricultural commodities to go up, if that is what these speculators focus on. For reasons of their own, Euroland and Japan may not allow their own currencies to appreciate against the dollar (either by printing more of their own currencies, thus importing some of the inflation the US is exporting or having their central banks intervene in markets by lapping up dollar liquidity). Other countries have their currencies pegged or semi-pegged to the USD: after all, it is still the global reserve. The outcome is that the Fed's QE ends up exporting inflation. This will only end when the dollar is no longer reserve: BRIC did have a meeting in Yekaterinberg a couple of years back to discuss another currency and jettisoning the USD, but nothing has materialised so far (that I know of).

And pegging to the dollar has been a very sound business decison for the Chinese- it has made them money.

They're holding a lot of hot potato dollars and dollar-denominated T-bills which they can't unload without causing a stampede for the exit door by all the other hapless owners of US debt. No-one wants to hold dollars. A recent piece in the WSJ stated that for the first time, the recent turbulence was causing investors to move away from the dollar rather than (as has hitherto been usual) towards the dollar as a safe haven.

 

[gouchobob]

Your 35% figure is for "domestic PRIVATE consumption".
That is the western model, where, in countries like the USA, virtually the entire economy is individual buying crap they dont need.

the 35% does not include hundreds of billions of dollars spent on infrastructure, or R&D- the chinese spend more on R&D alone than the entire economies of many countries.

So the 35% figure does not tell the whole story.

The chinese domestic markets for everything are huge.

In the first six months of 2010, Apple alone made $1.3 Billion dollars of sales in China.
And right now, the apple products are nowhere near market leaders in china- most people there buy cheaper stuff.
Yet the middle class in China is so huge that even if you are only selling to a sixth of the population, which can afford an I phone, that sixth is still bigger than the entire population of the USA.

Certainly, China has a long way to go to bring more of its people up from poverty, but the chinese economy is not to be ignored, and the multinationals are NOT, believe me.

The Chinese are contributing heavily to the rising of food prices worldwide. If an additional ten or twenty million people a year in China break thru into their lower middle class, that is a huge market for Washington Apples, or Russian Wheat, or other exports from a wide variety of countries.

Same thing with India- my wife was just there teaching, and the increase in luxury consumption from even three years ago is noticeable- and, when luxury means going from 1000 calories a day to 3000, suddenly thats tripling the food demands. And thats not a very big jump, in terms of the economy. If China and India keep at 10% growth rates, their food consumption could easily triple again in a few years.

Thats what I mean by pent up food demand.
When somebody lives on a dollar a day, and wages go up to three- it doesnt have much affect on Apple, or Caterpillar, or Boeing. But it has a huge affect on grain, rice, and soybean demand and prices world wide.

So you are looking for HUGE changes in China and India, but in reality very small changes will have a big effect, when multiplied by 2.5 Billion people.

The answer to your question is in the Canadian article I linked earlier.

Instead, the crisis and the government's response exposed just how fragile China's economy has become. The problem is simple — for all the hype around China's emerging middle class, Chinese shoppers contribute very little to the country's fortunes. In any economy, domestic consumption typically makes up roughly 55% to 65% of GDP. The remainder is typically split between exports and investment. Not so in China. Over the past decade, domestic consumption's share of the economy has plunged from around half to a miniscule 35%, the lowest of any significant economy ever, according to Michael Pettis, a finance professor at Peking University whose online writings have become must–reads for those eager to divine what's really going on in China.

Yes there is a lot of building going on, space that may not be needed for decades, millions of empty apartments, complete new cities empty. The point here is most of the growth in their economy today is construction, how can this make sense or be sustainable. Once this slows down as it must at some point the growth has to come from domestic consumption, they can only export so many toasters to Walmart. How are they going to make this happen? They have recognized this in their new 5 year plan. If it were that easy why haven't they done it before now? I think this will be much harder to do than the comrades realize.